Thursday 12, October 2017 by Georgina Enzer

Moody's: Egyptian banking system outlook is stable as economic growth picks up

Moody's Investors Service sees the outlook for Egypt's banking system as stable, as economic growth picks up, loan performance remains broadly resilient and banks benefit from a stable deposit base.

Economic growth will be driven by rising foreign investment, resilient domestic consumption and the gradual recovery of the tourism industry. Moody's forecasts that growth will pick up to 4.5 per cent for the fiscal year ending June 2018, from four per cent in 2017, before accelerating to five per cent in 2019.

"The banks are funded by stable and low-cost domestic deposits, mainly from households, a credit strength, says Melina Skouridou, Assistant Vice President and Analyst at Moody's.  "We expect increasing banking penetration and increased remittances to spur deposit growth. Though government-owned banks have significantly increased their market funding over the last two years, this funding is mainly from regional banks and multilateral development banks, where refinancing risks are lower", Skouridou adds.

Despite a sharp rise in borrowing rates and inflation, the rating agency does not expect a material deterioration in loan quality. While corporate profits declined, their debt repayment capacity is supported by relatively low overall levels of debt, as well as government initiatives to help tourist companies and importers. Retail loans are confined to wealthier households.

However, delinquency rates could increase as new loans mature, particularly if interest rates rise further, high inflation persists or economic growth falters. The banks' high exposure to low-rated government securities - accounting for 33 per cent of their assets - will continue to be a key concentration risk and links banks' credit profile to that of the government.

While capital buffers for Egyptian banks are weaker than those of their rated regional peers, Moody's expects them to improve over the coming two years as banks retain more of their profits. Egyptian banks will also continue to report better-than-peers profits. Although Moody's expects a small decline in the banks' high net interest margin of 4.6 per cent as of March 2017, pre-provision income will be supported by fees and commissions and higher loan volumes.

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