Fitch: Egypt's Banking Sector Capable of Facing Repercussions of Pound Depreciation

Fitch Ratings said that the compulsory reserve ratios within Egyptian banks are able to withstand any declines in the value of the pound as they are supported by reasonable inflows of capital, noting that major private sector banks are in a better position to withstand currency depreciation than the two largest state-run banks, namely NBE and Banque Misr, given the increase in the mandatory precautionary reserve.

The report pointed out that the Egyptian currency may remain under pressure in 2023 due to the accumulation of imports and the large external financing needs estimated at more than $19 billion for 2023.

“Fitch” indicated that there is anticipation for the Central Bank of Egypt regarding whether it will allow the exchange rate and interest rates to be adjusted sufficiently to attract inflows of new portfolios, noting that some Egyptian banks maintain open positions for long-term currencies, which could lead to pressure on rates  due to risk-weighted assets (RWA) inflation.

Fitch expects that certificates of savings at 25% interest will reduce the net interest margins of the National Bank of Egypt and Banque Misr, while private sector banks are likely to witness more deposit inflows abroad, however, returns on sovereign securities, which increased by more than 500 basis points in 2022 should support private sector banks' net interest margins and measures of overall profitability.

Asset quality risks mount as business activity slows due to macroeconomic pressures and liquidity shortages, but banks' strong reserves of large holdings of sovereign securities should mitigate the impact.

The agency said that even more sharp declines in the currency should not lead directly to a downgrade.