According to a recent report released by HC Securities and Investments, the flotation of the Egyptian pound in late November 2016 pushed the Monetary Policy Committee (MPC) of the Central Bank of Egypt (CBE) to hike interest rates a total 700 bps, resulting in a slowdown in private lending, with the bulk of loans — over 60 percent — being short-term working capital loans for banks.
"With economic improvements, the (MPC) cut rates consecutively in February and March 2018 by a total of 200 bps before cutting another 100 bps last February.
"According to surveys conducted by banks, private businesses are looking for a further 300-400 bps cut before resuming capital expenditure (CAPEX) borrowing," the report went on to say.
Meanwhile, the report anticipated that inflationary pressures will subside following the full removal of gasoline subsidies.
In addition, the CBE is projected to accelerate its planned rate cuts, with a possible 100-200 bps cut before the end of 2019, before another 200-300 bps cut in 2020, fully reversing the initial 700 bps hike.
According to the report, this should take average net interest margins (NIMs) to 4.5 percent and 5.0 percent by 2024, from 5.5 percent and 6.9 percent across 2017-18.
On the consequences of the final amendments to the income tax bill on treasuries, the report stated that the amendments entail separating the tax accounting of a bank’s income from treasuries from all other income.
So, the cost of treasuries will now be calculated by multiplying the bank’s cost to income ratio, excluding provisions and depreciation charges by 80 percent of treasury income, with a maximum of 70 percent of treasury revenue for 2019, 85 percent for 2020, and 100 percent for the following years.
The amendments came into effect on 17 May 2019 and will be applied on treasuries issued from 21 February 2019 as well as treasury re-openings since that date.
Treasuries trading in the secondary market before the issuance of the bill will assume the previous tax treatment, while treasuries trading in the secondary market post the issuance of the bill will be subject to the new tax treatment.
"The new amendments should raise the effective tax rate for banks by 26 percent, up to 31 percent over the forecasting period from 21 percent to 28 percent in 1Q19, prior to the application of the law," the report projected.