Egypt’s recent increase in Egyptian expat remittances has had a positive effect on recipient households, on the broader economy, and for Egyptian banks because it supports their deposit-based funding profile and enhances their lending capacity, according to Moody’s.
On 15 March, the Central Bank of Egypt (CBE) reported that monthly workers’ remittances for the six months leading up to December 2020 went up by 13.5 percent, totalling $15.5 billion, up from $13.7 billion a year earlier.
In its credit outlook report, issued on Monday, Moody’s said that the increased remittances, alongside the bank’s access to long-term funding from foreign financial institutions, back Egypt’s foreign-currency liquidity at a time when traditional sources of foreign currency have slumped as a result of the COVID-19 crisis.
The report pointed out that Egyptian banks are primarily funded by customer deposits, and increased remittances are credit positive for the banks because they contribute to higher deposit inflows, provide a stable and low-cost funding base as well as diversify the depositor base.
Moreover, technological advances, greater use of electronic channels – which reduce transaction costs – and pandemic-related limitations on travel by overseas Egyptian workers, which have increased their ability to save, have facilitated growth in remittances, according to the report.
Moody’s expected remittance inflows to Egypt maintain their positive momentum thanks to the wider use of electronic transfers.
In addition, the positive effect on household incomes creates new lending opportunities for banks and supports households’ debt repayment capacity, according to the report.
Increased remittances also support Egyptian banks’ foreign-currency liquidity, while the pandemic severely depresses other foreign-currency sources, such as tourism revenues.
Furthermore, banks' ongoing access to long-term funding from international banks and financial institutions also bolsters their foreign-currency liquidity.
According to the report, over the past 12 months, several Egyptian banks have obtained foreign currency funding from international funders.
Banque du Caire SAE obtained $100 million from the European Bank for Reconstruction and Development (EBRD) in order to provide trade finance to private firms as well as financing to local small and midsize enterprises (SMEs), following $100 million of funding received from the European Investment Bank (EIB) in 2020.
QNB Alahli, the Egyptian subsidiary of Qatar National Bank also obtained a $100 million senior loan from EBRD.
The Commercial International Bank (CIB), the largest private-sector bank in Egypt, obtained a $100 million subordinate loan from CDC Group and $200 million in loans from the EBRD and the International Finance Corporation to strengthen its SME lending portfolio.
Banque Misr obtained a €425 million line of credit from the EIB to support Egyptian private-sector SMEs, the report said.
Such credit facilities and remittances encourage banks to lend to the real economy, support business generation and generate additional revenue through interest income, loan fees and commissions, according to the report.
On the other hand, lending to new customers with limited credit history carries additional credit risks and requires higher provisions, according to the report.
“The private-sector banks we rate maintain strong foreign-currency liquidity, with US dollar loan-to-deposit ratios of 52 percent for CIB and 69 percent for Bank of Alexandria as of December 2020. Meanwhile, state-owned National Bank of Egypt (NBE), as reported in the latest financial statements available, had a much higher ratio of 122 percent as of December 2019,” the report explained.