Fitch Ratings forecasted Egypt’s GDP to attain pre-pandemic growth levels to reach 6 percent, the highest projection among all the global financial and credit institutions so far, expecting potentially higher foreign direct investment (FDI) inflows.
In its insights on interest margins of Egypt’s banks, Fitch said that Egypt’s banks' net interest margins (NIMs) average is expected to be resilient if the Central Bank of Egypt (CBE) would introduce more cuts to the interest rates by an additional 0.5 percent (50 bps) up to 1.5 percent (150 bps).
Interest income is highly dependent on sovereign yields, which represent about 65 percent of the sector's total interest income, Fitch explained.
Yet, the impact would vary depending on each bank's asset pricing power, funding structure and ability to re-price liabilities downwards, according to Fitch.
CBE’s Monetary Policy Committee (MPC) is anticipated to hold its fourth meeting for 2021 on Thursday to review the key interest rates.
The current overnight deposit rate, overnight lending rate, the rate of the main operation, and the discount rate are 8.25 percent, 9.25 percent, 8.75 percent, and 8.75 percent respectively.
According to Fitch, Egypt’s banks' NIMs are expected to come under pressure in 2021-2022 driven by the extent of potential policy rate cuts, changes in yields on sovereign debt, and any likely shifts in banks' balance-sheet structures.
The sector-average NIM was 4.1 percent in 2020 and has been resilient despite the CBE cutting policy rates by a cumulative 4 percent (400bp), according to Fitch.
NIMs were supported by yields on the 90-day treasury bills, which were kept high in 2020 at about 13 percent to attract back foreign portfolio investors following the global market volatility caused by the pandemic, which led to a $17 billion of capital outflows in March-April 2020, according to Fitch.
On the other hand, if Egypt’s both policy rates and yields on sovereign securities fall by 0.5 percent (50bp) up to 1.5 percent (150bp), the pressure on NIMs would increase.
“If yields on treasury bills fell by up to 1.5 percent (150bp), we would expect NIM compression of up to 0.7 percent (70bp). Inflation-adjusted returns on Egyptian sovereign debt are among the highest in emerging market economies. While there may be room for a reduction in yields if inflation remains broadly stable, we believe the CBE will seek to maintain positive real interest rates to retain portfolio inflows," Fitch illustrated.
Moreover, Fitch expected high single-digit loan growth in the Egyptian banking system in 2021, supported by lower interest rates and the CBE’s measures to boost lending.
“Such measures include the CBE extending its EGP100 billion 5 percent-8 percent subsidized rates lending programme to engage more sectors and asking banks to increase small and medium-sized enterprises (SME) loans to 25 percent of their loan portfolios, which was 20 percent previously," Fitch Ratings explained.
It also predicted low double-digit loan growth in 2022 in case that capex financing raises with recovering GDP growth.
Egyptian banks have higher profitability ratios than other peers in the region, which gives them more room to maintain adequate profitability margins and internal capital generation if interest rates are cut, according to Fitch.
“The sector-average return on equity was 23 percent in 2020. For comparison, Gulf Cooperation Council (GCC) banking sectors have average returns on equity of 10 percent up to 17 percent and average NIMs of 2.3 percent up to 3.5 percent. Profitability is a rating strength for Egyptian banks and NIM compression, provided it is moderate, is unlikely to trigger viability ratings downgrades," Fitch estimated.