The note explained that large private-sector banks are better-placed to endure Egyptian pound depreciation against the US dollar than the two largest public-sector banks, the National Bank of Egypt (NBE) and Banque Misr (BM), due to their higher regulatory capital buffers.

The Central Bank of Egypt (CBE) has devalued the Egyptian pound against the US dollar three times since March to reach its lowest levels on record, to trade for over EGP 29.6 on Tuesday, up from an average of EGP 15.5 recorded prior to the war in Ukraine.

According to Fitch Ratings estimations, the Egyptian pound has weakened by 16 percent against the US dollar so far this year, and by about 40 percent since the end of June 2022.

The note projected the Egyptian pound will likely remain under pressure in 2023, given Egypt’s import backlog, which is estimated at $5.4 billion. This represents 16 percent of the country’s foreign exchange (FX) reserves. Large gross external funding needs are estimated at over $19 billion in 2023 (about 60 percent of FX reserves).

Under its new 46-month loan deal, to conclude in FY 2025/2026, Egypt pledged to the International Monetary Fund (IMF) to gradually shift to a flexible exchange rate that leaves the Egyptian pound subjected to supply and demand mechanisms.

Touching upon the annual 25 percent certificates of deposit (CDs) the NBE, BM, and recently Banque de Caire have issued, the note expects these CDs to squeeze NBE and BM’s net interest margins, while private-sector banks are likely to experience further deposit outflows.

“However, yields on sovereign securities, which increased by more than 500 basis points in 2022, should underpin private sector banks’ net interest margins and overall profitability metrics,” the note said.

Meanwhile, Egyptian banks’ asset quality risks are increasing as business activity slows down due to macroeconomic pressures and shortage of foreign currency, yet banks’ strong provisioning buffers of large holdings of sovereign securities should soften the impact, according to the note.

Fitch stressed that further sharp currency falls should not directly trigger rating downgrades, adding that Egyptian banks’ main ratings sensitivity is to a change in Egypt’s ‘B+’/Negative sovereign rating.

In November 2022, Fitch Ratings revised the Long-Term Issuer Default Ratings (IDRs) of NBE, BM, Banque du Caire and Commercial International Bank (CIB) to Negative from Stable and affirmed the IDRs at 'B+'. It also affirmed the four banks' National Long-Term Ratings at 'AA(egy)' with Stable Outlooks, following its revision of the outlook on the Egyptian sovereign to negative.

This followed its revision on Egypt's IDRs outlook to Negative from Stable in the same month.