Moody's Upgrades Egyptian Banking System Outlook from Stable to Positive

Moody's Investors Service has upgraded the outlook for Egypt's banking system to positive from stable, supported by growth picks up, supporting credit growth, banks' profitability and internal capital generation, the credit rating agency’s report said.

" the positive outlook also reflects the strong links between the banks' and the Government of Egypt's (B3positive) improving credit profile due to the large exposure that Egypt's banks have to the country's government, through investments in securities and loans, which stood at 40% of total banking system assets as of June 2018", said the report.

According to Moody's report, "Banking system outlook: Egypt-Accelerating economy and strong loan demand drive our positive outlook", one of the key drivers of Moody's positive outlook for the Egyptian banking system is the improving operating environment, following the implementation of structural reforms which put the country on a path of sustainable and inclusive growth. Moody's expects real GDP growth to reach 5.5% in 2019 from 4.2% in 2017, while ongoing economic and fiscal reforms will slowly nudge GDP higher.

"Increased domestic private sector investment, large infrastructure projects, as well as higher exports will drive economic growth and credit demand", says Moody's Assistant Vice President Melina Skouridou.

The Moody’s report cites that loan quality will remain stable, as new lending is being tested. Moody's expects the formation of non-performing loans (NPL) to remain steady, and the NPL ratio to remain broadly unchanged from current levels of around 4.5% of total loans as of March 2018, as the improvement in asset quality from legacy exposures dwindles.

Regarding profitability, the credit rating agency believes it will remain strong, as rising fees and commissions on new lending will support banks' pre-provision profit

. Moody's forecasts said that loan-loss provisioning will be broadly stable for rated banks.

The report expected that Egyptian banks' capital buffers will improve only modestly, as internally generated capital finances' loan growth, in addition, the report declared that the largest Egyptian banks all exceed their regulatory minimum capital requirement, but their capital position is weaker than global peers.

'Banks' capital will improve modestly under Moody's base-case scenario, but, is more vulnerable under the rating agency's high-stress scenario, due to losses assumed on government securities', it mentioned.

The Egyptian banks will maintain high levels of liquid assets, to ensure coverage of liquidity needs and deposit movements. Stable deposit funding and low loan-to-deposit ratios also support liquidity, according to the report.

The report concluded that, the banks' funding and liquidity profiles will remain strong, as the two largest government-owned banks, National Bank of Egypt and Banque Misr, have increased their market funding significantly, but their large liquidity buffers already offset refinancing risk.