Egypt’s banks can cope with sharp currency drop, say experts

Egyptian banks can withstand the impact of further currency depreciation as they are supported by “healthy internal capital generation”, analysts say.

Fitch Ratings report that large private sector banks are better placed to deal with a weaker pound than the two largest public banks, National Bank of Egypt and Banque Misr, due to their higher regulatory capital buffers.

It added that additional sharp falls should not directly trigger rating downgrades. 

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The Egyptian pound has weakened 16 percent against the US dollar so far this year, and by about 40 percent since the end of June. 

Fitch added that the currency may remain under pressure this year given Egypt’s import backlog, estimated at $5.4 billion (16 percent of foreign exchange reserves), and large gross external funding needs, calculated to be over $19 billion for 2023. 

“It remains to be seen whether the Central Bank of Egypt will let the exchange rate and interest rates adjust sufficiently to attract new portfolio flows,” Fitch said.

Some Egyptian banks keep moderate long open currency positions, which can lead to pressure on capital ratios due to inflation of foreign currency (FC) denominated risk-weighted assets. 

FC assets accounted for 37 percent of risk-weighted assets on average at the five largest banks at the end of June. 

“Assuming a 100 percent risk-weight for most FC assets, we estimate that a 10 percent currency depreciation would erode banks’ common equity Tier 1 ratios by 30 basis points, on average,” Fitch said. 

However, it added that ratios will remain above the 4.5 percent minimum requirement, even for National Bank of Egypt and Banque Misr.

Banks have so far maintained healthy profitability despite macroeconomic challenges, supported by higher interest rates and FC revaluation gains. 

While asset quality risks are increasing as business activity slows due to macroeconomic pressures and FC shortages, large holdings of sovereign securities should mitigate the impact on banks, Fitch said.

The central bank moved to a more flexible exchange rate under the terms of an International Monetary Fund (IMF) financial support package worth $3 billion in October.

Egypt turned to the IMF for assistance after Russia’s war in Ukraine pushed up its bills for wheat and oil while dealing a blow to tourism from two of its largest markets, a key source of hard currency.

Some analysts said a key sign to look for would be investors and households using dollars to buy the Egyptian pound at its current low rates, suggesting they think the currency’s fall might have reached a limit.

Egypt was already under financial pressure before the war in Ukraine hurt tourism revenues, raised commodity import bills and led foreign investors to pull more than $20 billion out of the economy.

Goods began backing up in Egyptian ports after the central bank placed restrictions on imports in February. Last month it removed those restrictions, and importers have been scrounging dollars to get their goods released.

A cabinet statement said goods worth $1.5 billion left the ports in the first 10 days of January, bringing the total released since December 1 to $8.5 billion. The statement did not indicate how large a backlog remained.