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Egypt banking outlook still negative as strains remain

25 February, 2014

The outlook for Egypt's banking system is negative, unchanged since 2011, Moody's Investors Service said in a new report, despite recent steps towards political stabilisation.
The rating agency said that the outlook reflects continuing political and social tensions and the government's strained finances, which continue to undermine investor and consumer confidence.
Furthermore, the banks' high and increasing exposure to Caa1-rated Egyptian government debt poses a significant credit risk and ties the system's solvency to sovereign default risk. Banks' thin capital buffers are also insufficient to absorb potential losses under Moody's scenario analysis.
"Against the backdrop of the unsettled security situation and political climate, the banks' operating environment will remain difficult. This is because the outlook for foreign investment, tourism and consumer confidence remains weak, leading to subdued credit growth and low business generation for banks", said Constantinos Kypreos, Senior Credit Officer at Moody's. The rating agency forecasts GDP growth of 2.6% in 2014, well below the historical average of 4.9% between 2001-10.
However, Moody's acknowledged that the economy is relatively large and diversified, and could -- in the medium-term -- regain strength once structural and fiscal issues are addressed.
Over the next 12-18 months, Moody's expects a further rise in the banks' already high exposure to government securities, which reached 5.7 times their shareholders' equity as of September 2013. The government continues to rely on local banks to fill the funding gap in the absence of foreign funding and continues to run high budget deficits. The high exposure to sovereign paper is the major credit risk for linking the banking system's credit profile directly to that of the Egyptian sovereign. In addition, Moody's expects asset quality metrics to further deteriorate on the back of challenging operating conditions, and extensive restructuring and rescheduling of loans during the economic turmoil.
Egyptian banks reported an average Tier 1 ratio of 11.8% as of September 2013.
Nevertheless, Moody's views this capital buffer as low, given banks' large holdings of government bonds; and the high likelihood of asset-quality deterioration over the outlook period.
In addition, the national regulator applies a 0% risk-weight to the banks' holding of Egyptian government securities. Applying a risk weighting of 50% that is more in line with related global standards, the Tier 1 ratio drops below 6%.
Hoewvre, Moody's also expects Egyptian banks to remain well-funded because of their strong deposit bases. Customer deposits accounted for more than three-quarters (76%) of banking assets as of September 2013, supported by remittances from Egyptians working abroad. The large pool of deposits enables these banks to operate with minimal reliance on riskier market and/or foreign funding.