Moody’s Investors Service has downgraded the long-term bank deposit ratings of five Egyptian banks by one notch, following the downgrade on Tuesday of the government’s issuer rating to B3 ‘stable’ from B2 ‘negative’, to reflect Egypt’s reduced external buffers and shock absorption capacity.
The downgrades affect National Bank of Egypt SAE, Banque Misr SAE, Banque Du Caire SAE and Commercial International Bank (Egypt) SAE to B3 from B2, and Bank of Alexandria SAE to B2 from B1.
The rating agency has also downgraded the Baseline Credit Assessments (BCAs) of all five banks to b3 from b2. At the same time, Moody’s has raised the outlook to ‘stable’ from ‘negative’ on the banks’ deposit ratings.
Moody’s said the downgrade reflects the weakening operating environment, as captured by Moody’s lowering of its Macro Profile for Egypt to “Very Weak+” from “Weak-”; and the high interlinkages between the sovereign’s weakened creditworthiness and the banks’ balance sheets, given the banks’ significant holdings of sovereign debt securities.
The combination of foreign currency liquidity pressures, high interest rates and inflation are expected to dampen consumer confidence, compromising borrowers’ repayment capacity and increasing funding costs for the banks.
In turn, these factors pressure banks’ earnings, asset quality and foreign currency liquidity metrics, and will challenge their resilient financial performance to date.
High sovereign exposure
According to Moody’s, the banks’ high sovereign exposure, mainly in the form of government debt securities that range between 25% to 43% of their total assets, also links their credit profile to that of the government.
These banks’ standalone credit profiles and ratings are effectively constrained by the rating of the government, the rating agency said.
Unlike the other four rated Egyptian banks, BoA’s long-term bank deposit ratings remain one notch above the sovereign at B2, driven by affiliate support uplift from Intesa Sanpaolo S.p.A., its majority shareholder.
Moody’s said the stable outlooks assigned to all the banks’ ratings are in line with the stable outlook on Egypt’s government rating. This further reflects banks’ stable local currency funding and liquidity position, and good earnings-generating capacity that partly mitigates risks stemming from the tight foreign currency liquidity conditions and high asset risks.