Moody’s Investors Service said in its outlook that Egypt’s banking system remains negative due to the country’s challenging operating environment.
The note also disclosed that the high and rising exposure of Egyptian banks to government debt and their weak capital and asset-quality metrics, making their recovery bleak.
The report said that Egypt’s operating environment will remain challenging over the next 12-18 months, due to weak economic growth prospects and a negative investment climate. Moody’s said it expected the banks to further increase their already significant sovereign exposures as government’s financing needs balloon due to its large budget deficit (equivalent to 10 per cent of GDP in fiscal year 2012). Moody’s note also said that Egyptian banks’ government debt holdings increased to 550% of equity, from 430% in December 2010, linking banks’ credit profiles directly to the credit risk of the sovereign.
The international rating agency also noted that banks’ capital levels are weak and that capital ratios overstate the extent of banks’ current buffers due to high exposures to government securities. The note issued a negative outlook, expecting banks’ asset-quality metrics to deteriorate over the outlook period, with the ratio of non-performing loans (NPLs) to gross loans reaching 15-18% by the end of 2013.
Many economists believe Egypt’s banking sector is facing heightened liquidity challenges, due to a reduction in the banking system’s core liquid assets to 17% of total assets at December 2011, down from 23% a year earlier. However, Moody’s also highlighted that Egyptian banks continue to benefit from sound funding profiles due to high levels of deposits, amounting to 75% of total assets at the end of December 2011, despite the system’s liquidity challenges.
In April 2012, Moody’s downgraded the ratings of five Egyptian banks, following the extension of the review for possible downgrade of Egypt’s sovereign ratings.