Fitch Ratings said that the regulatory capital ratios of Egyptian banks can withstand a further decline in the pound against the dollar, as they are supported by sound internal capital generation.
In a note issued by the agency yesterday, it said: “The large private sector banks are in a better position to withstand the currency depreciation than the two largest public sector banks, the National Bank of Egypt and Banque Misr, given the higher regulatory capital buffer.”
This comes after the Egyptian pound has declined by 16% against the US dollar so far this year, and about 40% since the end of June 2022. The currency may remain under pressure in 2023 due to the accumulation of imports in Egypt, estimated at about $5.4 billion (16% of the total exports), according to Fitch Ratings.
She added that foreign currency reserves and large total external financing needs estimated at more than $19 billion for 2023 (about 60% of foreign currency reserves) represent another source of pressure on the Egyptian currency. It remains to be seen whether Egyptian Central Bank It would allow the exchange rate and interest rates to adjust sufficiently to attract new portfolio inflows.
The report, which was reviewed by Al Arabiya.net, indicated that some Egyptian banks maintain moderate open long-term currency positions, which may lead to pressure on capital ratios due to the inflation of foreign currency-weighted assets (RWA). Foreign currency assets accounted for an average of 37% of the RWA in the top 5 banks at the end of the first half of 2022.
Erosion of equity ratios
Assuming a 100% risk weight for most FX assets, Fitch estimates, a decline of 10% would erode the CET1 banks’ common equity ratios by 30 basis points, on average. Noting that foreign currency assets, among the weighted assets, have ballooned by about 60% since the end of the first half of 2022.
The CET1 ratios of CIB (rated B+ with a negative outlook) and Qatar National Bank of Egypt (not rated); They are most sensitive to currency depreciation.
Fitch estimated that a depreciation of 60% would reduce CET1 ratios by approximately 500 basis points and 300 basis points, respectively. Despite this, both banks still enjoy strong regulatory capital.
While the National Bank of Egypt and Banque Misr had the weakest CET1 ratios at the end of the first half of 2022, both banks were assigned a “B +” / negative rating, and they had a capital and leverage rating of “B-”. However, Fitch believes that the ratios will still be above the minimum of 4.5%, even without accounting for ex-dividend.
fair value
While I expected that, if the annual net income in the first half of 2022 was fully retained, it would add 220 basis points and 190 basis points to the ratios of the National Bank of Egypt and Banque Misr, respectively.
The report stated that capital is subject to losses in investment portfolios due to the sharp rise in interest rates and returns on sovereign securities since the first quarter of 2022.
The credit rating agency expected that fair value losses would continue to affect banks’ capital in 2023, but less than in 2022, when the average yield on treasury bills increased by about 540 basis points.
It noted that other comprehensive income (OCI) losses eroded regulatory capital ratios by an average of 90 basis points in the first half of 2022 (after a cumulative rise of 300 basis points from a higher policy rate), but the losses could be reversed if banks held. securities until their maturity date, according to Fitch.
However, additional interest rate increases by the central bank in 2023 may result in additional OCI losses, and some banks may cut dividends to support internal capital generation in the face of OCI losses and currency depreciation.
Good profitability
Egyptian banks have so far maintained healthy profitability despite the macroeconomic challenges, supported by higher interest rates and foreign currency revaluation gains. Average annual net income was 2.6% of RWA in the first half of 2022, offsetting RWA inflation from currency depreciation, as well as other comprehensive income losses.
Commenting on issuing investment certificates with a return of 25%, Fitch expects it to reduce the net interest margins of the National Bank of Egypt and Banque Misr, while private sector banks are likely to witness more deposit inflows abroad. However, yields on sovereign securities, which increased by more than 500 basis points in 2022, should support private sector banks’ net interest margins and overall profitability measures.
Fitch warned of increased asset quality risks as business activity slows due to macroeconomic pressures and liquidity shortages, but believes banks’ strong reserves of large holdings of sovereign securities should mitigate the impact.
Even more sharp declines in the currency should not lead directly to a downgrade, according to Fitch. The main rating sensitivity of Egyptian banks is the change in the negative sovereign rating of “B+” for Egypt.
