Moody’s affirms ratings of five Egyptian banks, changes outlook to negative

Egypt's overall classification was affirmed at Caa1 in October 2023
Moody’s affirms ratings of five Egyptian banks, changes outlook to negative
Growing risks associated with Egypt's deteriorating credit position

Moody’s downgraded the long-term bank deposits of five Egyptian banks. The affected banks are National Bank of Egypt (Al Ahly), Banque Misr, Banque du Caire, Commercial International Bank Egypt, and ALEXBANK. Moody’s has revised the outlook from “stable” to “negative.”

Moody’s decision to change the outlook aligns with a similar action taken for Egypt’s overall classification, which was affirmed at Caa1 but had its outlook shifted to “negative” from “stable.”

Read more: Moody’s says Egypt review continues amidst liquidity crisis, reform efforts

The shift in outlook to “negative” reflects the growing risks associated with Egypt’s deteriorating credit position. Despite ongoing efforts to stabilize public finances and support the formal sector, concerns remain regarding the challenges of rebalancing the macroeconomic situation and exchange rate.

According to Moody’s, the change in outlook primarily stems from the significant holdings of sovereign debt papers by the banks, which ties their creditworthiness to the government’s credit profile and limits their independent financial position.

All five banks have credit ratings that are in line with the government’s ratings, implying that any weaknesses in the government’s credit profile would also weaken the banks’ credit profiles.

Based on the most recent financial statements of the classified banks, their direct exposure to government securities is approximately 6.7 times the regulatory capital of the National Bank of Egypt, 3.5 times for Banque Misr, 3.2 times for Banque du Caire, 2.3 times for ALEXBANK, and 2.2 times for the Commercial International Bank Egypt.

Foreign exchange shortages and operating conditions

The negative outlook also reflects broader challenges such as foreign exchange shortages, difficult operating conditions, and heightened asset risks. These factors can impact the banks’ operations, create renewed pressure on their profits, affect the quality of their assets, and influence their foreign currency liquidity measures.

Moody’s further highlighted that the increasingly difficult operating conditions, coupled with foreign exchange shortages, high interest rates, and inflation, weaken consumer confidence, reduce borrowers’ repayment capacity, and increase financing costs for banks. Consequently, these factors put pressure on bank profits, asset quality, and foreign currency liquidity measures.

Government debt and external pressures

The affirmation of ratings for the five Egyptian banks reflects two conflicting dynamics. On one hand, the deteriorating sustainability of government debt and external pressures complicate Egypt’s macroeconomic correction process, exposing the banks to risks related to solvency and liquidity due to their high vulnerability to sovereign debt.

On the other hand, Moody’s recognizes the flexible financial characteristics demonstrated by the banks thus far, including funding sources based on deposits and strong local currency liquidity. These factors contribute to stable profitability within the sector. The banks have achieved a return on average assets of around 1.2 percent, and their capital adequacy ratio remains comfortably above the minimum requirement. Non-performing loans account for 3.3 percent of the total loans.

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