Moody’s downgraded the long-term bank deposits of five Egyptian banks by a single notch. The affected banks include the National Bank of Egypt, Banque Misr, Banque du Caire, the Commercial International Bank, and Alex Bank. The new ratings are Caa1 for the first four banks (down from B3) and B3 for Alex Bank (down from B2). The outlook for these downgraded ratings is stable.
As part of the same evaluation process, Moody’s has downgraded the basic credit rating (BCAs) of all five banks to Caa1 from B3. Previously, these evaluations were under review for potential downgrades.
Following the review conducted on 5th October, Moody’s downgraded the Egyptian’s classification to a stable Caa1 from B3. This decision was made in light of the deteriorating trend in debt sustainability, persistent foreign exchange shortages, and the upcoming increase in external debt service payments over the next two years. The economic challenges, coupled with policy constraints, make it necessary to explore options for rebalancing the economy while mitigating social risks.
Moody’s review of classifications, initiated on 16 May 2023, has now reached its conclusion with the completion of these procedures.
Moody’s downgrade of the classifications of Egyptian banks is driven by the following factors: a weak operating environment, as indicated by the agency’s downgrade of Egypt’s overall rating to “very weak” from “very weak+”; the significant interconnections between the weakened creditworthiness of the sovereign, reflected in the downgrade of the sovereign rating to Caa1 from B3, and the banks’ balance sheets, primarily due to the substantial holdings of sovereign debt bonds by large banks.
The significant exposure of banks, particularly through government debt bonds, creates a strong interconnection between their credit profile and the credit position of the government.
Notwithstanding the aforementioned challenges, Moody’s acknowledges that the banks have displayed defensive attributes in their financial performance thus far. They have witnessed an improved funding profile driven by deposits and have reported adaptable profitability measures. Despite the current asset return of 1.2 percent, the banks have managed to contain asset quality pressures, with non-performing loans accounting for 3.5 percent of total loans as of March 2023.
Last Thursday, Moody’s downgraded Egypt’s rating from B3 to Caa1, while maintaining a stable outlook.
The Agency has revised its decision to downgrade the country’s debt sustainability due to ongoing foreign exchange shortages and the anticipated rise in external public debt service payments over the next two years. The current reserves, amounting to approximately $27 billion, may face significant weakening in debt service coverage during this period, especially in the absence of measures to bolster foreign exchange reserves.
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