In his analyzes on Egyptian banks’ interest margins, Fitch said that the average net interest margins (NMIs) of Egyptian banks should be resilient if the Central Bank of Egypt (CBE) introduces more rate cuts. additional 0.5% interest. (50 bps) up to 1.5 percent (150 bps).
Interest income is heavily dependent on sovereign yields, which account for around 65% of the industry’s total interest income, Fitch explained.
Yet the impact would vary depending on each bank’s asset pricing power, its funding structure and its ability to revalue liabilities downward, according to Fitch.
The CBE’s Monetary Policy Committee (MPC) is expected to hold its fourth meeting for 2021 on Thursday to review key interest rates.
The current demand deposit rate, overnight loan rate, main transaction rate and discount rate are 8.25%, 9.25%, 8.75% and 8, respectively, 75%.
Egyptian banks ‘NIMs are likely to come under pressure in 2021-2022, Fitch said, due to the scale of potential policy rate cuts, changes in sovereign debt yields and any likely changes in the structure of banks’ balance sheets.
The industry’s average NIM was 4.1% in 2020 and has held up despite the CBE’s policy rate cut by 4% cumulative (400bp), according to Fitch.
NIMs were supported by yields on 90-day T-bills, which remained high in 2020 at around 13% to attract foreign portfolio investors again in the wake of global market volatility caused by the pandemic, which resulted in capital outflows of $ 17 billion in March. -April 2020, according to Fitch.
On the other hand, if key rates and yields on Egyptian sovereigns fall from 0.5% (50bp) to 1.5% (150bp), the pressure on NIMs will increase.
“If T-bill yields fell as much as 1.5% (150bp), we would expect NIM to compress as much as 0.7% (70bp). The inflation-adjusted yields on Egyptian sovereign debt are among the highest among emerging market economies. While there may be room for lower yields if inflation remains broadly stable, we believe the CBE will seek to keep real interest rates positive to keep portfolio inflows, ”illustrated Fitch.
Additionally, Fitch expects high single-digit loan growth in the Egyptian banking system in 2021, supported by lower interest rates and CBE measures to stimulate lending.
“These measures include extending its EGP 100 billion subsidized rate loan program from 5% to 8% to the CBE to involve more sectors and ask banks to increase lending to small and medium-sized enterprises (SMEs). 25% of their loan portfolios, or 20%. before, ”explained Fitch Ratings.
He also predicted weak double-digit loan growth in 2022 in case funding for capital spending increases as GDP growth picks up.
Egyptian banks have higher profitability ratios than other peers in the region, giving them more room to maintain adequate profit margins and internal capital generation if interest rates are reduced, according to Fitch.
“The sector’s average return on equity was 23% in 2020. For comparison, the banking sectors of the Gulf Cooperation Council (GCC) have average returns on equity of 10% to 17% and average NIMs. from 2.3% to 3.5%. Profitability is a rating force for Egyptian banks and compression of the NIM, provided it is moderate, is unlikely to trigger downgrades in sustainability ratings, ”Fitch said.