The Egyptian banking sector has shown remarkable resilience and flexibility in the face of political and economic challenges during the past years, according to the Union of Arab Banks (UAB).
In a recent report on the performance of the Egyptian banking sector, the UAB noted that the main driver of economic growth which will support banking activity in Egypt during the coming period is the rise in foreign investments, domestic consumption, and the recovery of the tourism sector, pointing out that the IMF expected the Egyptian economy to grow by 5.2% In 2018, and 5.5% in 2019, compared to 2.9% in 2014.
It added that after the Central Bank of Egypt (CBE) adopted the policy of raising interest rates on the pound for a period of time, as it began to shift its monetary policy to an expansionary policy since mid-February 2018. The CBE reduced its deposit and lending rates to 17.75% and 18.75% respectively, then to 16.75% and 17.75% in March.
The UAB expected that this decision will lead to the recovery of profits in Egyptian banks during the coming period, which fell in the recently, due to the increase in interest rates following the liberalisation of the pound.
Furthermore, it is also expected that banks will benefit from increasing lending rates in the coming period with the reduction of interest rates, as well as from the decline in the cost of deposits, which will positively affect their profits.
“It is expected that the CBE will stabilise the rates of deposit and lending in the coming period, especially with the inflationary wave expected from hiking fuel, electricity, and water prices,” UAB said.
The UAB report stressed that the Egyptian banking sector is one of the most important pillars of the economy, with liquidity rates and a prime quality of assets with a good capital base which contributed to overcoming many crises.
It added that, in light of the current economic reforms, the financial safety indicators of the Egyptian banking sector indicate financial security and remarkable strength in the performance of the Egyptian banks, despite the difficult operating conditions under which these banks were operating, as well as the flexibility of the banking sector in dealing with all financial and economic variables.
According to the UAB, the Egyptian banking sector has positive liquidity, profitability, quality of assets, and capital adequacy.
It also highlighted the increase in the capital adequacy ratio or the capital base to risk weighted assets from 14.0% at the end of 2016, to 15.6% by the end of June 2018. The tier 1 capital adequacy also increased from 11.9% to 12.6%, which indicates the strength of capital of the Egyptian banking sector. The leverage ratio increased from 4.8% to 6.3% during the same period, reflecting the decline in risk weighted assets, or the direction of banks towards low risk investments.
As for the quality of assets, the data revealed that the ratio of non-performing loans to total loans declined from 6% by the end of 2016 to 4.3% by the end of the first half (HI) of 2018. The ratio of loans to the private sector to total loans declined significantly from 71.5% to 61.8% during the same period, indicating a greater reservation by Egyptian banks, and an improvement in the quality of assets of the Egyptian banking sector.
These indicators also confirm, according to the UAB, the ability of the Egyptian banking sector to absorb the effects of the decision to liberalise the exchange rate, and the continued prime performance of banks.
Meanwhile, the CBE’s data indicated a decline in the profitability indicators of the banking sector during the H1 of 2018, reflecting a return on average assets of 1.5% compared to 2% in 2016, and a net margin of return of 3.9% against 4.6%, which led to a decline in the average return on equity from 30.9% in 2016 to 21.5% by the end of the H1 of 2018, in light of the low profitability level.
It also added that the Egyptian banking sector succeeded in attracting deposits at high costs, following the liberalisation of the pound exchange rate. In contrast, employment rates declined due to higher interest rates, which contributed to the reduction of bank revenues, and consequently the return on assets and equity.
In a different context, the UAB pointed out that Egyptian banks deliberately increased their liquidity in foreign currencies significantly from 60.2% in 2016 to 67.5% by the end of the first quarter (Q1) of 2018. It stressed that the availability of the dollar with banks reduces the risk of not being able to pay off foreign liabilities.
In contrast, the local currency liquidity ratio declined from 55.4% to 40.5% during the same period. Loans to deposits ratio stood at 45.9% at the end of the H1 of 2018, compared to 47% in 2016, and the ratio of deposits to assets was 70.2% against 79.6% during the same period. This reflects the trend towards enhancing liquidity in the Egyptian banking sector, and indicates that lending does not grow at the same pace as deposits in banks.
According to the UAB, the indicators communicate that liquidity in the Egyptian banking sector is sufficient to finance projects, which contributes to driving the economic operation in Egypt.
Within this framework, the IMF stressed that the Egyptian banking sector is still enjoying liquidity, profitability, and capital adequacy. The banks’ profitability balance is expected to coincide with lower interest rates, remaining sufficient to absorb the potential increase in credit risk costs. Most banks maintain strong liquidity reserves, and manage their balance sheet activity, to mitigate interest and liquidity risk through large holdings of government securities.
The IMF said that the new CBE law will introduce amendments to the new frameworks to help provide emergency liquidity and banking solutions in line with international best practices. The Ministry of Finance and the CBE will set rules for expanding public funds to maintain financial stability, with the recapitalisation of public banks to become the government’s responsibility.