Egyptian banks still threatened by currency risk says Fitch

Apr 10, 2017

Egyptian banks are still struggling to meet minimum regulatory capital requirements of 11.25 percent due to floating of the Egyptian pounds

Fitch Ratings disclosed in a statement last Tuesday that some Egyptian banks are still struggling to meet minimum regulatory capital requirements following the Egyptian pounds float last November, given banks' exposure to Foreign Currency (FC) loans. The capital fragility has been traced to the inflation of risk-weighted assets with banks reporting over 50 percent loan growth in 2016. FC loans have reached a significant threshold, accounting for 44 percent of the sector's total loans immediately after the pound was floated. "The currency devaluation will also weaken asset quality, with debt restructuring of loans for smaller corporates already taking place, but we expect only modest deterioration. However, the sector's FC loans/deposits ratio is weak, in our opinion, given the operating environment, with a worsening trend in recent years" Fitch said. Fitch ratings believe that the Egyptian authority will provide support in the event of capital shortfalls at public sector banks. This is similar to the support given by the Central Bank of Egypt (CBE) in 2016, providing interest-free loans in order to recapitalize the nation's public sector banks. But stabilization efforts could be hindered by the country's weak credit profile and financial flexibility. Prior to the floating of the pound, Egyptian banks had commendable asset quality with an average impaired loan ratio of 5.9 percent. Along with the floating of pound, CBE and the banks have agreed to restructure the FC debt of some smaller businesses. In the agreement, the CBE will provide banks with a $400 million-500 million facility to cover their open position and in return the firms will repay their debt in local currency at 12 percent interest rate.