Dubai: Egyptian banks’ net interest margins (NIMs) should be under pressure in 2021-2022 according to the rating agency Fitch Ratings.
The degree to which margins are squeezed will depend on the magnitude of potential policy rate cuts and changes in sovereign debt yields, as well as any changes in the structure of banks’ balance sheets.
The sector’s average NIM was 4.1% in 2020 and has held up well despite the Central Bank of Egypt (CBE) rate cut from 400bp cumulative to 8.75%.
High yield sovereign debt
NIMs were supported by yields on 90-day T-bills, which remained high in 2020 at around 13% to attract foreign portfolio investors again after global market volatility triggered capital outflows of 17%. billion dollars in March-April 2020.
“If the CBE cuts policy rates an additional 50 to 150 bps and sovereign yields remain, we expect the industry average NIM to be resilient. Indeed, interest income is highly dependent on sovereign yields, which account for around 65 percent of the sector’s total interest income. Nonetheless, the impact would vary depending on each bank’s asset valuation power, its funding structure and its ability to revalue liabilities downward, ”said Zeinab Abdalla, Director, Financial Institutions – Banks
On the other hand, if both key rates and sovereign bond yields fall by 50bp-150bp, the pressure on NIMs would be greater. If T-bill yields fall by as much as 150bp, Fitch expects NIM squeeze of up to 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, Fitch expects the CBE to seek to keep real interest rates positive to keep portfolio inflows.
Exposure to public debt
Egyptian banks are placing their excess liquidity in sovereign securities, which account for around 40 percent of the sector’s assets, due to their high yields and the limited availability of good counterparties to credit risk.
“We expect high single-digit loan growth in 2021, supported by lower interest rates and several CBE measures to boost lending,” Abdalla said.
Among these measures, the CBE is extending its subsidized loan program of EGP 100 billion, 5 to 8% to more sectors and asking banks to increase loans to SMEs to 25% of their loan portfolios (previously 20%). ). We forecast weak double-digit loan growth in 2022 if funding for capital spending increases with the resumption of GDP growth (Fitch forecasts 6% GDP growth in 2022, in line with prior levels. pandemic) and potentially higher foreign direct investment inflows.
Change in the structure of the balancing sheet
Shifting bank balance sheets from sovereign debt to higher lending could have implications for NIMs. In a scenario where the share of sovereigns in total assets declines by 5 to 15 percentage points, and policy rates and yields remain the same, Fitch sees the NIM sector contract by up to 90bp. A change in banks’ balance sheet structures combined with lower yields and key rates (green line) would have a much larger impact, with the NIM contracting up to 170bp.
Fitch expects the deployment of liquidity in treasury bills to remain high given the banks’ strong liquidity in local currency (the ratio of loans to deposits in local currency was 45% at the end of 2020) and the capital advantage of zero weighting on sovereign debt.
Egyptian banks have higher profitability ratios than their regional counterparts, which gives them more room to maintain adequate profit margins and internal capital generation if interest rates are reduced. The sector’s average return on equity for Egypt was 23% in 2020, compared to 10-17% for GCC banks.