Moody's upgrades Egyptian banking outlook to positive

Moody's Investors Service has changed the outlook for Egypt's banking system to positive from stable, as economic growth picks up, supporting credit growth, banks' profitability and internal capital generation, the ratings agency said in a statement on Wednesday.

Moody’s said the positive outlook also reflects the strong links between the banks' and the Egyptian government's improving credit profile. This is due to the large exposure that Egypt's banks have to the country's government through investments in securities and loans, which stood at 40 percent of total banking system assets as of June 2018.

“One of the key drivers of positive outlook for the Egyptian banking system is the improving operating environment, following the implementation of structural reforms that put the country on a path of sustainable and inclusive growth,” the statement said.

Moody's expects real GDP growth to reach 5.5 percent in 2019 from 4.2 percent in 2017, while ongoing economic and fiscal reforms will slowly nudge GDP higher.

"Increased domestic private sector investment, large infrastructure projects, as well as higher exports will drive economic growth and credit demand", said Moody's Assistant Vice President Melina Skouridou.

Moody’s also expects loan quality to remain stable, and the non-performing loans (NPL) ratio to remain broadly unchanged from current levels of around 4.5 percent of total loans, as the improvement in asset quality from legacy exposures dwindles.

It expects banks’ profitability to remain strong, as rising fees and commissions on new lending will support banks pre-provision profit. Loan-loss provisioning will be broadly stable for rated banks.

The banks' funding and liquidity profiles are also expected to remain strong, Moody’s noted.

“Egyptian banks will maintain high levels of liquid assets to ensure coverage of liquidity needs and deposit movements. Stable deposit funding and low loan-to-deposit ratios also support liquidity,” it said.