Fitch Ratings has upgraded the credit ratings of all four major Egyptian banks following the recent upgrade of Egypt’s sovereign rating. The upgrades, which reflect the strong link between the banks’ creditworthiness and that of the Egyptian sovereign, come after a comprehensive review of the banks’ financial health and their exposure to the government. As of the end of 2023, the total sector exposure to the sovereign accounted for 53% of total assets, equating to approximately 8.3 times the banks’ equity.
As a result, Fitch has raised the Long-Term Issuer Default Ratings (IDRs) of National Bank of Egypt (NBE), Banque Misr (BM), Commercial International Bank (CIB), and Banque Du Caire (BDC) to ‘B’/Stable from ‘B-‘/Positive. This upgrade follows the increase of Egypt’s sovereign rating to ‘B’/Stable from ‘B-‘/Positive on November 1, 2024.
Key Drivers Behind the Upgrade
Fitch’s ratings revision is closely linked to the banks’ substantial exposure to sovereign debt, which has been a central factor in their creditworthiness. The rating agency also upgraded the Viability Ratings (VRs) of these banks to ‘b’ from ‘b-‘, reflecting their improved operating environment and strengthened liquidity conditions. In addition, the Government Support Ratings (GSRs) for BM, NBE, and BDC have been upgraded to ‘b’ from ‘no support,’ recognizing the government’s enhanced capacity to support these financial institutions. Despite this, Fitch noted that the typical Domestic Systemically Important Banks (D-SIB) GSR for Egyptian banks remains at ‘no support’.
The upgrade also reflects a significant improvement in the operating environment for Egyptian banks. Foreign currency liquidity has strengthened notably compared to 2023, aided by foreign capital inflows and the return of non-resident investments into Egypt’s treasury bills market. As of September 2024, the banking sector reported a marked turnaround in its net foreign assets position, with the deficit narrowing sharply to USD 130 million, compared to USD 17.6 billion at the beginning of the year. This was driven by capital inflows from transactions such as the Ras Al Hekma deal and a substantial increase in remittances.
Economic Growth and Inflation Projections
Looking ahead, Fitch expects Egypt’s real GDP growth to accelerate to 4.2% in 2025 and 5.4% in 2026, following a lower growth rate of 2.4% in 2023. These positive projections are attributed to improved economic confidence, stronger real income levels, and continued growth in remittances and foreign direct investments (FDIs). Furthermore, Fitch anticipates inflation will decrease to 12.5% by June 2025, down from 26.5% in October 2024.
These economic improvements have prompted Fitch to upgrade the operating environment score for Egyptian banks to ‘b’/stable from ‘b-‘/positive. This would lead to bolster profitability across the sector, with banks likely to benefit from higher yields on sovereign securities, revaluation gains, and stronger client activity.
Banking Sector Liquidity and Capital Ratios
Fitch’s upgrade has also strengthened the banks’ funding and liquidity scores, now rated ‘b’/stable. This positive outlook reflects improved external balances, with Egypt’s foreign assets expected to turn positive in 2025 and 2026, driven by foreign portfolio investment inflows, a lower current account deficit, and support from international financial institutions (IFIs).
The banking sector’s capital ratios will also strengthen. Although the 35% devaluation of the Egyptian pound in Q1 2024 caused a temporary dip in the sector’s Common Equity Tier 1 (CET1) ratio, the ratio rebounded to 12.3% by the end of the first half of 2024. Fitch expects this ratio to exceed 13% by the end of 2024, bolstered by robust internal capital generation and expected exchange rate stability.
Outlook and Future Challenges
While Fitch remains optimistic about the outlook for Egyptian banks, it also acknowledges that certain challenges remain. These include continued global inflationary pressures and uncertainties in commodity prices. However, the rating agency is confident that Egypt’s improved operating environment, backed by government reforms and strengthened foreign capital inflows, will continue to support the creditworthiness of the country’s leading financial institutions.
In conclusion, the upgrades to the credit ratings of Egypt’s major banks reflect the significant improvements in the country’s economic conditions and the banks’ stronger financial standing. The positive outlook highlights the country’s resilience and growth prospects, reinforcing investor confidence in Egypt’s banking sector as a key driver of economic stability.
