Fitch Rtgs: COVID-19 poses downside risks to Egyptian banks

Fitch Ratings-Dubai/London-19 March 2020: Egyptian banks, which were set to enter into a credit expansion cycle in 2020-2021, will be hit by the outbreak of the coronavirus, Fitch Ratings says.

Banks' credit profiles could come under pressure in a weaker operating environment and with an economic slowdown. Delayed capex financing plans despite interest-rate cuts combined with a lack of appetite to lend to some distressed sectors will weigh on credit growth. 

All Fitch-rated Egyptian banks' Long-Term Issuer Default Ratings are at 'B+' with Stable Outlooks, in line with the sovereign rating. We do not see immediate pressure on banks' ratings but material weakening in asset quality affecting the banks' capitalisation could lead to negative rating actions.

The asset quality of those banks that are most exposed to tourism, aviation and trade will be the most vulnerable to the impact of the outbreak and travel restrictions. The trade and services sectors (including tourism, transportation and Suez Canal) account for about 27% of total banking sector lending and 23% of GDP. Banks with higher exposures to small businesses will also be affected given the latter's weaker resilience to a deteriorating operating environment.

Measures by the Central Bank of Egypt (CBE) to restructure credit facilities to the distressed tourism sector for a period of three years combined with a six-month credit extension for corporates and retail could provide some relief, but will delay the recognition of impaired loans and understate the real level of problem loans in the sector. Fitch also believes some banks are less conservative in their loan classifications and their stock of Stage 2 loans is underestimated.

Stage 3 loans are adequately provided for, with sector average reserve coverage of 97% at end-3Q19. However, coverage of Stage 2 loans by specific provisions is weak (less than 20% for most banks). In a higher restructuring environment, we expect banks will be taking additional provisions against Stage 2 loans, which will inflate their cost of risk.