Moody's Investors Service announced Wednesday it has changed the outlook for Egypt's banking system to stable from negative, reflecting its expectation that banks' funding and liquidity positions will remain strong amid improving operating conditions over the next 12-18 months. "We expect that Egypt's banking system will benefit from improved operating conditions, resulting in rising consumer confidence and business investments, which in turn will support loan growth and asset quality", says Melina Skouridou, CFA Moody's lead analyst for Egyptian banks. Moody's forecasts that a pick-up in Egypt's GDP growth - to 5.0% for the 2016 fiscal year ending in June, from 4.5% in fiscal 2015 and 2.2% in fiscal 2014 - will mainly be driven by large, government-led infrastructure projects, increased foreign investment, and a rise in tourism. The rating agency notes that the strengthening of the domestic economy and improvements in the performance of restructured loans will also contribute to an improvement in Egyptian banks' asset quality. However, capital buffers will continue to be pressured, in Moody's view, owing to the banks' large holdings of local-currency government bonds which are zero risk-weighted in the calculation of capital buffers under the domestic regulatory framework. That said, Moody's projects that Egyptian banks' problem loans will decline to around 8.0% of total loans from 8.6% as of December 2014. Furthermore, Egyptian banks will maintain robust cash provisions against troubled exposures, with loan loss reserves accounting for 98% of non-performing loans, says Moody's. In addition, the rating agency forecasts that Egyptian banks' funding and liquidity profiles will continue to improve. "The Egyptian banks' deposit-based funding structure remains a credit strength. We expect deposits to continue to grow, likely above nominal GDP growth, driven by a rise in remittances from migrant workers and by the banks' deepening penetration of the bankable population," says Ms. Skouridou. Overall, strong credit demand both from the private sector and the government will lead the Egyptian banks to deploy some of their large pool of core liquid assets (cash and bank placements) to fund part of their growth. However, Moody's expects that the erosion in core liquidity will be relatively modest and will allow the banks to maintain a strong liquidity position over the outlook horizon.
