Moody's sees Egypt's rate cut, easing inflation as credit positive for banks

Credit rating agency expects Egypt's GDP to grow 5.6% in 2019, additional rate cuts next year

Egypt's interest rate cut and easing inflation will support bank revenues, credit rating agency Moody's said in a Monday report. The report cited the Central Bank of Egypt's (CBE) 1% interest rate cut as credit positive for banks.
Accordingly, as inflation is currently below the CBE's 9% target, Moody's forecasts further rate cuts over the next year, "which will bolster business confidence and economic growth, supporting increased credit growth and business opportunities for banks, which will outweigh pressure on their net interest margins," the agency stated.
Lower interest rates and inflation will encourage capital spending by businesses that have been holding back on such investments, supporting consumer spending through enhanced debt affordability and government finances through a reduced interest bill.
Consequently, Moody's forecasts that Egypt's GDP will grow 5.6% in 2019 and 5.8% in 2020.
Furthermore, the credit rating agency believes that banks will also benefit from increased credit growth, estimating it at more than 15% in 2020, while pressure on asset quality will remain subdued; banks' nonperforming loans-to-gross-loans ratio was 4.1% as of March 2019.
Following Egypt's currency flotation in November 2016, interest rates rose by 700 bp to 19.25%, while inflation accelerated to 33%. Since then, the CBE has cut interest rates by 550 bp, on the back of the easing headline and core inflation, which recorded a six-year low in August at 7.5% and 4.9%, respectively.
However, Moody's believes that rate cuts will be pressure on banks' net interest margins. The report indicates that banks' loan and investment books will fully incorporate the drop in interest rates, while a portion of deposits – mainly demand deposits – are non-interest bearing or already earn very low rates.
"We believe, however, that the benefits of increased business generation will outweigh pressure on net interest income stemming from lower margins. The state-owned banks in particular (National Bank of Egypt (B2 stable, b21) and Banque Misr (B2 stable, b2) also have more scope than private-sector banks to contain the drop in net interest margins, as their more expensive funding products (certificates of deposit, saving deposits) gradually mature and new deposit products are priced lower," the report concluded.