Covid is the gift that keeps on giving for Egyptian banks, which will remain exposed to “heightened” medium-term threats, Fitch Ratings said in its latest report on state-owned Banque Misr’s credit rating. The ratings agency still sees low near-term risks, especially as it relates to foreign currency funding and liquidity as the effects of the pandemic begin to taper off. With that in mind, Fitch has affirmed the long-term issuer default rating for Banque Misr at 'B+' with a stable outlook, a level equivalent to the agency’s sovereign rating for Egypt.

Egyptian banks now have stable liquidity positions after facing large capital outflows between March and April, during which foreign investors pulled bns in capital in response to the pandemic. The short-lived capital flight was cut short in May, with foreign portfolio investment more than doubling to USD 21.1 bn as of mid-October.

But even as banks weather the short-term storm, the outlook post-covid remains sketchy. Banque Misr, which Fitch estimates represents 17% of total banking assets and 19% of deposits in the country, reflects wider issues in the banking sector.

Issues include “weak internal capital generation,” with loans-to-deposit ratios well below standards and the performance of banks being closely linked to how well Egypt continues to bring in foreign currency. Major sources of foreign currency have come under pressure due to the pandemic, which erased bns of tourism inflows and reduced Suez Canal revenues and remittances from Egyptian workers abroad.

A sustainable improvement in the banking sector would therefore require FX stability, but Fitch expects our widening current account deficit to continue putting pressure on foreign currency reserves, even if inflows recover. The ratings agency sees the current account deficit widening to 5% of GDP this year from 3.1% in 2019.

For now, banks remain sufficiently capitalized, with ample liquidity at hand to defend against a rise in defaults. Commercial banks managed to maintain this position despite ramping up loan loss provisions this year, but profits are likely to come under pressure in the coming months as the rate of non-performing loans increases, the Financial Times said last week.