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Tuesday, 8 November 2016

Decision to float EGP is credit positive for Egyptian banks -Moody’s

The decision to float the EGP is credit positive for Egyptian banks as it will likely increase the availability of USD in the economy, supporting economic activity and the banks’ business, Moody’s said in a sector comment. The 300 bps increase in interest rates will also support banking sector profitability given the exposure to short-term government securities, positives that Moody’s says will “offset the negative effect that the currency devaluation will have on the banks’ capital adequacy ratios and the negative pressures that banks will face on asset quality owing to rising inflation and higher interest rates, which weaken debt affordability.” The ratings agency explains that “a weaker currency will exert mild pressure on banks’ already-low capital buffers because [USD]-denominated banking assets will appreciate relative to the banks’ Egyptian pound-denominated capital, although the higher profits that banks will make on their foreign currency assets will partially offset this effect. We estimate that a 50% devaluation would lower the banks’ reported Tier 1 capital ratio by 150 basis points to 10.8%.”

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