Egypt’s banks could face further pressure on net income in 2021 due to the lower interest rate environment and a potential rise in bad loans when the Central Bank of Egypt (CBE) lifts support measures it introduced at the onset of the pandemic, Fitch Ratings said in a report yesterday. “We expect continued pressure … due to lower rates and higher loan impairment charges as borrower support measures end,” the ratings agency wrote.

So far, loan quality has remained stable: Non-performing loans held on bank balance sheets were little changed during the pandemic, remaining at an industry average of 3.4% at the end of 3Q2020 thanks to the central bank’s interest rate cuts and its debt relief initiative.

But this could change when emergency stimulus measures are wound down: Fitch expects the ratio of bad loans to rise to 4% by the end of 2021 as the central bank ends its measures to support borrowers. Banks last year set aside bns on their balance sheets in the form of provisions against the possibility that covid-19 would force more borrowers to default on loans, which played a key role in a 20% drop in profits during the first half of 2020.

Over-reliance on lending to state and large borrowers is a weakness: “We do not expect [rising bad loans] to lead to capital erosion, but capitalization remains a credit weakness given banks’ high exposure to the sovereign and large individual obligors,” the report says.

Banks remained financially sound throughout the pandemic despite operating income from loans and core operations mostly decreasing. This is because a large part of bank income comes from government debt, and their loans-to-deposit ratio is quite low by international standards.

FX liquidity is also exposed to external shocks: The sector’s net foreign assets nosedived by 45% m-o-m at the beginning of the pandemic in 2020, when banks made USD available to foreign investors who pulled USD 18 bn out of the country in a single month during the great global covid selloff. Their positions have been recovering steadily since then, but remain susceptible to capital outflows.