Monday, 19 April 2021

Egypt’s banking sector likely second fastest-growing in MENA, EFG says in earnings preview

Aggregate earnings of Egypt’s listed banks are expected to have grown 10% y-o-y in 1Q2021, reversing a trend of anemic bottomline growth in 2020 as lenders were forced to shore up loan loss provisions last year amid worries over pandemic-linked bad loans, EFG Hermes said in a note to clients forecasting 1Q2021 earnings for the sector. Earnings for eight publicly traded banks grew 3% q-o-q during the first quarter of the year, the report estimated, as higher net interest income driven by higher credit volumes offset lower central bank rates. A diminishing need for loan loss provisions as the economy recovers from covid-19 will also drive growth, with the aggregate cost of risk expected to fall to 130bps in 1Q2021, down from 198bps in 4Q2020, the report notes.

Loan activity for Egypt’s banks is expected to have ticked up 9% y-o-y during the quarter and 2% q-o-q, according to the report. “We expect retail credit and working capital financing to be the key drivers of credit growth during 2021,” EFG said, though the waiving of fees and commissions till June 2021 in accordance with a CBE decision last year is expected to keep fee income muted. The report covers CIB, QNB, Credit Agricole, Al Baraka Egypt, Faisal Islamic Bank, the and Development Bank, Abu Dhabi Islamic Bank, and Egyptian Gulf Bank.

But an increase in loan defaults remains a downside risk, the report said, as banks may need to ramp up provisioning costs once again if 1Q2021 results indicate increased risk.

Egypt’s banking sector was the second-fastest growing in the region, recording 10% following the UAE’s 13%. Overall, bank earnings across MENA grew 5% y-o-y in 1Q2021, staging a slight recovery from “various shocks” in 2020 including higher provisioning costs and pressure on margins from a series of rate cuts at the height of the pandemic, according to the report. “We expect broadly stable interest margins q-o-q,” EFG said, “as lower policy rates have largely been passed on to asset yields and funding costs, and as there is no evidence of tightening in banking sector liquidity.”

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