Cairo – February 20, 2025: Fitch Ratings forecast that Egypt’s banking sector will maintain resilient profitability despite anticipated interest rate cuts by the Central Bank of Egypt (CBE) in 2025, expecting net interest margins (NIMs) to remain above the 2017-2023 average, even though performance metrics are likely to decline from their recent highs.
Fitch noted that Egypt's banking sector demonstrated resilience during the previous monetary easing cycle, which spanned from 2018 to 2021.
Banks were able to offset the impact of lower short-term yields on sovereign securities by deploying liquidity into high-yielding treasury bonds (T-bonds) and benefiting from lower funding costs. Furthermore, as more than three-quarters of customer deposits in Egypt are interest-bearing, these deposits typically reprice downwards when policy rates are cut.
Fitch anticipates that the CBE will begin its new monetary easing cycle on 20 February 2025, with expectations for a 100–200 basis point rate cut.
This move follows a steady decline in inflation, which dropped to 24 percent in January 2025 from 35.7 percent in February 2024, with further decreases expected in February 2025 due to a strong base effect.
Fitch also predicts that inflation will slow to 10.6 percent by mid-2026, thanks to broad currency stability and despite additional fuel subsidy cuts and increases in certain administered prices. The agency expects policy rates to be reduced to a level consistent with real rates of around 4 percent, implying rate cuts of about 10 percentage points over the next year, barring external shocks.
In the first half of 2024, the sector's NIM expanded by 140 basis points year-on-year and is expected to have increased further in the second half due to higher treasury bill yields, which rose by 230 basis points. However, Fitch anticipates some pressure on NIMs as policy rates are cut in 2025, since the banking sector is negatively impacted by falling rates in the short term due to positive repricing gaps.
Over the medium term, lower rates should lead to reduced funding costs, as most customer deposits are time or savings deposits (77 percent at the end of 9M24).
During the previous easing cycle (2018-2021), when three-month treasury bill yields fell by about 800 basis points, the average NIM for Egypt’s five largest banks contracted by only about 40 basis points.
Fitch expects banks to adopt the same liquidity strategy in 2025, increasing their exposure to T-bonds to protect their NIMs as yields on T-bills and overnight deposit auctions at the CBE decrease in line with policy rate cuts.
The authorities are planning to issue EGP 203 billion in T-bonds during the first quarter of 2025, compared to EGP 44 billion in the first quarter of 2024, as part of a plan to extend Egypt’s domestic debt maturity profile. Banks are also expected to increase their fixed-rate retail lending to limit the impact of falling rates on NIMs.
The agency predicts a slight decline in NIMs in 2025 and 2026 as lower rates impact banks’ revenues.
The operating profit-to-risk-weighted assets ratio, Fitch’s core metric for bank profitability, averaged 10 percent for Egypt’s five largest banks in the first half of 2024, marking the highest level ever recorded in any half-year.
While this figure is expected to decrease in 2025, it should remain above historical averages, supported by higher business volumes, lower borrowing costs, and reduced costs of risk due to improving economic conditions. While the sector’s net income growth will likely slow after more than doubling year-on-year in the first nine months of 2024, Fitch expects it to still rise by at least 30 percent in 2025.
Notably, Egypt is the only country in the Middle East with an ‘improving’ banking sector outlook for 2025. This positive outlook reflects Fitch’s belief that general business and operating conditions will improve in 2025 compared to 2024, driven by easing inflation, lower interest rates, improved investor confidence, and healthy foreign-currency liquidity conditions.
Be Social
Comments
Leave a Comment