CBE's key rates hike to boost banks profitability: Moody's

CAIRO – 25 May 2017: Egyptian banks will benefit from the Central Bank of Egypt's (CBE) decision to raise its key interest rates, as it will boost their interest income and capital-generation capacity, Moody's said in a Thursday report.

In a surprise move late Sunday, the CBE increased its key interest rates 200 basis points, pushing the overnight deposit rate up to 16.75 percent, the overnight lending rate to 17.75 percent, and the CBE’s main operation to 17.25 percent.

This was the first action since the CBE raised the rates by 300 basis points the same day it free-floated the pound on November 3.

"The rate hike will increase yields on banks’ large stock of liquid assets composed of placements with banks and the central bank and Treasury bills that will be reinvested at higher rates and improve their profitability," Moody's said in the report.

Banks are also projected to benefit at lower scale from raising the rate they charge on floating-rate loans, which account for around 40 percent of loans, according to Moody's estimates.

Banks’ cost of funding is expected to go up less than 200 basis points because the bulk of the banks’ funding is composed of deposits, a large portion of which are low-cost current and savings accounts, which accounted for 30 percent of total deposits, while customer deposits funded 70 percent of total assets as of year-end 2016, the report read.

Egypt's largest private bank, "Commercial International Bank (Egypt), is better positioned to benefit from the rate hike, Moody's predicted, citing the lender's higher stock of liquid assets.

"The significant 500-basis-point cumulative increase in interest rates since November 2016 will also likely reduce debt affordability, negatively affecting loan performance," it added.

However, Moody's expects the low leverage in the private sector, along with the central bank’s macro-prudential regulations to ensure repayment capacity, to partly mitigate the risk of worsening asset quality.

Warning of banks' aggressive expansion in loans to small and midsize enterprises, Moody's said it highly exposes them to credit risks with these businesses being more vulnerable to changes in the economy.

"However, a sizable amount of these loans were made under a special scheme that the CBE offered at preferential interest rates of (5-7) percent," it concluded.