According to a recent report by HC Securities & Investment, the stability of the exchange rate, and the complete elimination of the black market will benefit Egypt.
HC Securities & Investment expects banks operating in Egypt to record strong profitability indicators in the current year. This will be supported by the rise in treasury and loan returns. HC said that the Ras El Hekma deal, a multi-billion-dollar deal being developed in a prime coastal area by the United Arab Emirates (UAE), has led to an improvement in the external situation of the Egyptian economy and restored investor confidence. Egypt concluded the deal worth USD35 billion last February. Since then, Egypt has received the first and second tranches of the deal worth USD24 billion.
HC explained that the deal contributed to an 85 percent decline in the Egyptian banking sector's net foreign currency liabilities. These fell on an annual basis to $3.64 billion last April, compared to $29 billion last January.
Dollar liquidity continues to improve after the flotation
On March 6, the Central Bank of Egypt (CBE) raised the interest rate by 600 basis points, bringing the total increase to 800 basis points since the beginning of the year and 1,900 basis points since the start of the tightening monetary policy in March 2022. The CBE allowed market forces to determine the exchange rate of the US dollar against the Egyptian pound. These measures caused the value of the Egyptian pound to decline by 35 percent since the beginning of 2024, reaching 47.7 pounds against the dollar.
Taking into account the impact of the Gaza War on tourism and Suez Canal revenues, the International Monetary Fund (IMF) and Egypt reached an agreement regarding a set of comprehensive reforms to increase the value of the loan from the IMF to $8 billion instead of only $3 billion previously agreed in December 2022.
Amending the agreement, and reviews of the Egyptian programme, resulted in the disbursement of about $820 million last April, in addition to another $820 million that the Egyptian government received on 1 August. The EU also pledged to provide an aid package worth 7.4 billion euros (USD 8.06 billion) to Egypt, which will be disbursed until 2027.
This reflected positively on the credit ratings of the Egyptian economy and the banking sector. Standard & Poor's and Fitch raised Egypt's credit rating to positive from stable, while Moody's announced that it raised Egypt's credit rating to positive from negative.
HC does not expect capital lending to grow before 2025 due to the high cost of borrowing, and the company does not expect interest rates to be reduced before the end of this year or the beginning of next. Hence, the company expects the banking sector to benefit from high treasury returns, which will reflect positively on the banks' net interest margin.
Higher treasury yields and actual loan growth
The company's macroeconomic analyst, Heba Mounir, said: "We expect bank profits to grow strongly in 2024, supported by the rise in treasury revenues, the actual growth of loans, and the growth of the loan portfolio in the banking sector by about 31 percent on an annual basis, to reach 7.25 trillion pounds (USD 0.151 trillion) in 2024."
Last January, the National Bank of Egypt and Banque Misr issued one-year deposit certificates with an annual interest rate of 27 percent. After the devaluation of the pound and the rise in interest rates last March, the two banks offered three-year certificates of deposit with decreasing interest, payable annually, with a return of 30 percent during the first year, 25 percent during the second year, and 20 percent during the third year.
Some private banks, such as the Cairo-based Commercial International Bank (CIB), also issued three-year certificates of deposit with a monthly interest rate ranging between 20 and 22 percent. This is why HC expects total banking sector deposits to grow by about 27 percent on an annual basis to 13.7 trillion pounds (USD 0.285 trillion) in 2024. HC also expects profit margins to continue to rise, especially those in local currency because of the rise in treasury yields.
Photo: Egyptian banks are likely to benefit from the floating of the pound against the dollar (by Adobe).