The outlook for Egypt's banking system is negative, unchanged since 2011, says Moody's Investors Service in a report published today.
Moody's acknowledges the recent steps taken toward political stabilization, yet attribute the negative outlook to continuing political and social tensions and the government's strained finances, which in Moody's view will continue to undermine investor and consumer confidence.
Furthermore, the banks' exposure to Caa1-rated Egyptian government debt poses a significant credit risk and ties the system's solvency to sovereign default risk.
Moody's forecasts GDP growth of 2.6 percent in 2014, well below the historical average of 4.9 percent between 2001 and 2010. However, Moody's acknowledges the economy is relatively large and diversified, and could — in the medium-term — regain strength once structural and fiscal issues are addressed.
On a positive note, Moody's expects Egyptian banks to remain well funded because of their strong deposit bases. Customer deposits accounted for more than three quarters of banking assets as of September 2013, supported by remittances from Egyptians working abroad. The large pool of deposits enables Egyptian banks to operate with minimal reliance on riskier market and/or foreign funding.
In November 2013, S&P raised its rating on four Egyptian banks and assigned them a stable outlook from negative, following a similar action on Egypt's sovereign rating. Fitch has taken a similar decision on Egypt and three Egyptian banks in January 2014.
