Fitch offers new warning on Egyptian banks: Fitch Ratings has downgraded the operating environment score of four of Egypt’s biggest banks on the back of their high exposure to sovereign debt, the rating agency said Wednesday. This follows on the heels of its decision to downgrade Egypt’s sovereign credit rating earlier this month.

Gauging the operating environment: Fitch measures the operating environment by assessing “the ability of banks to generate business volumes while taking on acceptable levels of risk.” It does this by looking at the GDP per capita of a country and its operational risk index (pdf).

The downgrade: Fitch lowered the score of the National Bank of Egypt, Banque Misr, Banque du Caire, and CIB to ‘B-’ from ‘B’ and revised its outlook to stable from negative. Fitch cut the credit ratings of the banks earlier this month after downgrading its rating for Egypt’s sovereign debt.

The rationale:

#1- Banks are exposed to sovereign debt: “The operating environment score is in line with the sovereign rating as operating conditions for banks are highly correlated with the sovereign profile,” the rating agency said. Fitch estimates that almost 50% of the total assets of Egypt’s banking sector are invested in government debt, creating a significant exposure.

#2- The currency crisis is weighing on investor confidence: The rating agency doesn’t expect a significant increase in FX inflows in 2024 due to weak investor confidence caused by the FX crunch, an overvalued currency, and slow progress on structure reforms. As a result, it forecasts the banking sector’s net foreign asset position to remain negative through next year.

What they said:High inflation, currency pressure, and geopolitical uncertainties are also affecting investor confidence in Egypt, Redmond Ramsdale, Fitch’s head of Middle East Bank Ratings, told Asharq Business in an interview. He went on to predict 3.5% growth in Egypt’s GDP in the current FY 2023-2024, lower than the government’s most recent forecast for 4.2% growth.

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