How Egypt’s commercial banks are bracing for a potential rate cut

The banking sector will need to make some changes in the event of a rate cut: With the prospect of a monetary easing cycle looming large, commercial banks are expected to take several measures to prevent a decline in their revenues, after an extended period of high earnings achieved due to high interest rates on loans and treasury bills, sources in the banking sector told EnterpriseAM.

REMEMBER- Analysts are divided over whether the central bank's Monetary Policy Committee (MPC) will cut rates this week, with four of the nine analysts we surveyed penciling in a rate cut in the upcoming meeting on Thursday. Some analysts are predicting that the CBE will cut interest rates by 100-200 basis points (bps), pointing to a strong positive base effect and slowing inflation as factors that could influence the decision. Others believe that the recent inflation data not slowing down at the expected pace will prompt the bank to wait until the next time the MPC meets in April.

Should a rate cut take place, banks will be looking to reduce costs: Banks will be focusing on expanding lending while reducing their costs as much as possible by monitoring their expenses to preserve profit margins, our sources said. However, revenues may not be as affected as many expect, as lower interest rates will affect both deposit and lending rates, Al Baraka Bank CEO Hazem Hegazy told EnterpriseAM.

Lenders will also turn to bonds to lock in the highest possible yield and could move to issue variable-yield certificates of deposit instead of fixed-rate ones during the CBE’s easing cycle, a senior banking executive told EnterpriseAM. Banks could also initiate interest rate cuts on savings certificates before the MPC begins its cutting cycle, with the aim of reducing the cost of their deposited funds, banking expert Hany Abou El Fotouh told us. Additionally, banks could increase their investments in long-term bonds, fixed-income securities, or any assets that provide high returns to compensate for the expected decline in loan earnings, he added.

Some banks have already started cutting interest on CDs: Banque Misr, CIB, and QNB Alahli — to name a few — have all slashed rates on their certificates of deposit this month as they prepare for the CBE to start its easing cycle.

Launching additional products could be another solution for lenders: Banks could focus on diversifying their revenue sources by offering investment banking services, trade financing, digital banking services, and seeking new investments to boost their revenues, Abou El Fotouh said.

However, banks seem to be exercising caution with regard to launching new products as they remain alert over the overall macro picture and the heightened risks currently present in the market, one source told us. Meanwhile, banks are no longer as keen on acquiring or financing firms operating in the non-banking financial sector, they said, adding that the strict regulatory measures imposed by the Financial Regulatory Authority (FRA) have lessened the appeal for banks to invest in the NBFS sector.

REMEMBER-Last February, the CBE issued a fresh batch of regulations targeting the financing provided to financial leasing firms from banks, in a bid to better govern the funds given to financial leasing firms and mitigate associated risks. Under the regulations, the total credit facilities and investments made in the securitization portfolios of leasing companies should not exceed 5% of the bank’s total portfolio of loans and credit facilities and no more than 1% of a bank’s credit portfolio can be granted to a single financial leasing company. This was followed by the Financial Regulatory Authority issuing fresh controls for banks that take part in NBFS.

AND- The FRA suspended issuing new licenses for companies seeking to operate in consumer finance or microfinance for one year last October. It also restricted the transfer of credit portfolios from NBFS players to banks.

Despite high borrowing costs, there has been an increase in overall credit volumes, which suggests that the high cost of financing will ultimately be borne by the consumer, banking expert Mohamed Abdel Aal told EnterpriseAM. This, in turn, could become a factor contributing to high inflation as businesses raise prices to maintain profitability, he said.