The end of easy credit as banks stress test for a weaker EGP

Escalating regional tensions and a spike in global energy costs are pushing banks away from growth-led strategies in favor of a cautious and defensive approach, industry insiders tell EnterpriseAM. Local lenders are offloading risk from energy-intensive manufacturing and logistics while doubling down on defensive sectors like agri-tech, pharma, and import substitution, we’re told.

“Banks in Egypt and other emerging markets are no longer driven solely by the goal of achieving the highest returns,” Egyptian Society for Political Economy, Statistics, and Legislation member Ahmed Shawky tells us. The “primary focus has shifted to maintaining asset quality and enhancing the ability to withstand shocks,” he explained, warning that crises often lead to the ratios of non-performing loans rising 1 to 2 percentage points in emerging markets.

With a growing drain on foreign currency, lenders are intensifying portfolio reviews and shifting their focus to risk management, NBK Corporate Finance Assistant Deputy CEO Mohamed Abdel Moneim similarly tells us.

“Traditional models are no longer sufficient under current challenges,” according to Shawky, as banks are now “relying on extended stress tests covering multiple scenarios, such as spikes in energy prices, supply chain disruptions, and currency devaluation,” and putting increased weight on future earnings flow expectations. “In times of crisis, the strength of a bank is not measured by its capacity to lend, but by its ability to make the right credit decision at the right time with the highest degree of professional prudence,” according to Shawky.

Banks are prioritizing food, pharma, healthcare, and agriculture — sectors seen as resilient to external shocks — while scaling back exposure to industries grappling with supply chain disruptions and rising operating costs, Abdel Moneim said. Shawky also points to renewable energy, SMEs, fintech, and digital services as sectors being pivoted towards by banks as they move “toward reducing concentration in sectors most vulnerable to volatility while strengthening precautionary provisions and repricing financing to reflect actual risk.”

Why this matters: With between USD 5.2 bn and USD 6.8 bn in foreign outflows since February and CDS spreads hovering near 330 points, “the expansion first logic no longer dominates,” Alraya Consulting and Training Managing Partner Hany Abou El Fotouh tells EnterpriseAM. Banks are no longer looking at clients’ growth trajectories, but stress testing them for a weaker EGP, vulnerability to supply chain disruptions, and exposure to high energy costs, he added. Depending on where your company sits on these points, the cost of capital might have just gone up significantly.

What’s next? If pressures persist, credit growth could fall from normal rates of around 10% to 5% as banks become “more stringent in granting credit, redirecting financing toward defensive sectors and prioritizing liquidity management and asset quality over lending expansion,” according to Shawky. Abou El Fotouh also suggests that a longer war will lead to banks opting for further “shorter-term financing, higher selectivity, and more conservative risk pricing.”