{"id":617412,"date":"2024-03-21T00:00:00","date_gmt":"2024-03-21T00:00:00","guid":{"rendered":"https:\/\/enterpriseam.com\/egypt\/2024\/03\/21\/banks-capital-adequacy-ratio-saw-a-minor-decline-in-2023\/"},"modified":"2024-03-21T00:00:00","modified_gmt":"2024-03-21T00:00:00","slug":"banks-capital-adequacy-ratio-saw-a-minor-decline-in-2023","status":"publish","type":"post","link":"https:\/\/enterpriseam.com\/egypt\/2024\/03\/21\/banks-capital-adequacy-ratio-saw-a-minor-decline-in-2023\/","title":{"rendered":"Banks\u2019 capital adequacy ratio saw a minor decline in 2023"},"content":{"rendered":"

The banking sector wrapped up 2023 with a slight decline in the capital adequacy <\/strong>ratio (CAR)<\/strong>, with the metric hitting 18.6%, compared to the 19% recorded a year earlier, according to the financial soundness indicators report (pdf)<\/a> released by the Central Bank of Egypt (CBE). Banks\u2019 CAR remains well above the central bank\u2019s minimum threshold of 12.5%.<\/p>\n

Egyptian banks are well-positioned to absorb financial shocks<\/strong>, banking expert and Alraya Consulting CEOHany Abou El Fotouh told Enterprise. The marginal CAR drop doesn\u2019t pose a risk to the banks, and it\u2019s expected to recoup as economic recovery accelerates, Abou El Fotouh added.<\/p>\n

What is CAR? <\/strong>The capital adequacy ratio \u2014 also known as capital to risk-weighted assets ratio \u2014 is a metric that measures a bank\u2019s ability to pay liabilities (bank-speak to give depositors back their money), absorb potential losses (from, say, bad debts), and respond to credit risks.<\/p>\n

When does CAR drop?<\/strong> The CAR declines as risk-weighted assets grow, Abou El Fotouh explained, adding that the latter could be a result of increased credit and operational risks, investment in securities, and financial losses as well as the deterioration of asset quality. Moreover, a weaker EGP can pressure the CAR due to its impact on the value of banks\u2019 assets and liabilities, he said.<\/p>\n

The float may shake things up: <\/strong>Some banks may have to increase their capital to meet the CBE\u2019s capital requirements, EG Bank board member Mohamed Abdel Aal told Enterprise<\/a> on the day the central bank floated the EGP. \u201cIt\u2019s hard to tell where the price of the EGP will stabilize, but with sufficient FX liquidity in local banks to meet demand, there won\u2019t be a big impact on banks\u2019 capital adequacy ratio,\u201d he added. If that doesn\u2019t happen, then some banks will probably have to increase their capital to meet requirements, Abdel Aal said.<\/p>\n

Remember: <\/font><\/strong>Under the 2020 Banking Act<\/a>, local banks were mandated to increase their capital to a minimum of EGP 5 bn, while foreign banks operating in Egypt were required to raise their capital to USD 150 mn.<\/p>\n

Sound smart: <\/strong>The float could pressure both banks\u2019 ability to disburse FX loans and customers\u2019 ability to pay them back. A weaker EGP could hurt banks\u2019 asset quality and mount pressure on their non-performing loans, especially FX-denominated loans, as it would cost borrowers more in local currency to pay them back. On the other hand, currency depreciation could also hamper banks\u2019 FX exposure, especially amid a low rate of FX assets, which would cost banks more in EGP to disburse FX-denominated loans.<\/p>\n

Other metrics from the report:<\/strong><\/p>\n