Cairo – Mubasher: The Egyptian pound’s free flotation boosted the US dollar liquidity in the Egyptian banking system, paving a smooth way for lending growth and higher non-interest income. But fears of asset quality shock, tight capital adequacy and cash dividend cuts may tremble the whole system, Pharos said Sunday in a research note.
This concrete improvement was partially driven by the narrower gap between the parallel and official rates, along with Egyptians’ profound confidence in the domestic banking cycle, the research agency clarified.
Working capital financing is hence forecast to show signs of recovery in 2016, increasing asset allocation for lending, “which should “gradually” and “partially” substitute treasury instruments’ asset allocation”, according to the agency.
The outlook for retail lending will be, the agency believes, determined by several factors, most importantly including: lower disposable income; debt service ratio cap at 35% and affordability.
“We vote that affordability will outweigh others and that retail lending will continue to deliver healthy growth even before corporate lending picks up”, the report indicated.
Policy rates are anticipated to gradually drop over the second half of 2017/18, leading net interest margin (NIM) to level off starting from 2018 from the peak spot reached in 2016. However, NIM is to revive once again on fees and commissions after years of silence, the agency foresees.
On the other hand, some banks, including public ones, will see losses on the short USD-positions after reporting net foreign liability positions pre-floatation. Moreover, corporate banking clients with short USD-positions will incur losses that might affect credit quality.
Accordingly, a significant drop in capital adequacy ratios is likely to be registered in the foruth quarter of 2016 as most capital bases are assessed in local currency banks hold foreign currency denominated assets.
As a result, banks may resort to capital hikes or tier II funding plus profit retention in 2016 to gradually revive CARs.
Therefore, the research firm expects “a cut in cash dividends, but an attractive alternative will be offering stock dividends, provided that retained earnings or reserves support such a move.”
