Cairo - Mubasher: Some Egyptian banks are still at risk of struggling to meet minimum regulatory capital requirements, Fitch Ratings said in a report on Tuesday.

This comes as a consequence of the local currency weakness after the Egyptian pound was floated last November, given the bank’s high exposure to foreign-currency (FC) loans, the ratings agency added,

The Egyptian pound devaluation will also weaken asset quality, with debt restructuring of loans for smaller corporates already taking place, but we expect only modest deterioration.

“In the event of capital shortfalls at public-sector banks, we believe the Egyptian authorities would look to provide support, as they did last year when the Central Bank of Egypt (CBE) provided interest-free loans classified as subordinated debt to help recapitalise the country's three public-sector banks.”

“However, the government's ability to support banks is severely constrained by its weak credit profile and financial flexibility,” the report indicated.

Fitch expects private-sector banks would cut dividends to bolster capital if needed.

The capital weakness stems from the inflation of FC risk-weighted assets due to the depreciation of the pound in November 2016, with some banks reporting more than 50% loan growth in 2016, while capital is predominantly in local currency, the report explained.

“Capital remains vulnerable to the weakening of the pound as FC loans are significant, reaching 44% of the sector's total loans at end-November 2016 just after the pound was floated.”

“Egyptian banks had reasonable asset quality before the pound was floated, with an average impaired loan ratio of 5.9% while impaired loans were 99% covered by reserves at end-September 2016.”

Further to the devaluation, the CBE has agreed with banks to restructure the FC debt of some smaller corporates with turnover less than EGP 500 million and debt not exceeding $5 million.

The CBE will provide banks with $400 million to $500 million to cover their open position and in return the firms will repay their debt in local currency at 12% interest rate, the report noted.

Egyptian banks have strong pre-impairment operating profits, which provides a buffer to absorb impairments, according to Fitch.

“We believe the floating of the pound will increase the flow of foreign direct investments (FDI) and help to ease the FC shortage in the Egyptian banking system. However, the sector's FC loans/deposits ratio is weak, in our opinion, given the operating environment, with a worsening trend in recent years,” Fitch added.