In early May, Fitch downgraded Egypt’s sovereign rating to "B" with a negative outlook. Three of the four banks, whose ratings it downgraded, are public banks exposed to the state. 

Rating agency Fitch downgraded on May 17 the credit ratings of four major Egyptian banks, namely The National Bank of Egypt (NBE), Banque Misr, Banque du Caire, and Commercial International Bank. 

NBE and Banque Misr are respectively the largest and fourth-largest banks in Africa by assets  ($193.53 billion and $114.22 billion in assets respectively as of December 31, 2022) 

The Issuer Default Ratings (IDR) and Viability Ratings of these four Egyptian banks have been lowered from "B+" to "B" with a negative outlook.

According to Fitch, these ratings are closely related to the recent downgrade of Egypt's sovereign rating to "B" with a negative outlook in early May. They reflect a more difficult operating environment for these banks, due to their high exposure to the government, but also the pressure on the banks' liquidity.

The four banks mentioned above have significant exposure to the government through holdings in Egyptian government debt and loans to public sector companies. The total exposure of the Egyptian banking sector to the government and the broader public sector is estimated to be close to 75 percent of total assets, or about 11 times banks' equity at end-2022.

As for the tight liquidity conditions for these Egyptian banks, they are explained by the recurrent capital shortages of Egyptian banking institutions.

Fitch explains that the depreciation of the local currency, the Egyptian pound, a few months ago, has led to the decline of the average Tier 1 capital ratio (CET1) of the Egyptian banking sector by 180 basis points to 11.1% at the end of 2022. This is expected to put "some pressure on banks' core capital ratios in 2023, mainly arising from further currency depreciation and MTM losses,” it wrote. Taking the analysis a step further, the rating agency estimates that "a 10% currency depreciation would erode these four banks' CET1 ratios by 30bp on average."

Fitch also lowered the government support ratings (GSR) of the four banks from "B" to "B-", reflecting the weaker capacity of the government to provide support, “particularly in foreign currency (FC), which caps the domestic systemically important bank (D-SIB) GSR for Egyptian banks at 'b-', one notch below the sovereign rating.”

Chamberline Moko