The new regulations issued by the Central Bank of Egypt (CBE) are credit positive for Egyptian banks, according to a report issued Wednesday by the credit rating agency Moody’s Investors Service.
The report explained that these regulations will mitigate the credit risk in banks’ growing retail portfolios and will reduce banks’ asset quality vulnerability that has been caused by focusing on large single-corporate customers.
The CBE issued new regulations last Monday that impose affordability criteria for new retail borrowers and reduce maximum loan limits for corporate borrowers.
It introduced a 35% debt payment-to-income cap for retail loans, aiming to contain the expansion in retail and consumer loans and mitigate the threat of rising credit risk in banks’ retail portfolios, according to the report.
Over the past four years, retail lending in Egypt has increased by 73% despite the weakness of total loan growth, Moody’s said and that retail lending currently constitutes 27% of private-sector loans.
Retail lending in Egypt is salary assigned, with the payment automatically deducted from the borrower’s salary, a measure that is intended to diminish credit risk, according to the report.
“However, the new measure will avert overheating in the retail loan space and protect banks’ asset quality,” the report read.
“The National Bank of Egypt SAE (NBE, B3 stable, caa11), which we estimate had an 18% market share of retail loans as of December 2014 and Banque du Caire SAE (B3 stable, caa1), which we estimate had a 10% share, will benefit from the new affordability criteria,” Moody’s said.
The CBE also reduced the single corporate borrower concentration to 15% of bank equity from the previous 20% and group concentrations to 20% from 25%. CBE gave the banks three years to bring their positions in alignment with this new decision.
“The new regulation will help diversify the banks’ loan portfolio from a small number of corporate borrowers and will help develop the small and midsize enterprise (SMEs) sector, which accounts for an estimated 5-10% of total loans currently,” Moody’s said.
The CBE also instructed Egyptian banks to increase their lending to SMEs to 20% of their loan portfolio over the next four years, up from the current 5-10% rate, according to Moody’s estimates.
“Along with other government-led growth enhancing reforms, CBE’s regulation will likely shore up the country’s fragile economic recovery, a credit positive for Egypt (B3 stable),” Moody’s said.
While the CBE’s new regulations will prompt rapid growth in SME loans to reach the 20% target, they will also likely weaken loan performance, a credit negative for Egyptian banks, according to Moody’s.