Egyptian Banks’ Net Interest Margins Resilient to Upcoming Rate Cuts

Egyptian banks’ net interest margins (NIMs) should be resilient to the large interest rate cuts likely to be announced by the Central Bank of Egypt (CBE) this year, Fitch Ratings says. Performance metrics will start to fall in 2025 from recent highs, but we expect profitability to remain strong and above the 2017-2023 average.

NIMs were resilient during the last monetary easing cycle (2018–2021), despite policy rates being cut by a cumulative 10.5pp, with the sector NIM falling by only 40bp from its 2020 peak. Banks deployed liquidity into high-yielding treasury bonds (T-bonds) to mitigate the effect of lower short-term yields on sovereign securities, and benefitted from lower funding costs. More than three-quarters of customer deposits in Egypt are interest-bearing, and these typically reprice downwards when policy rates are cut.

We expect the CBE to start its monetary easing cycle on 20 February. The consensus expectation is for a 100bp–200bp cut, on the back of a steady decrease in inflation to 24% in January 2025, from 35.7% in February 2024, with a significant further decrease likely in February 2025 due to a strong base effect. Fitch forecasts inflation to slow to 10.6% by mid-2026, aided by broad currency stability and despite further fuel subsidy cuts and increases in some administered prices, and expects policy rates to be cut to a level consistent with real rates of around 4%. This implies rate cuts of some 10pp over the next year or so, barring external shocks.

he sector NIM expanded by 140bp in 1H24 year-on-year and will have expanded further since then due to higher treasury bill yields, which increased by 230bp in 2H24. As policy rates are cut in 2025, we expect some pressure on NIMs as the banking sector is negatively geared to falling rates in the short term, due to positive repricing gaps. In the medium term, however, lower rates will lead to lower funding costs as most customer deposits are time or savings deposits (77% at end-9M24). During the 2018-2021 monetary easing cycle, when three-month treasury bill (T-bill) yields fell by about 800bp, the average NIM for the five largest banks contracted by only about 40bp.

We expect banks to adopt the same liquidity strategy in 2025, increasing their exposure to T-bonds to shield their NIMs against yields on T-bills and overnight deposit auctions at the CBE decreasing in tandem with policy rates. Indeed, the authorities plan to issue EGP203 billion of T-bonds in 1Q25 (1Q24: EGP44 billion) as part of their plan to lengthen Egypt’s domestic debt maturity profile. We also expect banks to increase their fixed-rate retail lending to limit the impact of lower rates on NIMs.

We expect NIMs to decline slightly in 2025 and 2026 as lower rates feed through to banks’ revenues. The operating profit/risk-weighted assets ratio, Fitch’s core metric for bank profitability, averaged 10% for Egypt’s five largest banks in 1H24, the highest in any half-year ever. The figure is likely to start reducing in 2025 but should remain above historical averages, supported by higher business volumes (because of pent-up credit demand), lower borrowing costs and lower costs of risk due to improving economic conditions. The sector’s net income growth will slow after more than doubling year-on-year in 9M24, but we still expect it to increase by at least 30% in 2025.

Egypt is the only Middle Eastern banking sector with an ‘improving’ sector outlook for 2025. This reflects our views that general business and operating conditions should improve in 2025 compared with 2024 due to easing inflation, lower interest rates, improved investor confidence and healthy foreign-currency liquidity conditions.