The agency’s gloomy prognosis is mitigated by some positive comments on private sector banks’ profits, recent management changes at public sector banks and approval of the efforts spearheaded by Commercial International Bank (Egypt – CIB)to establish a centralised credit bureau.

Moody’s says the sluggish performance of the Egyptian economy since 1998 is the main challenge facing banks. In addition, the fall in tourism income after the 11 September attacks has resulted in shortages of hard currency and severe problems for local businesses tied to the tourism sector.

The agency notes that the lack of new corporate lending opportunities has led many banks to turn to the underdeveloped retail sector. However, Moody’s says it views retail lending cautiously because of the lack of good information about borrowers and the weakness of the regulatory framework.

Moody’s acknowledges that recent data show some improvements in Egypt’s external accounts, but the agency says this is insufficient to support a sustained recovery. ‘We believe there needs to be a significant and sustained rebound in tourism and foreign investment for the stagnant economy to get moving again,’ the report says.

The slowdown is reflected in the sharp fall in credit growth, from 23.6 per cent in 1997 to 4.8 per cent in 2001. Moody’s says that it suspects that asset quality has also deteriorated, and that not all banks have made adequate provisions. It says the Central Bank of Egypt puts the level of classified loans at 16 per cent of the total, a modest increase on the 12 per cent level in 1999. ‘We believe this level may not fully capture credit risks in banks’ portfolios,’ says Moody’s. The problem is thought to be more acute in the state sector than in the private sector.

The agency says that some banks may face difficulty meeting the central bank’s new capital adequacy minimum ratio of 10 per cent, applicable from the start of 2003.

Moody’s in January assigned negative outlooks to the financial strength ratings of three of the seven banks it covers in Egypt: National Bank of Egypt, Misr International Bankand Egyptian American Bank. It says in its new report that the weakness of the economy will build up pressures on the ratings of all the banks it rates.