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Opinion article: The increase in the required reserve ratio for Egyptian banks

We believe the Central Bank of Egypt’s decision to increase the reserve requirement ratio on short-term local currency deposits by 4 percentage points to 18.0% – in light of its efforts to withdraw liquidity and cope with inflationary pressures – may have negative effects on banks’ profitability.

According to our estimates, this decision aims to absorb a liquidity surplus of approximately 150 billion Egyptian pounds from the banking system, which means that this liquidity will be withdrawn and deposited with the Central Bank of Egypt without interest. We expect banks to meet the higher liquidity ratio primarily by investing less in interbank assets (which account for around 18% of the sector’s assets) and to a lesser extent in public debt instruments (which account for around 37%).

It is worth noting that the required reserve ratio on foreign currency deposits was kept unchanged at 10%.

On the positive side, most Egyptian banks have the ability to significantly absorb the negative effects of lost interest income. One of the options presented is for banks to gradually start raising the required yields in public debt auctions in the future. Some banks may be able to increase the long-term deposit ratio (the required reserve ratio is zero), while reducing the cost of financing short-term deposits. Despite this, we point out that banks with a high loan-to-deposit ratio will face greater pressure to raise deposit rates. We believe banks can also use a partial fee increase to reduce the impact on profitability. At the level of loans, individual loans are considered the most suitable products to raise their prices to partially offset the impact of the decrease in liquidity available in banks.

The worst case scenario – and this is unlikely to happen – is that banks will experience the full impact of raising the reserve requirement ratio without reacting. According to our calculations, we expect this to reduce the average return on equity by around 100 basis points. We believe that Credit Agricole-Egypt is considered the least affected among the banks covered by the increase in the compulsory reserve ratio, as the additional liquidity required to be deposited with the Central Bank of Egypt represents approximately 1.0% of the assets of the bank and 1.27% of deposits, which is the lowest level among other banks. This is despite the bank’s relatively high loan-to-deposit ratio, which stands at 68.5%. Despite this, we believe that the relative increase in the liquidity available to Crédit Agricole-Egypt used in the interbank market (13.2% of total assets) helps to mitigate this impact.

Against this backdrop, we maintain our expectation that the tightening of monetary policy will be followed by a new rise in interest rates.

We see that Egyptian banks are clearly benefiting from rising interest rates, with neutral to positive effects for any depreciation of the Egyptian pound in the short term.

(By: Monsef Morsi, Co-Head of Research at CI Capital for Financial Services in Egypt)

(للتوصلاز [email protected])

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