CBE's expected rate cuts unlikely to dent Egyptian bank's NIMs: Fitch Ratings

Updated 2/20/2025 9:22:00 AM

Arab Finance: Egyptian banks’ net interest margins (NIMs) are expected to withstand the impact of major interest rate cuts likely to be introduced by the Central Bank of Egypt (CBE) this year, according to a research note by Fitch Ratings.

While profitability metrics are projected to decline from recent highs in 2025, they should 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 10.5 percentage points, with the sector NIM falling by only 40 basis points from its 2020 peak,” Fitch stated.

Banks managed to offset lower short-term yields by investing in high-yielding treasury bonds and benefiting from reduced funding costs.

Fitch expects the CBE to begin its monetary easing cycle on February 20, with consensus forecasts pointing to an initial rate cut of 100 to 200 basis points.

Inflation has steadily declined, falling to 24% in January 2025 from 35.7% in February 2024, and is expected to drop further in February due to a strong base effect.

Fitch forecasts inflation to ease to 10.6% by mid-2026, aided by currency stability, despite planned fuel subsidy cuts and price hikes for some regulated goods.

The rating agency anticipates policy rate cuts of around 10 percentage points over the next year, barring external shocks.

“During the 2018-2021 monetary easing cycle, when three-month treasury bill (T-bill) yields fell by about 800 basis points, the average NIM for the five largest banks contracted by only about 40 basis points,” Fitch noted, adding that banks are expected to adopt a similar strategy in 2025 by increasing exposure to treasury bonds to shield their margins.

Fitch predicts a slight decline in NIMs in 2025 and 2026 as lower rates feed into bank revenues.

However, profitability should remain strong, supported by rising business volumes due to pent-up credit demand, lower borrowing costs, and reduced credit risk as economic conditions improve.

“The sector’s net income growth will slow after more than doubling year-on-year in the first nine months of 2024, but we still expect it to increase by at least 30% in 2025,” Fitch stated.

Egypt remains the only Middle Eastern banking sector with an “improving” outlook for 2025, reflecting expectations of better business and operating conditions driven by easing inflation, lower interest rates, stronger investor confidence, and improved foreign-currency liquidity.