The global economy witnessed more strong setbacks due to the Russian-Ukrainian war coinciding with the tightening policy adopted by the US Federal Reserve. This has led to an inflationary wave in most countries of the world, and these repercussions strongly affected global banks, as four banks declared bankruptcy in only three months.
We have seen the dominos effect in action with the fall of several banks one after the other. It started with the Silicon Valley Bank, followed by Signature Bank, First Republic Bank, and others. Meanwhile, Standard & Poor’s lowered its future outlook for the three largest banks in Egypt, which are the National Bank of Egypt (NBE), Banque Misr, and CIB from “stable” to “negative”.
Daily News Egypt surveyed the market about the impact of all these changes on the banking sector shares listed on the Egyptian Exchange.
The share of CIB declined since the announcement of the credit rating of Egyptian banks on May 2, as it closed at a price of EGP 52.74 per share, down to EGP 52.1 per share at the end of trading on Tuesday.
Amr El Alfy, head of the research department at Prime Trading, said that the decline in the credit rating of banks is due to the decline in the credit rating of the country as a whole. Therefore, it is natural for the banking sector to be affected by the rating. He explained that it is a natural sequence of events and will not affect the stock market, but it may affect the transactions of foreigners in the Egyptian market.
He went on to explain that investing in stocks has different criteria related to the evaluations and risks related to the stock, the nature of the sector and other data. El Alfy pointed out that the cost of CDS insurance could have a greater impact, as the higher the insurance cost, the lower the market performance.
The cost of insurance against defaults on sovereign debt rose by 1% to 1,813.88 points on Tuesday, compared to 1,796.71 points on Monday.
State of anxiety and suspicion
Mostafa Shafeae, head of the research department at Arabeya Online, said that there are many effects on the Egyptian Exchange from credit ratings, as well as global banking crises that affect the banking sector, which causes the investment scene to be fresh, as well as the dealings of foreigners within the Egyptian market, which is reflected negatively on the economy as a whole.
He added that this will create a state of anxiety and suspicion among foreign investors, because the investor in this case views the country as a package, which can create a state of suspicion and anxiety towards the entire country.
Fitch Ratings downgraded Egypt’s rating to B instead of B+, with a negative outlook, and Moody’s took a similar step a few weeks ago.
In its report, the agency said that the risks of external financing increased in light of the high financing needs, the tightening of external financing conditions, and the sensitivity of Egypt’s financing plans to the level of investor confidence, at a time of increasing uncertainty about the course of the exchange rate and the decline in foreign currency reserves.
Fitch added that there is uncertainty about Egypt’s inability to meet its external financing liabilities, which have increased with the difficulty of accessing markets and the lack of market confidence in the exchange rate system applied by CBE, which led to the cessation of foreign currency inflows.
Reduction in stock valuations
Mohamed Abdel-Hakim, head of the research department at Ostoul Securities Brokerage, believes that a re-evaluation of the listed shares would occur based on the change in inflation rates, as lowering the credit rating will lead to an increase in the required rate of return on investment, which will result in a reduction in stock valuations at 15%.
He explained that the decline in the credit rating announced by Fitch on Egyptian banks, which includes the three largest banks in the market, including CIB, which is the most important security in the Egyptian Exchange due to its large relative weight, will greatly affect the market.
Amaniy Bendary, an analyst at Alma Capital, said that the global and local stock markets have become a real test for resilience in the face of the repercussions of bank bankruptcies in the United States of America in the past few months, which caused the spread of losses in global stock markets, especially in the banking financial services sector.
She added that the reduction of the credit rating of the three banks will affect several levels in their foreign transactions, increase the cost of commercial transactions with international banks, and the difficulty of procuring foreign currency, as well as the increase in the cost of external insurance.
She attributed the reduction in the rating of banks to their possession of a large part of sovereign debt securities, representing about 25-43% of the total assets of those banks, which means that the independent credit status of banks as well as their credit rating is linked to the credit rating of the Egyptian government.
Bendary believes there would be a weak impact on the performance of the banking sector shares on the Egyptian Exchange, stressing that the sector represents a strong opportunity for profit in EGX, supported by several factors, most notably the banks’ benefit from interest rate hikes, and the growth of their investment portfolios, which will certainly reflect on profitability.
She explained that the banking sector represents about 25% of the total market capital in the Egyptian Exchange, and the banking sector is still one of the promising sectors in the Egyptian Exchange.
According to the Egyptian Exchange data, the Egyptian banking sector is trading at a profitability multiple of 4.78 times, while the market is trading at a profitability multiple of seven times.