Egypt's banking sector absorbed a 600-basis-point rate shock in March 2024 — the NPL impact has been contained so far

A rate shock delivered alongside a currency reset

At a special meeting on 6 March 2024, the Monetary Policy Committee (MPC) raised the overnight deposit rate, the overnight lending rate and the rate of the main operation by 600 basis points, to 27.25%, 28.25% and 27.75%, building on a 200 basis point rise in February 2024. IMF staff counted a cumulative 800 basis points of hikes in the first quarter of 2024, and said the 6 March move had pushed the policy rate to historic highs, a significantly more aggressive stance than during the 2016–17 stabilisation episode.

The hike came with the unification of the exchange rate, which the CBE said would allow the rate to be determined by market forces and eliminate foreign exchange backlogs. IMF staff later reported that the spread between the official rate and market-clearing measures had remained closed, the foreign exchange demand backlog at banks had remained zero, and daily interbank foreign exchange turnover was about ten times its pre-unification level. Net international reserves reached US$32.1 billion at the end of April 2024, US$12.3 billion more than in February 2024.

Inflation then turned. Annual headline inflation, which peaked at 38.0% in September 2023, spiked to 35.7% in February 2024 from 29.8% in January, then eased to 25.5% in November 2024 and 24.1% in December 2024. On 26 December 2024 the MPC kept the overnight deposit rate at 27.25%, and it projected a notable decline in inflation in the first quarter of 2025. Two days earlier, IMF staff and the authorities had reached staff-level agreement on the fourth review of the Extended Fund Facility (EFF), with commitments that include maintaining tight monetary conditions to further reduce inflationary pressures.

The CBE did not expect the shock to be painless for borrowers. When it raised rates, it acknowledged that the tighter stance could result in a short-term contraction in the private sector's real credit growth. For banks, the offset was that the rate rise arrived together with the end of foreign exchange rationing, so companies needing foreign exchange could again obtain it through banks, which eased one source of payment stress.

The system's NPL ratio was lower after the hike

The CBE's Financial Stability Report for March 2024, published on 2 October 2024, gives the first system-wide reading after the hike. It shows the NPL ratio at 2.6% in March 2024, down from 2.9% at the end of 2023 and 3.5% in March 2023, with the capital adequacy ratio at 18.1% against a regulatory minimum of 12.5%. The CBE's financial soundness indicators for the end of September 2024, released on 8 January 2025, show it lower still, at 2.4%.

Coverage is the weaker side of the picture. Provisions covered 91.9% of NPLs in FY2022 and 88.7% in FY2023, slipping to 86.3% in March 2024 before recovering to 87.4% in September 2024. Capital moved the other way: the capital adequacy ratio rose to 19.1% at the end of September 2024, against the 12.5% minimum. Liquidity ratios were 32.1% in local currency and 77.7% in foreign currency, well above minimums of 20% and 25%, and the loan-to-deposit ratio was 61.3%.

Egypt banking system: soundness indicators, %

Source: Central Bank of Egypt, Financial Stability Report - March 2024, 2 October 2024; Central Bank of Egypt, Financial Soundness Indicators Reflect the Resilience of the Banking Sector (press release), 8 January 2025.

The largest lenders show the same pattern. The three domestic systemically important banks (DSIBs), which held 67.4% of clients' gross loans, had an NPL ratio of 1.65% in March 2024, against 2.06% in March 2023 and 1.81% at the end of 2023. The CBE's stress tests point the same way: scenario analysis of the largest 10 banks, about 80% of sector assets in March 2024, found a low or moderate level of solvency risk, with their capital adequacy ratio staying above the CBE's 12.5% minimum and the Basel Committee's 10.5%. Part of the fall in the ratio reflects a larger denominator. The clients' loan portfolio reached EGP 6.8 trillion in March 2024, and the foreign-currency share of loans rose to 36.8% from 29.7% in December 2023. Revaluation of foreign-currency loans and fast local-currency lending both enlarge the loan book faster than new defaults can show up in it, so a falling ratio in the year of a shock is weaker evidence than it looks. IMF staff reached a similar view. They said the banking system remained stable so far following the increase in interest rates and the currency depreciation, but that some vulnerabilities remained; banks on average were profitable, liquid and had capital above prudential minimums. They linked a sharp rebound in banks' net foreign asset positions to capital inflows that followed the Ras El-Hekma deal and the completion of the first and second EFF reviews; commercial banks' net foreign assets strengthened by US$13.3 billion in the third quarter of fiscal year 2023/24.

One large lender shows NPLs down and provisions up

Commercial International Bank (CIB), which describes itself as Egypt's number one private-sector bank by loans and deposits and reported a loan market share of 4.62% as of May 2024, publishes quarterly asset-quality ratios that run through the shock. Its standalone NPL ratio was 5.02% in 2Q23 and 5.04% in 3Q23, then 4.28% in 1Q24, 4.08% in 2Q24 and 4.39% in 3Q24. Direct coverage rose from 233% in 3Q23 to 307% in 1Q24 and 314% in 2Q24, before easing to 289% in 3Q24.

The bank provisioned more heavily as it grew. Its impairment charge for credit losses was EGP 3.74 billion in the first nine months of 2024, against EGP 1.25 billion a year earlier. The third-quarter 2024 charge, EGP 1.69 billion, was more than double the previous quarter's, which management linked to strong lending and trade business growth. Gross loans rose 33% over the first nine months of 2024 to EGP 353 billion, but by 15% net of the devaluation, which added EGP 41.7 billion to the pound-equivalent balance. Capital and earnings point away from stress. CIB's consolidated capital adequacy ratio rose from 21.4% in 3Q23 to 29.1% in 3Q24, and nine-month consolidated net income was EGP 42.3 billion, up 89%. Management described the third quarter of 2024 as one that "exhibited relative macroeconomic stability". With 4.62% of the loan market, CIB illustrates the post-shock picture rather than measuring it for the system.

Why the result still carries a "so far"

When it raised rates, the MPC said it was mindful of the lagged impact of the additional 600 basis points, and IMF staff said the full impact of the March 2024 hike would be observed with a lag. The CBE's system data run only to the end of September 2024. Two exposures could carry that lagged impact onto bank balance sheets. First, IMF staff noted that banks' foreign-currency loans, particularly to public sector entities, are not fully matched by foreign-currency deposits, especially at the biggest banks, which implies a potential vulnerability to exchange rate movements, including through credit risk. Second, domestic banks require government guarantees on all loans to the state petroleum company EGPC, and guarantees issued on its behalf rose by about 5% of GDP after 1 October 2023. That shifts credit risk from banks to the sovereign rather than removing it.

The authorities have also committed to tighten oversight. They committed that the CBE will not issue new subordinated debt to state-owned banks, to commission an independent assessment of state-owned banks' policies, procedures and controls, to establish a bank resolution unit, and to publish financial stability reports on a predictable schedule and without excessive lags.

On the evidence available, the 600 basis point shock has not produced a visible deterioration in reported asset quality. The system's NPL ratio was lower after the hike than before it, coverage stabilised, the CBE's stress tests found low or moderate solvency risk, and the large private bank we examined shows a lower NPL ratio and rising provisions. Our view is that "contained" is a fair description, while "so far" remains essential until the lagged effects of the hike have worked through bank balance sheets.

Primary sources: Central Bank of Egypt, Special MPC Press Release 6 March 2024, 6 March 2024; Central Bank of Egypt, Financial Soundness Indicators Reflect the Resilience of the Banking Sector (press release), 8 January 2025; Central Bank of Egypt, Financial Stability Report - March 2024, 2 October 2024; International Monetary Fund, Arab Republic of Egypt: Third Review Under the Extended Arrangement Under the Extended Fund Facility — Staff Report, including the authorities' Letter of Intent and Memorandum of Economic and Financial Policies (IMF Country Report No. 24/274), 26 August 2024; Central Bank of Egypt, MPC Press Release 26 December 2024, 26 December 2024; Central Bank of Egypt, CPI Press Release December 2024, 9 January 2025; International Monetary Fund, IMF Reaches Staff Level Agreement on the Fourth Review of the Extended Fund Facility with Egypt (Press Release No. 24/500), 24 December 2024; Commercial International Bank (Egypt) S.A.E., Earnings Release 3Q.2024 (RNS Number 7507K, London Stock Exchange Regulatory News Service), 3 November 2024; Commercial International Bank (Egypt) S.A.E., H1.2024 Press Release (RNS Number 1837X, London Stock Exchange Regulatory News Service), 21 July 2024.