RIYADH: Egypt’s banking sector is positioned to absorb the potential economic spillovers from the ongoing Iran conflict, supported by strong capital buffers, liquidity, and profitability, according to a report by Fitch Ratings.
The agency’s base-case scenario assumes the conflict will remain short-lived and indirect in its impact on Egypt’s economy, limiting pressure on the country’s sovereign credit profile and, by extension, its banking system.
The assessment comes as escalating tensions in the Middle East raise concerns about broader economic spillovers for oil-importing countries such as Egypt. Higher energy prices, currency volatility and capital outflows have emerged as key risks for emerging markets, putting pressure on fiscal balances, external accounts and financial stability.
The agency emphasized that the sector’s credit profile remains closely linked to Egypt’s sovereign rating, currently at “B” with a stable outlook.
Fitch noted that banks are entering the current period from a position of strength, with “healthy profitability, capital and foreign-currency liquidity buffers,” which it said, “should enhance its resilience compared, for example, with the escalation of the Russia-Ukraine war in 2022.”
Under its baseline scenario, “in which the conflict lasts less than a month and Brent averages $70 a barrel in 2026, risks to Egypt’s ratings should be contained,” though a prolonged conflict or higher oil prices could increase pressure.
While direct exposure to the conflict is limited, Fitch highlighted risks related to energy import dependence, exchange-rate pressures, and access to international financing.
Recent capital outflows have weighed on Egypt’s financial markets. Non-resident holdings of local-currency treasury bills reached around $45 billion by the end of September.
Since late February, more than $6 billion has exited these instruments, contributing to a depreciation of the Egyptian pound to approximately 52.4 pounds per US dollar as of March 12, a decline of about 9 percent since the end of 2025.
Despite these pressures, foreign-currency liquidity has strengthened. Net foreign assets in the banking sector rose to about $14.5 billion by the end of January, the highest level since 2012, providing capacity to absorb further outflows.
Banks’ reliance on foreign funding remains limited, at less than 10 percent of total funding, with most liabilities structured over medium- to long-term maturities.
Fitch also highlighted the sector’s structural sensitivity to currency movements, noting that around one-third of sector loans are denominated in foreign currency, which could impact capital ratios in the event of further depreciation.
The sector’s common equity Tier 1 ratio stood at 14 percent at the end of the third quarter of 2025, its highest level since 2020 and above regulatory minimums.
The agency said the Viability Ratings of National Bank of Egypt and Banque Misr are more exposed to potential currency-related capital pressure due to relatively tighter buffers, although both banks have strengthened their capital positions since early 2024.
Looking ahead, Fitch expects profitability to remain solid despite moderating following interest rate cuts in 2025.
It said “we expect profitability to remain strong, with sector return on equity sustained above 20 percent, maintaining robust internal capital generation,” supported in part by higher treasury yields and inflation dynamics.
Asset quality is expected to weaken modestly amid higher energy prices and softer economic conditions.
Fitch projects the cost of risk to average around 100 basis points in 2026, supported by provisioning buffers built up since 2022, while warning that a more severe or prolonged conflict could lead to a sharper deterioration in banks’ financial performance.
Separately, global central banks are responding to renewed inflationary pressures linked to higher energy prices amid the Iran conflict.
The Reserve Bank of Australia raised its benchmark rate by 25 basis points to 4.10 percent, as inflation accelerated to 3.8 percent year-on-year in January from 1.9 percent in mid-2025, citing fuel costs as a key upside risk.
Attention is now on the Federal Reserve, which is expected to maintain a cautious stance as energy-driven inflation complicates its policy outlook.
While US inflation had shown signs of easing in late 2025, rising oil prices linked to disruptions in the Strait of Hormuz risk slowing the pace of rate cuts or prompting a prolonged pause in monetary easing.
The Bank of England is facing similar pressures, with policymakers monitoring the potential pass-through of higher energy costs into consumer prices.
Recent developments underscore the broader impact of the energy shock. The Bank of Japan has warned that rising oil costs are complicating its path toward stable inflation, while the Bank for International Settlements has cautioned policymakers against overreacting to what could be a temporary supply-driven shock.
