Moody’s Investors Service downgraded its outlook for African banks from stable to negative in a its latest report, reflecting their weakening operating environment, rising assets quality pressures, and political and social uncertainties.
Weakening operating conditions are pressuring governments’ credit quality leading to a knock on effect on banks through reduced business generation, with slower credit growth and rising asset risk. Moreover, asset risk remains high as a result of rising government arrears, high loan concentration, borrower-friendly legal framework, and still evolving risk management and supervision capabilities. Importantly, banks will maintain high exposures to their respective sovereigns which link and cap their credit profiles to those of their governments.
Global economy remains sluggish with negative business sentiment and trade uncertainty clouding growth prospects. Moreover, the external environment has become less predictable, in addition to global trade tensions and their potential impact on commodity prices.
In Africa, government debt levels are high, and increased to around 52% of GDP, leading to government arrears and adding to vulnerabilities. While GDP growth is expected to record 4.1% in 2020, below historical level of 6%, and insufficient to buttress per capita income levels and increase economic resilience.
Moody’s believe that banks in South Africa, Nigeria, Angola, and Tunisia will face the greatest challenges, while Egyptian, Moroccan, Mauritian, and Kenyan banks will be more resilient. The two largest economies of South Africa and Nigeria will grow by just 1.5% and 2.5%, respectively, while growth in West African Economic and Monetary Union (WAEMU) and in Egypt will be closer to 6% each.
In Egypt, Moody’s expect that economic and fiscal reforms will support growth to record 5.8%, and business prospects for banks besides interest rate cuts will boost loan demand and narrow interest margins. As banks’ liquidity and funding will remain solid, supported by remittances and financial inclusion initiatives, the new Banking Law will facilitate consolidation and strengthen banks.
Asset risk will remain high despite the expectations for stable problem loans due to increased lending to high-risk segment like SMEs, high loan concentrations, and legal obstacles. Moreover, capital at state-owned banks is modest, given the banks’ high exposure to zero risk-weighted government bonds and zero coupon bonds from the government that are classified as capital.
Moody’s mentioned its criteria to upgrade its outlook to positive again, including implementation of structural reforms and a more business-friendly environment with stronger institutions would support higher growth rates, further improvement in risk management in supervision on legal reform facilitating foreclosure and out of court settlements would help reducing problem loans levels, and banks to maintain solid funding and liquidity in foreign currency and sound capital buffers.