Moody’s Senior Vice President Constantinos Kypreos leads a team of analysts covering banks in Africa, the Middle East and the Balkans. He talks to Rafiq Raji about why the rating agency has downgraded its outlook for African banks
Please elaborate on your recent change in outlook from stable to negative for African banks.
Changing our outlook from stable to negative reflects the weakening operating environment for African banks, and the negative outlook on the sovereign ratings of large African economies like Nigeria and South Africa.
The global economy remains sluggish, with negative business sentiment and trade uncertainty clouding growth prospects. African governments in particular have high debts and their GDP growth (forecast for 2020: 4.1%) will remain insufficient to boost per capita income levels or increase economic resilience.
Weakening operating conditions, pressuring governments’ credit quality, are set to have a knock-on effect on banks through reduced business generation, slower credit growth and rising asset risk.
Also, banks benefitting from government support uplift – and those with ratings capped at the sovereign level because of heavy exposure to government debt – face pressure too.
Asset risk is also high as a result of rising government arrears, high loan concentrations, borrower-friendly legal frameworks, and still-evolving risk management and supervision capabilities.
On the flip side, most of the rated African banks maintain high capital levels, while funding and liquidity will remain in many countries. Improved dollar access and stricter prudential requirements will also help resist foreign-currency liquidity pressures.
Why do you think banks in South Africa, Nigeria, Tunisia and Angola will face challenges, while banks in Egypt, Morocco, Mauritius and Kenya will be resilient?
Africa is a diverse banking region, with banks in South Africa, Nigeria, Tunisia and Angola indeed facing the greatest challenges.
The challenges for South African and Nigerian banks are macro-driven and relate to subdued growth. In South Africa specifically, the inability to address fiscal pressures and weaknesses at State-Owned Enterprises is also affecting investor sentiment.
In Tunisia and Angola, challenges are structural in nature and relate to the banking sector. Tunisian banks are still challenged by weaker state-owned banks, tight liquidity and relatively high non-performing loans (NPLs). In Angola, banks are faced with very high NPLs and its central bank has asked the large public banks to recapitalise.
By contrast, Egyptian banks will be more resilient, supported by more robust growth following the successful completion of an IMF programme, and the implementation of structural reforms that led to lower inflation and a decline in interest rates that will support both the business community and consumers.
In Mauritius, a stable economy, high bank liquidity levels and strong capital buffers moderate asset risk. Similarly, in Kenya, while the economy is facing more challenges, its banks’ high liquidity levels, strong profitability and capital levels shield them from high asset risks.
In Morocco, gradual economic diversification, solid profitability, stable deposit funding and ample liquidity will help balance the risk from high lending concentrations, growing Sub-Saharan African operations and modest capitalisation.
How do you see the new West African currency, the eco, affecting banks in that region?
We expect the credit profiles of WAEMU-based banks to be unaffected by the recent changes to the monetary cooperation agreement between WAEMU countries and France, reflecting the WAEMU authorities’ decision to maintain both the exchange rate peg to the euro and France’s guarantee of unlimited convertibility of the region’s currency.
How much of a difference will the recent repeal of the interest rate cap law in Kenya make?
We do not expect lending rates or profitability to return to early-2016 levels given the authorities’ and banks’ focus on maintaining a low cost of credit, but there could be an increase over the next 12-18 months. Removing the rate cap no longer constrains lending as banks are able to better price their risks without a rate cap. This will mean increased lending to segments of the economy that have had subdued growth and access to credit, primarily small and midsize enterprises.
Kenyan banks’ profitability will benefit slightly from loan and business growth, but also higher lending rates will increase net interest income, reversing the recent years’ trend of declining income and margins. However, profitability will remain below pre-lending rate cap levels. Banks’ return on assets declined to 3.4% in 2018 from 3.6% in 2017 and 4.0% in 2016.
On the one hand, you say asset risks remain high and yet you also acknowledge most rated African banks maintain high capital levels. Please explain.
‘High asset risks’ speaks to the risks of banks’ loan and investment portfolios. Such risks remain high because of the subdued operating conditions and high government arrears that hurt the loan repayment capacity of contractors and sub-contractors of government projects. African banks also face long-standing loan book weaknesses due to the limited diversification of their loan books, weak risk management practices in the past, and scant financial data and creditor information that make it difficult for banks to assess borrower creditworthiness.
But we do note that African banks have a number of defences against these risks, including still robust earnings generating capacity (that is, they are typically more profitable than banks in developed markets) and maintaining higher capital buffers.
Based on your current view, how likely is Moody’s to change its outlook for African banks to stable this year?
Our outlook could stabilise if structural reforms and a more business-friendly environment with stronger institutions emerge to support higher economic growth, if improvements in risk management, supervisory and legal reform take place to reduce problem loan levels, and current capital buffers and liquidity are maintained. The banks’ outlook could also stabilise if the related sovereign ratings become stable.