Moody’s Investors Service have changed their outlook for African banks in 2020 to negative from stable, reflecting their weakening operating environment.
This weakening is due to sluggish global economic growth with negative business sentiment and trade uncertainty clouding growth prospects.
In Africa, government debt is high and gross domestic product (GDP) growth will remain below potential and insufficient to boost per capita income levels or increase economic resilience.
“Weakening operating conditions are pressuring governments’ credit quality leading to a knock-on effect on banks through reduced business generation, slower credit growth and rising asset risk,” said Constantinos Kypreos, Senior Vice President at Moody’s.
Moody’s said asset risk will remain high, a result of rising government arrears, high loan concentrations, borrower friendly legal frameworks, and still evolving risk management and supervision capabilities.
Importantly, banks will maintain high exposures to their respective sovereigns, which links and caps their credit profiles to those of their governments. Nevertheless, most rated African banks maintain high capital levels, and funding and liquidity in local currency will remain solid in most countries.
Regional variations remain: banks in South Africa, Nigeria, Tunisia and Angola will face the greatest challenges; Egyptian, Moroccan, Mauritian and Kenyan banks will be more resilient.
Moody’s said an improvement could take place if governments implement structural reforms and provide a more business-friendly environment with stronger institutions which would support higher economic growth. This is a strategy which the South African government aims to follow.
“Further improvements in risk management, in supervision, and legal reform facilitating foreclosures and out-of-court settlements, would help reduce problem loan levels. Concurrently, banks maintain solid funding and liquidity (including in foreign currency) and sound capital buffers,” it noted.
Turning to the Fourth Industrial Revolution, Moody’s indicated the increased use of digital and mobile technology in particular will help unlock potential as unique mobile money accounts in sub-Saharan Africa increased to 280 million, accounting for 21 percent of adults compared with only 12 percent in 2014.
“The use of mobile money accounts brings other significant benefits for banks, including higher fees relating to money transfers/payments; and reduced costs as mobile technology uses agents in place of bank branches,” it said.
Moody’s warned that trade tensions can hurt commodity prices and risk weakening Africa’s exports to China, pressuring the ability of exporters and their suppliers to service their bank loans, but that the new African Continent Free Trade Agreement (AfCFTA), which is due to come into effect in July 2020, may create new business opportunities for banks once non-tariff barriers are removed. -IOL