12 December 2017

Africa: Challenging Operating Conditions Keep 2018 Outlook for African Banks Negative

press release

Limassol — Moody's Investors Service says its negative outlook for the African banking system in 2018 reflects high macroeconomic risks that expose banks to asset quality pressures, reduced government support and sovereign credit risk.

Moody's report, "Banks -- Africa, 2018 Outlook", is available on www.moodys.com. Moody's subscribers can access this report via the link provided at the end of this press release. This report does not constitute a rating action.

"Although African banks will maintain solid capital and local currency liquidity buffers in 2018, macroeconomic conditions will remain difficult in a majority of African countries," said Constantinos Kypreos, a Moody's Senior Vice President and the report's co-author. "Economic growth will remain below historical levels, while political uncertainty will dampen confidence and governments' capacity for fiscal stimulus will be limited."

Higher oil prices and easing drought conditions are expected to drive GDP growth rate for Moody's rated African countries to 3.9% in 2018 from an estimated 3.1% in 2017. However, growth will remain below its potential and will fall short of the levels required to increase employment and support meaningful per capita income growth. In addition, elevated debt levels will create challenging operating conditions that will compromise governments' capacity for fiscal stimulus. Political uncertainty will dampen investor and consumer confidence.

African banks face the risk of macroeconomic contagion through a range of channels, including their large holdings of government securities, which link their credit profiles to the sovereign. Risks also stem from the authorities' reduced capacity to support banks in case of need, while problem loans are expected to edge higher as ongoing structural issues expose banks to unexpected shocks. However, gradual GDP growth suggests non-performing loans will peak in 2018.

Banks' capital buffers will be maintained reflecting their low balance-sheet leverage, while profitability will be stable as high provisioning charges will be compensated by income growth in line with nominal GDP and resilient margins. African banks are expected to deliver an estimated pre-tax return on equity of around 17% and return on assets of 2% in 2017, with a similar outcome forecast for 2018.

Challenging conditions will most affect banks based in South Africa, Kenya and Tunisia. Those in Nigeria, Morocco and Egypt will fare better.


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