Nigeria: Moody's Assigns Negative Outlook to African Banks in 2020

10 December 2019

The 2020 outlook for African banks has changed to negative from stable, reflecting their weakening operating environment, Moody's Investors Service stated in a report published yesterday.

The global rating agency noted that economies in the continent have remained sluggish with negative business sentiment and trade uncertainty clouding growth prospects.

According to a statement, in Africa, government debt is high, just as it predicted that Gross Domestic Product (GDP) growth in the region would remain below potential and insufficient to boost per capital 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," Senior Vice President at Moody's, Constantinos Kypreos 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.

"However, 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," it added.

It anticipated that capital buffers for banks in the region would remain solid.

"African banks' average capital stands at around 10.6 per cent of assets, higher than the global average of 7.8 per cent. The average capital adequacy ratio is 16.3 per cent of risk-weighted assets, signaling the banks have capacity to absorb some unexpected losses. "We expect broadly stable capital in 2020, given the banks' resilient earnings generation (despite some pressures, see below) and a less aggressive shareholder base, which allows them to reduce dividend payouts if required.

"We expect a number of bank insolvencies over 2020, a result of volatile operating conditions, weak governance, flaws in the internal assessment of capital needs (ICAAP) or the application of outdated (and so weaker) capital principles. The majority will be small, unrated banks," it added.

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