Moody’s Investors Service predicts a negative outlook for African banks in 2021 as a result of the difficult operating conditions and sovereign pressures straining banks’ credit profiles amid the global crises.
In its latest report, Moody’s intimated that loan quality, profitability, and foreign currency liquidity will be the main stress points next year for banks, although stable funding and capital could limit the impact.
Difficult operating conditions are expected to persist for African sovereigns, the report mentioned adding that, with the resulting pressures also weighing on banks’ credit profiles, the economic slowdown will hamper banks’ performance, while the governments’ ability to provide support remains impaired.
The report further asserted that banks will remain heavily invested in government securities, which further reinforces the close credit linkages between banks and their respective sovereigns.
However, this is contrary to Fitch Ratings projection of a stable outlook for African Banks with respect to a gradual normalization alongside business volumes and revenues picking up, even though, Fitch cautions that it does not “expect a return to pre-pandemic performance levels for at least another two years”.
Emphasizing the earlier submission of his outfit Constantinos Kypreos, Senior Vice President at Moody’s Investors Service opined that “Our outlook for African banks remains negative as we head into 2021, with the difficult operating conditions and banks’ close links to their sovereigns being the key driving factors.
“Heading into next year, we expect nonperforming loans (NPLs) to potentially double from 2019 levels as payment holidays expire, while increased provisioning needs, reduced business generation, and margin pressure will erode banks’ profitability” he remarked.
This affirms Dr. Ernest Addison, the Governor of the Bank of Ghana’s advice to Ghanaian financial institutions to remain vigilant in the supervision of their operations as a result of pandemic-related impact on NPLs.
Giving more insights into projections for some African countries, the report indicated that South African and Nigerian banks will face acute macro challenges which is in line with fitch’s earlier prediction that impaired loan ratios could head towards low double digits in Nigeria and “the rebuilding of earnings will be slower for South African banks”.
Additionally, Moody’s Investors Service anticipate that the main issues likely to be faced by Angolan and Tunisian banks resulting in a deterioration of their banking industry’s prospects in 2021 is with regards to loan quality and liquidity problems, respectively.
Further analysis also suggest that East African and Francophone West African banks are better placed than Central African banks to weather the pandemic, taking into account their more resilient economies, and especially with Egyptian banks facing the least impact.
Overall, Moody’s forecasts that the banks’ financial stability will be broadly maintained. Stable local currency deposit funding, high liquidity in local currency, good capital buffers, and gradual improvements in risk management will help to contain banks’ risk over the next 12 to 18 months.
