Fitch Ratings projects a stable outlook for African Banks in 2021 as they see a gradual normalization with business volumes and revenues picking up.
This is according to its latest ratings released on Monday, November 30, 2020.
However, the rating agency said, “ we do not expect a return to pre-pandemic performance levels for at least another two years”.
Asset quality is expected to deteriorate faster in 2021 and beyond due to the lag effect of the pandemic on households and businesses, combined with the expiry of temporary debt-relief measures.
The most likely scenario, according to Fitch, is the active restructuring of large corporate loans preventing a sharper hike in impaired loans.
“Such flexibility will not be afforded to consumer and SME loans and these segments will drive higher impaired loans over the longer term. Impaired loan ratios could head towards low double digits in some countries, particularly in Nigeria and Morocco”.
Fitch also notes that due to still healthy revenue generation capability, most banks in the region will remain profitable despite large credit losses.
“The rebuilding of earnings will be slower for South African banks”.
The rating agency also noted that funding and liquidity will remain broadly stable. Banks are generally more liquid due to slower loan growth and risk aversion. Deposit growth will remain strong. Foreign-currency liquidity risks have not materialized, particularly in Nigeria but present a significant risk to banks’ ratings.
“The risk to capital comes from asset quality but our stress tests show that banks have healthy capital buffers and could withstand moderate shocks.
“Fifty percent of the bank ratings under our coverage have Negative Outlooks or Watches compared with 35% a year ago despite multiple rating downgrades since the crisis unfolded. Therefore, the Rating Outlook for the sector is Negative. The Negative Outlooks on banks’ ratings reflect either the sovereign being on Negative Outlook or standalone weakness, typically around the capital”.
Fitch noted that the downside shocks to operating conditions persist as economic recovery is fragile and prone to setbacks. Sovereign downgrades would likely trigger bank downgrades due to the influence of the sovereign’s creditworthiness on the risk of banking in Africa.
With regards to bond issuance, Fitch noted that weaker-rated nations in sub-Saharan Africa may still face higher funding costs than before the coronavirus pandemic, which could discourage their return to markets.
“We expect other sovereigns to follow Cote d’Ivoire in issuing Eurobonds in 2021, as market conditions have eased sharply,” Fitch said.
In a sign of improving market sentiment, the JPMorgan Emerging Market Bond Index (EMBI) Global spread for African issuers eased back to below 600 basis points in late November after spiking to more than 1,000 basis points on March 23, 2020.
The Fitch expects Namibia, Nigeria, and South Africa to roll over maturing bonds in 2021 when they fall due, with the trio to conduct further issuance to meet funding needs.
Ivory Coast and Kenya are also expected to return to the markets in 2021, with a possibility that other issuers, such as Benin, could join them, Fitch predicted, given which countries had been expected to launch issues in pre-pandemic 2020.
But Sub-Saharan Africa bond issuance may remain lower than in previous years, in part reflecting enhanced official creditor financing, Fitch indicated that with the International Monetary Fund and other official creditors continuing to provide strong support.
