African banks face risk of macroeconomic contagion from large holdings of govt securities

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.

In a report, African Banks 2018 Outlook, published this week, Moody’s says 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.

The report specifically noted that challenging conditions will most affect banks based in South Africa, Kenya and Tunisia while those in Nigeria, Morocco, and Egypt will fare better.

It equally identified risks stemming 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.

It, however, notes that gradual GDP growth suggests non-performing loans will peak in 2018.

“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.

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“Economic growth will remain below historical levels, while political uncertainty will dampen confidence and governments’ capacity for fiscal stimulus will be limited,” he noted.

The report sees higher oil prices and easing drought conditions driving GDP growth rate for Moody’s rated African countries to 3.9 percent in 2018 from an estimated 3.1 percent 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,” it said.

Moody’s noted that banks’ capital buffers would 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 percent and return on assets of 2 percent in 2017, with a similar outcome forecast for 2018,” it said.