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Says fast bank accumulation of government debt securities risk to recovery
Global rating agency, Fitch, says the 2022 outlook for African banks remains neutral with uncertain business conditions and Covid-19 risk constraining recovery. It said there will be a rapid increase in lending with most economies growing and banks slowly loosening their stricter underwriting standards in the face of relatively high commodity prices and favourable external financing conditions.
The agency, in its report on ‘African Banks – No easy road to recovery’, noted that under the prevailing operating conditions fraught with uncertainties and challenges, African banks will likely make mistakes in their pursuit for growth.
Fitch also sees significant uncertainty with Africa being particularly at risk from new Covid-19 variants, amid very low vaccination rates and governments’ limited fiscal space.
“Our base case also considers risks to global growth, relatively high commodity prices and still favourable external financing conditions. We anticipate a slightly faster rise in lending with most economies growing at the trend rate and banks gradually loosening stricter/pandemic-era underwriting standards. We see significant uncertainty with Africa being particularly at risk from new Covid-19 variants, amid very low vaccination rates and governments’ limited fiscal space. If this risk materialises, it could change the outlook quite dramatically,” the report says.
Mahin Dissanayake, head, African banks at Fitch, while commenting on the Fitch report said, “Banks are likely to make mistakes in the pursuit of growth under prevailing operating conditions, which are fraught with challenges and uncertainty. We believe a return to normalisation will be beyond 2022. Even excluding the serious threat of new variants, banks face the prospects of limited earnings growth, and, therefore, limited loss absorption capacity.”
Fitch says it does not believe asset quality deterioration will be widespread, even with the unwinding of remaining government-support measures and with all things being equal, adding that the fast rebound in formal and informal economic activity in the second half of 2020 and 2021 respectively, strong commodity prices and the resilience of certain economic sectors and loan restructuring will continue to contain corporate bad debt.
It also mentioned that high unemployment and the consequent impact on retail loans remain a risk, while the fast accumulation of government debt securities by banks presents a key risk as the focus shifts to sovereign debt sustainability.
