African Banks Expected to Sustain Profitability in 201
A Peak into African banks’ performance in 2019 by Moody’+s shows they are going to sustain a healthy level of profitability within the year. At the close of last year, the year ended with several African banks stronger than they started. This is the prediction of Moody’s.
Nigeria’s Access Bank Plc. announced a deal that seems sure to make it the country’s largest bank in 2019, even as competitors Guaranty Trust Bank (GTBank) and Zenith Bank Plc. strengthen. In Kenya likewise, largest privately owned commercial bank CBA and Nairobi Securities Exchange (NSE)-listed mid-sized lender NIC Bank are merging to produce the country’s third largest bank. Pan-African banking group Oragroup raised $100 million, the largest ever on Bourse Régionale des Valeurs Mobilières (BRVM), Ivory Coast’s stock exchange.
Regulators also stepped up in 2018, handing down fines to erring banks and safeguarding depositors’ funds from banks doomed to fail. But how will 2019 look for African banks? Ratings agency Moody’s Investor Service says African banks will show resilience in 2019, especially Egyptian, Moroccan and Mauritius banks rated by Moody’s, but tightening global financial conditions are a key downside risk.
“For 2019, we expect most rateGd banks to maintain stable profitability, build up their capital buffers and retain ample local currency funding,” says Moody’s
“While growth across Africa is recovering, it is still below potential. Our stable outlook for African banks reflects expectations of a slight acceleration in growth and stricter regulation that supports financial stability; but risks are titled to the downside,” the ratings agency added.
Moody’s expects several African economies to show a mild recovery, with the macroeconomic outlook strengthening slightly. The ratings agency projects GDP growth of 3.8 percent in 2019, up from 3.1 percent in 2018 and 2.7 percent in 2017 for countries it rates. This growth is expected to be driven by relatively stable oil and commodity prices, stronger agricultural output, domestic policy adjustments and strong domestic demand. Growth will come mainly from East Africa, Egypt and the West African Economic and Monetary Union (WAEMU), which has Benin, Senegal, Burkina Faso, Ivory Coast, Mali, Niger, Togo and Bissau Guinea.
Growth will, however, be subdued in Nigeria and South Africa, at 2.3 percent and 1.3 percent respectively, says Moody’s, which expects more stable oil prices to drive economic acceleration in Nigeria and improved business and investor confidence will spur improvement in South Africa.
While Moody’s identifies risks, the ratings agency says the banking sector in Africa has significant scope for growth in the longer term.
“This is mainly because of the still low banking penetration (banking assets at ~63% of GDP, according to the IMF), low level of financial inclusion and rising urbanisation, increased use of mobile technology in particular will help unlock potential: already, unique mobile money accounts in Sub-Saharan Africa increased to 280 million, accounting for 21% of adults (up from 12% in 2014). Also, the use of mobile money accounts brings significant benefits for banks, including higher fees relating to money transfers/payments; reduced costs as mobile technology uses agents in place of bank branches; and eventually increasing banking penetration,” Moody’s says.
Sources: International Monetary Fund, National Bank of Angola, Central Bank of Egypt, Central Bank of the DRC, Moody’s Investors Service; latest available data
In the short term, however, Moody’s expects loan quality to remain under pressure. This will be driven by legacy issues, such as weak risk management practices in the past.
“For 2019, we expect capital to increase slightly, driven by internal capital generation and modest dividend payments. The quality of capital will also remain strong,” Moody’s adds.
Moody’s also expects profitability of African banks to remain broadly stable, with an estimated pre-tax return on equity (RoE) of around 16.5% and return on assets of 1.9 percent.