Rabat - Fitch Ratings is warning the Moroccan banks present in Sub-Saharan Africa of potential risks arising from the expansion of their subsidiaries on the continent.
Rabat – Fitch Ratings is warning the Moroccan banks present in Sub-Saharan Africa of potential risks arising from the expansion of their subsidiaries on the continent.
The increase in the activity of Moroccan banks in Africa and the growth of these subsidiaries in their balance sheets constitutes a drag on their credit profile, at least in the short term, stated the rating agency in its latest note published yesterday.
Fitch Ratings, one of the three major notation agencies in the world, explained how “Moroccan banks that establish or acquire banks in markets with lower sovereign ratings are exposed to the large portfolios of local government bonds that these subsidiaries will typically hold.”
The publication comes only days after Attijariwafa Bank’s acquisition of the Egyptian Barclays bank. While the African market constitutes a rich and untouched investment land for many Moroccan banks, Fitch’s notes warns how “in most African markets, domestic sovereign bonds are rated several notches lower than Moroccan sovereign bonds (BBB-),” a fact that makes operating environments much more risky, exposing banks to greater asset risk, as well as regulatory standards that may be less developed than they are in Morocco.
The rating agency Fitch also explains that the “African subsidiaries have helped to offset weak credit growth and narrowing margins in these banks’ Moroccan units, and are becoming increasingly important contributors to overall earnings, generating 32 percent of 2016 net income for BMCE, 29 percent for Attijariwafa and 12 percent for GBPC.”
African banks’ contributions to group consolidated earnings could become even more important, but this increase in the profits of Moroccan banks is not without risk and the steady growth of African loans means that these loans represent about 20 percent of Attijariwafa Bank lendings, 15 percent of BMCE and 12 percent of GBPC at the end of 2016.
According to Attijariwafa Bank, Barclays Egypt reported a net income equivalent to 6.5 percent of that of Attijariwafa Bank’s in 2016, an annual return of 4.3 percent on assets in Q1FY17 thats is significantly above the 1.4 percent achieved by the Moroccan Bank in 2016.
Fitch explains that the consolidation of Barclays Egypt in the Attijariwafa Bank group in Q2FY17 could mean that more than a third of the group’s profits will be generated by its African network. But things are not guaranteed to run as smoothly as the Moroccan bank might hope: “However, the Egyptian business is unlikely to maintain such high profitability once yields on Egyptian government bonds fall.”
The international agency recalls that the net interest margins for Egyptian banks were strengthened in 2016 by a 300 percent increase in order to ease the transition to the total liberalization of the Egyptian pound. However, Fitch forecasts for the upcoming year are quite gloomy: “We expect yields on Egyptian treasury bills to decline this year as the operating environment stabilises after the currency depreciation that followed the free float, translating into lower margins for banks.”
The number of African subsidiaries of Moroccan banks, mainly in sub-Saharan countries, has grown quite considerably in the past years, notes the rating company. “BMCE has subsidiaries in 19 African countries, Attijariwafa in 13 and GBPC in eight. The subsidiaries vary in size and franchise.” Only BMCE’s subsidiaries in Benin, Burundi and Djibouti are market leaders, controlling more than a quarter of the banking sector’s deposits, while their banks in Ghana, Kenya, Rwanda and Tanzania each have market share of about 2 percent, concludes the note.