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Rabat – Introducing a covered bonds market in Morocco would support continued strong growth of retail mortgage lending, which totaled a gain of MAD 188 billion for banks by the end of 2016, says Fitch Ratings Agency.
In a recent report on real estate activity in Morocco published July 10, the ratings agency discusses the importance of covered bonds for housing finance and its main constraints.
Issued by banks under Bank Al Maghrib authorization, covered bonds are debt securities supplied by commercial banks or mortgage institution and collateralised against a pool of assets that, in case of failure of the issuer, can cover claims at any point in time.
Back in 2013, the Moroccan Ministry of Economy and Finance presented a draft law on covered bonds, intending to fix the legal regime applicable to covered bonds in accordance to the laws governing credit institutions and assimilated organizations. However, the said draft was never promulgated.
Some banks interviewed by Fitch indicated that they were considering issuing their first covered bonds by 2018, as they hope that the necessary legislation will be put in place in a short period of time. However, Fitch notes that “legislative progress has been slow, the valuation of assets being an obstacle due to data limitations.”
For banks, covered bonds “would be an important new source of funding, especially if growing demand outstrips deposit growth,” explains Fitch. Commercial banks’ enthusiasm for covered bonds is all the more understandable, as Fitch points out that “deposits provide about 70 percent of banks’ funding.”
By the end of 2016, “retail mortgage loans by banks totaled MAD 188 billion,” notes the report, with a growth of 5 percent per year, reflecting strong demand. In 2016, deposit growth reached 6 percent, breaking a new record.
The unhealthy practices of the Moroccan banking sector
For Fitch, covered bonds would help reduce maturities disparities between banks’ assets and liabilities, enabling banks to acquire more assets than liabilities for medium- and long-term obligations.
Covered banks would lessen bank’s liquidity risk, as “retail mortgages loans have maturities of 15 to 25 years but most deposits are contractually short-term, albeit with a high degree of stability.”
However, the agency points out that asset quality in the Moroccan banking sector is weak by international standards, “with impaired loans in retail housing loan books at about 8 percent.”
“The high impairment levels reflect long debt-servicing delays, a common practice in Morocco.” Moroccan banks debts write-offs are far lower at about 1 percent a year, explains the agency.
In this context, Fitch expects covered bonds legislation to “include high collateralisation requirements.” The 2013 covered bonds draft law explained that for a mortgage loan claim to be used as collateral for covered bonds, the ratio of the outstanding principal to the value of the mortgage asset on the date of issue of the secured bond can not exceed 80 percent. For Fitch, this “would mean that most mortgage loans would qualify as collateral.”
Fitch points out that “investors’ appetite for covered bonds is untested, but Morocco’s capital markets are reasonably deep and well developed, and institutional investors already buy long-term senior and subordinated bonds issued by Moroccan banks.”
Overall, the agency believes that growth prospects for Morocco’s retail housing finance market are positive, supported by “strong housing demand, banks’ appetite for retail lending and relatively low interest rates.”
