African banks to cushion rising asset quality risks by capital buffers – Moody’s

09 Dec 2015
Financial Nigeria


Sub-Saharan banks are more vulnerable to rising credit risks due to their increased fiscal challenges and weaker risk management practices.

Group MD/CEO, United Bank for Africa (UBA) Plc, Phillips Oduoza

Africa's banking system has a stable outlook for 2016 that reflects its resilient earnings, solid capital buffers and deposit-based funding set against rising asset quality risks, Moody's Investors Service said on Tuesday.

"While challenging operating conditions are leading to increased credit risks for African banks over the next 12 to 18 months, robust earnings, business opportunities stemming from greater financial inclusion and strong deposit bases will support the banks' credit profiles," said Constantinos Kypreos, a Moody's Vice President - Senior Credit Officer and author of the report.

The credit profile of oil-importing banking systems in North Africa will be more resilient as they benefit from lower oil prices and progress on the policy front, while sub-Saharan banks are more vulnerable to rising credit risks due to their increased fiscal challenges and weaker risk management practices.

The main pressures stem from slowing growth, lower commodity prices and currency depreciation that are affecting many African economies. Combined with structural challenges, such as infrastructure bottlenecks, weak governance and fiscal imbalances, these factors will continue to threaten African banks' asset quality metrics. As such, we expect the level of non-performing loans (NPLs), which we currently estimate at around 8%-9% of gross loans, to rise further in 2016.

Rising credit risks will, however, be counterbalanced by still robust credit growth as well as the maintenance of solid capital buffers and deposit-based funding. Despite slowing economic expansion, credit growth in Africa is expected to exceed 10%-12% over 2016. This will be driven by real GDP growth that is still forecast to exceed 4%, making Africa one of the world's fastest growing regions.

"Structural reforms, greater political stability and the longer-term impetus from an emerging middle class will increase the demand for credit," Mr Kypreos added. "Trading blocs in Africa will also create new business opportunities for the region's banks." Similarly, mobile phone technology will continue to increase financial inclusion. The share of adults holding a bank account with a formal African financial institution rose to 34% in 2014 from 24% in 2011.

Profitability will remain broadly stable, with the pre-tax return on equity at around 21% and the return on average assets at over 2.0%, although higher loan-loss provisioning requirements and increased funding costs will put downwards pressure on earnings growth. Capital buffers and banks' deposit-based funding structures will also be maintained and liquidity buffers in local currency will remain high.

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