Resilient Earnings at African Banks Offset Risks, Moody's Says

  • Demand for credit expected to increase as continent grows
  • Credit risk also on the rise and bad debts seen climbing

Banks across Africa are expected to remain stable in 2016 as resilient earnings, adequate capital levels and deposit-based funding counter rising asset-quality risks, according to Moody’s Investors Service.

“Structural reforms, greater political stability and the longer-term impetus from an emerging middle class will increase the demand for credit,” Constantinos Kypreos, a Moody’s vice president based in Limassol, Cyprus, said in an e-mailed report on Tuesday. African banks’ pretax return on equity is seen at around 21 percent, he said.

While the drop in the price of oil and other commodities has strained economies in Africa, real growth in gross domestic product is still forecast to exceed 4 percent next year, according to Moody’s, making the continent among the world’s fastest-growing regions. Credit risk will also increase, the ratings company said, as rising interest rates and inflation confront consumers in some countries.

Headwinds for banks next year will come from slowing growth, lower commodity prices and currency depreciation. Combined with structural challenges such as infrastructure bottlenecks, weak governance and fiscal imbalances, these factors will threaten the lenders’ asset quality, Moody’s said. Non-performing loan levels, currently estimated at as much as 9 percent of gross loans, are forecast to rise further in 2016, it said.

The most vulnerable banking systems are in oil or commodity exporting sub-Saharan African countries, including Angola, Nigeria and Ghana, Moody’s said. The best-placed are those in countries that benefit from low oil prices, including Egypt and Morocco. South African banks are resilient because of their strong earnings and capital, the agency said.

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