Banks face negative outlook amidst difficult operating conditions - report

Adnan Adams Mohammed

Moody’s Investors Service has forecasted that banks in Ghana and African countries will post negative growth for the year ahead amidst difficult operating conditions and sovereign pressures straining banks’ credit profiles.

The Moody’s report published, last week, loan quality, profitability, and foreign currency liquidity will be the main stress points next year for banks, although stable funding and capital could limit the impact.

The report projected that, difficult operating conditions are expected to persist for African sovereigns, with the resulting pressures also weighing on banks’ credit profiles. The economic slowdown will hamper banks’ performance, while the governments’ ability to provide support remains impaired.

Furthermore, banks will remain heavily invested in government securities, which further reinforces the close credit linkages between banks and their respective sovereigns.

“Our outlook for African banks remains negative as we head into 2021, with the difficult operating conditions and banks’ close links to their sovereigns being the key driving factors,” says Constantinos Kypreos, Senior Vice President at Moody’s Investors Service.

“Heading into next year, we expect nonperforming loans (NPLs) to potentially double from 2019 levels as payment holidays expire, while increased provisioning needs, reduced business generation, and margin pressure will erode banks’ profitability.”

South African and Nigerian banks will face acute macro challenges, while loan quality and liquidity are the main issues for Angolan and Tunisian banks, respectively.

East African and Francophone West African banks are better placed than Central African banks to weather the pandemic, given their more resilient economies, with Egyptian banks facing the least impact.

Overall, the banks’ financial stability will be broadly maintained. Stable local currency deposit funding, high liquidity in local currency, good capital buffers, and gradual improvements in risk management will help to contain banks’ risk over the next 12 to 18 month.