In con­ver­sa­tion – Con­stanti­nos Kypreos, Se­nior VP, fi­nan­cial in­sti­tu­tions at Moody’s

Business Day (Nigeria) - - COMMENT - RAFIQ RAJI

On be­half of African Banker magazine in Jan­uary 2020, I sought the views of Con­stanti­nos Kypreos, se­nior vice-pres­i­dent for fi­nan­cial in­sti­tu­tions at Moody’s, on the 2020 out­look for African banks. Though PRE-COVID, Moody’s Kypreos’ views re­main in­sight­ful. As the pan­demic clouds al­most ev­ery­thing, it is easy to miss the dis­tinc­tive char­ac­ter­is­tics of the var­i­ous African economies and their banks. I dare say that if one fo­cuses ob­jec­tively on the fun­da­men­tals, one could eas­ily find good op­por­tu­ni­ties now that val­u­a­tions are rel­a­tively cheap; ahead of an in­evitable re­cov­ery in the hope­fully not too dis­tant fu­ture. At the very least, it en­ables a com­par­i­son of what once was only months ago with cur­rent re­al­i­ties.

Please elab­o­rate on your re­cent change in out­look to neg­a­tive from sta­ble for African banks.

Chang­ing our out­look from sta­ble to neg­a­tive re­flects the weak­en­ing op­er­at­ing en­vi­ron­ment for African banks, and the neg­a­tive out­look on the sov­er­eign rat­ings of large African economies like Nige­ria and South Africa.

The global econ­omy re­mains slug­gish with neg­a­tive busi­ness sen­ti­ment and trade un­cer­tainty cloud­ing growth prospects. African gov­ern­ments, in par­tic­u­lar have high debts and their GDP growth (forecast for 2020: 4.1%) will re­main in­suf­fi­cient to boost per capita in­come lev­els or in­crease eco­nomic re­silience. Weak­en­ing op­er­at­ing con­di­tions, pres­sur­ing gov­ern­ments’ credit qual­ity, are set to have a knock-on ef­fect on banks through re­duced busi­ness gen­er­a­tion, slower credit growth and ris­ing as­set risk.

Also, banks ben­e­fit­ing from gov­ern­ment sup­port up­lift, and those with rat­ings capped at the sov­er­eign level be­cause of heavy ex­po­sure to gov­ern­ment debt face pres­sure too. As­set risk is also high as a re­sult of ris­ing gov­ern­ment ar­rears, high loan con­cen­tra­tions, bor­rower friendly le­gal frame­works, and still evolv­ing risk man­age­ment and su­per­vi­sion ca­pa­bil­i­ties.

On the flip side, most of the rated African banks main­tain high cap­i­tal lev­els, with solid fund­ing and liq­uid­ity in lo­cal cur­rency re­main in many coun­tries. Im­proved dol­lar ac­cess and stricter pru­den­tial re­quire­ments will also help re­sist for­eign-cur­rency liq­uid­ity pres­sures.

How do the re­gions com­pare in your as­sess­ment? Why do you reckon banks in South Africa, Nige­ria, Tu­nisia & An­gola would face chal­lenges, for in­stance? And what un­der­pins the re­silience you see for banks in Egypt, Morocco, Mau­ri­tius & Kenya?

Africa is a di­verse bank­ing re­gion, with banks in South Africa, Nige­ria, Tu­nisia and An­gola fac­ing the great­est chal­lenges:

The chal­lenges for South African and Nige­rian banks are macro-driven and re­late to sub­dued growth. In South Africa specif­i­cally, the in­abil­ity to ad­dress fis­cal pres­sures and weak­nesses at State-owned En­ter­prises is also af­fect­ing in­vestor sen­ti­ment.

In Tu­nisia and An­gola, chal­lenges are struc­tural in na­ture and re­late to the bank­ing sec­tor. Tu­nisian banks are still chal­lenged by weaker state-owned banks, tight liq­uid­ity and rel­a­tively high NPLS. In An­gola, banks are faced with very high non-per­form­ing loans and its cen­tral bank has asked the large pub­lic banks to re­cap­i­talise.

In con­trast, Egyp­tian banks will be more re­silient, sup­ported by more ro­bust growth fol­low­ing the suc­cess­ful com­ple­tion of an IMF pro­gramme, and the im­ple­men­ta­tion of struc­tural re­forms that led to lower in­fla­tion and a de­cline in in­ter­est rates that will sup­port both the busi­ness com­mu­nity and con­sumers.

In Mau­ri­tius, a sta­ble econ­omy, high bank liq­uid­ity lev­els and strong cap­i­tal buf­fers mod­er­ate as­set risk. Sim­i­larly, in Kenya while the econ­omy is fac­ing more chal­lenges, its banks’ high liq­uid­ity lev­els, strong prof­itabil­ity and cap­i­tal lev­els shield them from high as­set risks.

In Morocco, grad­ual eco­nomic di­ver­si­fi­ca­tion, solid prof­itabil­ity, sta­ble de­posit fund­ing and am­ple liq­uid­ity will help bal­ance the risk from high lend­ing con­cen­tra­tions, grow­ing Sub­Sa­ha­ran African op­er­a­tions and mod­est cap­i­tal­i­sa­tion.

How do you see the West African cur­rency ECO af­fect­ing banks in that re­gion?

We ex­pect the credit pro­files of Waemu-based banks to be un­af­fected by the re­cent changes to the mon­e­tary co­op­er­a­tion agree­ment be­tween WAEMU coun­tries and France, re­flect­ing the WAEMU au­thor­i­ties’ de­ci­sion to main­tain both the ex­change rate peg to the euro and France’s guar­an­tee of un­lim­ited con­vert­ibil­ity of the re­gion’s cur­rency.

How much of a dif­fer­ence would the re­cent re­peal of the in­ter­est rate cap law in Kenya make?

We do not ex­pect lend­ing rates or prof­itabil­ity to re­turn to early-2016 lev­els given the au­thor­i­ties’ and banks’ fo­cus on main­tain­ing a low cost of credit, but there could be an in­crease over the next 12-18 months.

Re­mov­ing the rate cap no longer con­strains lend­ing as banks are able to bet­ter price their risks with­out a rate cap. This will mean in­creased lend­ing to seg­ments of the econ­omy that have had sub­dued growth and ac­cess to credit, pri­mar­ily small and mid­size en­ter­prises.

Kenyan banks’ prof­itabil­ity will ben­e­fit slightly from loan and busi­ness growth, but also higher lend­ing rates will in­crease net in­ter­est in­come, re­vers­ing the re­cent years’ trend of de­clin­ing in­come and mar­gins. How­ever, prof­itabil­ity will re­main be­low pre-lend­ing rate cap lev­els. Banks’ re­turn on as­sets de­clined to 3.4 per­cent in 2018 from 3.6 per­cent in 2017 and 4.0 per­cent in 2016.

On the one hand, you say as­set risk re­mains high & yet you also ac­knowl­edge most rated African banks main­tain high cap­i­tal lev­els....”. please ex­plain?

High as­set risks speak to the risks of banks’ loan and in­vest­ment port­fo­lios. Such risks re­main high be­cause of the sub­dued op­er­at­ing con­di­tions and high gov­ern­ment ar­rears that hurt the loan re­pay­ment ca­pac­ity of con­trac­tors and sub-con­trac­tors of gov­ern­ment projects.

African banks also face long-stand­ing loan book weak­nesses due to the lim­ited di­ver­si­fi­ca­tion of their loan books, weak risk man­age­ment prac­tices in the past, and scant fi­nan­cial data and cred­i­tor in­for­ma­tion that make it dif­fi­cult for banks to as­sess bor­rower cred­it­wor­thi­ness.

But we do note that African banks have a num­ber of de­fences against th­ese risks, in­clud­ing still ro­bust earn­ings gen­er­at­ing ca­pac­ity (that is, they are typ­i­cally more prof­itable than banks in de­vel­oped mar­kets) and main­tain­ing higher cap­i­tal buf­fers.

Based on your cur­rent view, how likely is Moody’s to change its out­look for African banks to sta­ble this year?

Our out­look could sta­bilise if struc­tural re­forms and a more busi­ness­friendly en­vi­ron­ment with stronger in­sti­tu­tions emerge to sup­port higher eco­nomic growth, im­prove­ments in risk man­age­ment, su­per­vi­sory and le­gal re­form take place to re­duce prob­lem loan lev­els, and cur­rent cap­i­tal buf­fers and liq­uid­ity are main­tained. The banks’ out­look could also sta­bilise if the re­lated sov­er­eign rat­ings be­come sta­ble.

An edited ver­sion was pub­lished in the Q1 2020 is­sue of African Banker magazine

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