Majority of the African banking sector remains stable with positive outlooks

According to Dirk Greeff, Head of Financial Institution Ratings at GCR, the Zimbabwean banking system has been impacted severely by the liquidity crunch. These conditions are unlikely to improve in the short term.

 

He says however, banks have been resilient in the past (to even more rigorous issues) and there is no reason to indicate why they can’t be as resilient now, especially considering the measures that Government intends initiating.

 

"From a GCR standpoint, while the current liquidity challenges facing Zimbabwe are serious, it is something that the country has been through before; in fact it is lesser compared to the macro-economic upheavals it went through in 2008-2009.

 

So even though the cash situation in Zimbabwe has worsened, liquidity concerns were already very much evident when GCR rated Zimbabwean banks in 2013, reflected in the outlook’s that were assigned. Out of 15 banks rated, only two were placed on a stable rating outlook with eight being placed on a negative outlook and five currently on a rating watch.

 

"Foremost, there is a need for the vicious liquidity cycle to be addressed which has seen aggregate demand weakening. Also, attracting foreign investment inflows remains paramount in reviving Zimbabwe’s faltering economy, as all sectors require sustainable long-term funding to grow and return to profitability,” explains Greeff.

 

As a result, he says GCR will take no rating/outlook action on the Zimbabwean banking sector for now, though they remain cautious and will take action as and when necessary.

 

 

Following the industry wide recapitalisation exercise in 2005, the Nigerian banking sector has been transformed into one of the most regulated sectors in the country.

 

"The Financial Sector Stability Assessment ("FSSA”) also recognised that the Nigerian economy had recovered from the banking crisis in 2009, through various decisive and broad based policies by the government and the Central Bank of Nigeria ("CBN”),” explains Greeff.

 

He says total assets grew by 9.8% to N21.3tn as at end-December 2012, with the five largest banks (First Bank of Nigeria Limited, Zenith Bank Plc, United Bank of Africa Plc, Guarantee Trust Bank Plc and Access Bank Nigeria Plc) controlling around 60% of the market.

 

"According to the CBN’s annual report for 2012, all deposit money banks, except one, met the regulatory minimum capital, with the weighted average capital adequacy ratio ("CAR”) reflected at 18.1% compared to 17.7% for 2011. Though the total non-performing loan ("NPL”) ratio for the industry improved to 3.5% (F11: 5.0%), this was largely on the back of NPL sales to AMCON. Total loans grew by 5.3% to N6.8tn, with 40.4% of the loans maturing in more than 12-months.

 

"Hence, considering the aggressive loan growth and the decision of AMCON not to buy NPLs from 2013 onwards, asset quality is likely to deteriorate, except if internal processes are better controlled and monitored. Deposit liabilities, on the other hand, stood at N13.1tn from N11.5tn in 2011, and are short dated by nature, resulting in a maturity mismatch against risk assets,” explains Greeff.

 

Though the banking sector is doing well, Greeff says the competitive space is expected to intensify as new entrants begin to build up their market share. "Therefore to ensure stability in the economy, amidst the continuous decline in oil revenue, the incessant decline in the value of the Naira and the dwindling portfolio on foreign direct investments (on the back of the quantitative easing measures by the American Federal Reserve); the CBN further increased the CRR on public funds to 75% in January 2014 (up from 50%) to curtail inflationary pressures.”

 

Greeff says this will harshly impact on banks’ performance going forward, given their growing cost base and narrower sources of revenue. That said, the financial inclusion strategy of the CBN is expected to help drive new deposit growth going forward.

 

 

According to Greeff, the East African economies remained resilient, despite challenging macroeconomic conditions characterised by high inflation rates, volatile exchange rates and high interest rates.

 

"Real gross domestic product ("GDP”) growth of 4.7% was recorded in Kenya, up from 4.4% in 2011, supported by improved weather conditions and macroeconomic stability.”

 

Greeff says the Central Bank of Kenya ("CBK”) continued to enforce a tight monetary policy, following heightened inflationary conditions which prevailed/persisted from the last quarter of 2011.

 

"Resultantly, inflation has dropped from a high of 19.7% y-o-y in November 2011, to 7.7% in July 2012, and 3% in December 2012, in line with the CBKs target range (5 ± 2.5%). Monetary policy tightening succeeded in curbing credit growth and reducing volatility in the interbank market,” explains Greeff.

 

Following its success against inflation, Greeff explains that the CBK has progressively reduced its policy rate from 18% in December 2011 to 13% in September 2012, 11% in December 2012 and 9.5% in March 2013. The IMF estimated a real GDP growth of 4.7% for 2012 (2011: 4.4%).

 

"The Kenya Shilling has stabilised after witnessing significant volatility in 2011 (depreciated by up to 30%), ranging between 83 - 87 to the US$ in 2012.”

Greeff concludes by saying that the economic outlook remains subject to risks arising from an uncertain external environment, unpredictable donor inflows and political stability.