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    From Nigeria to Africa’s Biggest Banks Profitability is likely to improve this year

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    LOAN loss provisioning is expected to fall among the biggest banks in South Africa, Kenya and Morocco, but will remain above long-term averages over the next 12 months, Moody’s Investors Service said yesterday.

    “The drop will boost net profits at these banks, given their solid pre-provision income,” the global credit rating agency said.

    South African and Kenyan banks were prudent in recognising forward-looking provisions, as required under IFRS 9 rules. Some South African banks took additional provisions to reflect expectations of weak economic conditions, Moody’s said in a report on the 15 biggest banks in South Africa, Kenya, Nigeria and Morocco.

    “Problem loans have soared at African banks, as the pandemic brought widespread economic disruption. While comparison across systems is imperfect, financial reports show non-performing loans (NPLs) increased most sharply in Kenya, breaking through 10-year highs,” the report said.

    Nigeria was an exception, with its banks reporting a surprise fall in NPL ratios and setting aside lower loan-loss provisions than their continental peers, a trend that was likely to reverse this year, said Moody’s.

    Barring Nigeria, profitability collapsed at most banks, mainly because of an unprecedented increase in provisions, but a partial recovery was expected over the next 12 to 18 months, Moody’s predicted.

    “If provisioning costs revert to their 2010-2019 highs, profits could increase by an average of 57 percent for Kenyan banks and 42 percent for South African banks, all else constant. For Nigerian banks, we expect provisioning costs to increase towards long-term averages as problem loans increase and require more provisions.”

    Although return on assets (ROA) was expected to improve for Kenyan, South African and Moroccan banks this year, these returns would likely remain below long-term averages.

    “In South Africa, although lower interest rates will negatively pressure banks’ interest margins, we expect pre-provision income to increase by about 2.5 percent, and lower provisions will improve profits.”

    Nigerian banks’ weaker efficiency would moderate their higher margins (partly reflecting a higher inflation rate), straining pre-provision income. Higher provisions would likely pressure their profits this year, Moody’s said.

    Last year, Kenyan banks’ ROA declined the most, by 122 basis points (bps) to 2.2 percent, but remained the highest among these banks and within its 10-year range.

    Nigeria’s ROA declined by only 43 bps, largely due to lower provisions. A steep fall in yields on government securities last year strained pre-provision income.

    For South Africa’s largest four banks, ROA declined by an average 70 bps to 0.44 percent, below its 0.82 percent, 10-year low.

    Similarly, the average ROA of Morocco’s largest three banks was 0.45 percent, below the 2010-2019 low of 0.65 percent.

    Problem loan volumes jumped sharply last year, rising the most in Kenya (83 percent among these large banks), followed by South Africa (54 percent) and a more moderate 15 percent in Morocco. Nigeria’s problem loans increased by only 2 percent, likely because of big volumes of restructured loans and loan repayment holidays granted to borrowers during the pandemic, Moody’s said.

    All the banks covered up in the report substantially increased the volume of their loan-loss provisions last year, in expectation of rising credit losses. Volumes of provisions more than doubled in most systems.

    Provisioning increased 260 percent in Kenya, 144 percent in South Africa and 127 percent in Morocco. In Nigeria, provisioning volumes increased 66 percent in aggregate.

    edward.west@inl.co.za

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