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AfricaJune 1 2017

Shaken but not stirred: Mozambique's banks look forward with optimism

The 'tuna bond' scandal, donor suspensions, a sharp rise in inflation rates and slower economic growth have made for a difficult operating environment for Mozambique's banks in the past couple of years. However, Peter Wise discovers a sector where optimism very much prevails. 
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BCI

When Société Générale Moçambique (SGM) opened a gleaming new headquarters in Maputo in March, the ceremony marked not only a new phase in the French group’s expansion in sub-Saharan Africa, but also a demonstration of confidence in a country that has been battered over the past two years by an economic downturn, a debt crisis and two bank failures.

Speaking at the inauguration, Alexandre Maymat, the head of African operations at Société Générale, said SGM planned to grow through a two-pronged strategy of mobile banking and extending its retail franchise across Mozambique, adding that Africa could become a model for more mature, developed economies in the deployment of mobile banking technologies.

The expansion of Société Générale, which began operations in Mozambique in 2015 after buying a majority stake in a local bank, is a sign of the resilience of a Mozambican financial sector that has weathered the impact of currency depreciation, high inflation and tough central bank measures. Despite these difficulties, local bankers say the industry remains focused on the huge potential of the country’s developing economy and its emergence as an international energy hub with one of the world’s largest untapped reserves of natural gas.

High expectations

Paulo Sousa, chief executive of Banco Comercial e de Investimentos (BCI), one of Mozambique’s two largest lenders, alongside Millennium BIM, is confident of an upturn fuelled by energy sector investment. “There are strong expectations that talks between the government and multi-national companies on developing the country’s gas reserves will conclude favourably,” he says. “This will restore investor confidence, which has been shaken over the past two years, and lend new drive to the economy.”

Confidence has been undermined by the fallout from Mozambique’s ‘tuna bond’ case (the use of state-backed loans to buy navy vessels instead of a fishing fleet) and the disclosure in April 2016 of almost $2bn in hidden sovereign debt. The revelation led international donors to suspend aid, triggered talks on debt restructuring and left the country with insufficient funds to pay a government bond coupon in January. Deepening an incipient downturn, the debt crisis led to a sharp rise in inflation, currency depreciation and weaker growth.

Banks have been at the centre of measures aimed at stabilising the currency, controlling inflation and steering the economy back onto a path of sustained growth. In a series of dramatic interventions, the central bank has raised the base interest rate to 23.25%; it was only 7.5% in mid-2015. The mandatory reserve requirement, which was previously differentiated for local and foreign currency holdings, has now been unified at 15.5%.

“Mozambican banks are operating in a more challenging economic and business environment marked by slower economic growth and increasing competition,” says Pedro Ferreira Neto, chief executive of Eaglestone, a financial services company focused on sub-Saharan Africa. “This is likely to be reflected in the sector’s 2016 results.”

Room for growth

Yet even in this tougher climate, lenders are growing. Millennium BIM, Mozambique’s most profitable bank and the second largest by assets, achieved its sixth consecutive year of strong growth in 2016, according got chief executive José Reino da Costa, despite “a very challenging year for the banking system”. The bank, controlled by Portugal’s Millennium bcp, posted a net profit of 4.5bn meticais ($70m) in 2016, up 33% on 2015. Its return on average equity was 22.7%. BCI, meanwhile, registered a 2016 net profit of $22.5m, according to Mr Sousa.

Banco Único, the country’s fifth largest bank, increased net profits almost fourfold to 440m meticais in 2016, according to chief executive António Correia. This corresponded to a return on equity of almost 21%, up from 8.5% the previous year. One of the newest entrants in the market, Banco Único (in which South Africa’s Nedbank owns a controlling stake) has expanded rapidly since opening in 2011. “In 2016, we achieved credit growth of 24% against an average of 15% for the sector. Deposits were up 34% compared with an average of 11%,” says Mr Correia. 

BiG Mozambique, a subsidiary of Portugal’s Banco de Investimento Global and another newcomer, broke even at its first financial closing in 2016. This was after 24 months of capital expenditure on setting up and only eight months of commercial activity. “As an investment bank focused on institutions and corporates, as well as affluent retail clients, the kind of banking we want to do in Mozambique is being well accepted,” says chief executive Sérgio Magalhães. “This tells us that there is room to develop.”

At the smaller end of the spectrum of Mozambique’s 18 banks, Banco Terra, whose leading shareholders include Rabobank of the Netherlands and Norway’s Norfund overseas development fund, reported a 2016 net profit of 12m meticais, an increase of 120% on its performance in 2015. Established in 2008 with the aim of becoming Mozambique’s leading food and agriculture bank, Banco Terra currently has a staff of 160 and total assets of €50m.

According to the World Bank, recent figures show a slowdown in growth for every business sector in Mozambique except financial services. The increase of 25% for banking, however, largely reflects the exchange rate effect on deposits.

Financial casualties

As business conditions worsened and regulatory controls were tightened in 2016, two banks went under in Mozambique. In September, the central bank intervened at Moza Bank, then the country’s fourth largest lender with 48 branches. As its liquidity dried up, shareholders were unable to recapitalise the bank, in which Portugal’s Novo Banco owns a 49% stake. The board was replaced and the lender is now being put up for sale. Two months later, the financial authorities ordered the liquidation of Nosso Banco, citing “serious liquidity and management problems”. The small bank employed about 70 people and was controlled by the country’s social security institute.

The failure of two banks in 2016 “underscores how quickly vulnerabilities in the financial sector can emerge”, the World Bank said in a recent report, adding that the “combination of slower growth, currency depreciation and tighter monetary policy has heightened the exposure of Mozambique’s banks to risks”. In April this year, the central bank took further radical steps to reduce this exposure by increasing the minimum capital requirement for banks from 70m meticais to 1.7bn meticais and raising the minimum solvency ratio from 8% to 12%. Banks have three years to comply. 

Efforts by the central bank to strengthen the financial system have been broadly welcomed by the sector. “This is a very difficult phase and tough actions requiring big adjustments have been taken,” says Banco Único’s Mr Correia. “But we feel that the central bank has put the right measures in place and, above all, has done so in an open and constructive way in dialogue with the banks.”

BiG Mozambique’s Mr Magalhães agrees. “The dialogue with local banks and the recent regulatory changes have had a very positive effect in stabilising the sector. The consumer trust is slowly coming back after two very difficult bank interventions,” he says. He also warns, however, that more demanding regulations will need careful management if they are to prove effective, saying: “More capital may not be the equivalent of more capacity and could lead to a greater concentration of risk if not handled properly.”

Mozambique’s tougher banking climate is expected to result in consolidation in the sector, if not more victims. “We see M&A activity among existing players as more likely than the entry of new players,” says Mr Ferreira Neto of Eaglestone. 

“Stricter regulation and greater central bank intervention will add complexity,” adds Mr Sousa of BCI.  “Regulatory requirements will get tougher, vigilance tighter and the need for accountability stronger. Making the system more robust in this way could lead to mergers. In a Darwinian way, the strongest and the best adaptors will survive, others will seek mergers and others may disappear.”

Multitude of regulations

Higher lending rates have increased the cost of financing in Mozambique, leaving borrowers and adjustable-rate loan holders more exposed, while currency depreciation has raised debt-servicing costs for foreign loans. Non-performing loans, which averaged 4.3% in 2015, had increased to 5.2% by November 2016. “Updated figures are likely to reveal a higher degree of asset impairment, requiring additional provisioning which reduces bank profitability and could undermine capital adequacy,” the World Bank warns.

The current banking landscape comprises 18 banks. The six largest lenders account for almost 90% of total assets, loans and deposits, and are controlled by foreign groups, mainly from Portugal and South Africa. This obliges them to comply not only with Mozambican regulations, but also with the rules set by the central banks in their countries of origin and, in the case of Portuguese lenders, the European Central Bank. These banks will also have to comply with Basel III regulations in the coming years.

“If we look back over the past 15 years, we see how much Mozambique’s financial system has evolved,” says Mr Sousa. “We have not yet caught up with the banking systems in more developed countries. But competition has driven innovation and differentiation, in some cases to the point of excellence. Although the share of the population that uses banking services is below average for the region, branch network coverage, to which BCI is the biggest contributor, has expanded to a reasonable level.”

The government has set a target of ensuring that 35% of the population has access to a bank account within the next five years, up from a current level of about 20%. The National Strategy for Financial Inclusion (2016-2022) also seeks to guarantee that 75% of districts will offer banking services and that three-quarters of the population will be able to access formal financial services within five kilometres of their home or place of work by the same date. For a population of more than 14.2 million, Mozambique, a largely rural country, currently has about 660 bank branches and 1600 ATMs. At the end of 2015, 87 districts out of a total of 158 had a bank branch, while 98 had ATMs.

Reaching out

In 2015, Millennium BIM launched a partnership with Mozambique’s postal service, offering banking services in post offices, many of which are being renovated as part of the agreement. The bank’s Jajá project also provides financial services to people in rural and suburban areas. “We do this by using agents in shops, grocery stores and other commercial outlets that meet the necessary requirements,” says Mr Reino da Costa. “Recognised as a highly innovative bank, we seek to anticipate market needs. In the coming years, we will also be investing in technology-based banking services.”

“The Mozambican financial system has shown itself to be robust and capable of meeting the challenges it faces,” says Mr Correia of Banco Único. “It doesn’t have the size to finance the huge infrastructure projects needed in the energy sector, but local banks have proved capable of financing the growth of the economy and meeting the needs of companies seeking to provide services to the big natural gas and other energy projects.”

Mr Magalhães of BiG Mozambique adds: “Local banks will have to work as a syndicate to diversify risk, mitigate exposures and fight for a part of the financing of the big oil and gas projects and the adjacent pipeline of financing deals for service providers and similar firms.”

In transition

Banco BiG focuses on corporate financial services and capital markets. “We see ourselves as complementing the other banks, which are mainly mass-market retail operations, and we have found that the two sides fit very well together in the current economic climate,” says Mr Magalhães. “Mozambique is in the midst of a social transformation from a low-income society to one that is gradually building a middle class. The banking system has come a long way over the past five years, but we see a need for innovation and sophistication that goes beyond term deposits and current accounts and keeps pace with the needs of local consumers and international investors.”

Bankers see the country’s stock exchange, the Bolsa de Valores de Mocambique, as well managed and investor friendly, but it is limited in size and lacks liquidity. “The exchange is moving in the right direction, but work is required to educate investors who are not used to capital markets,” says Mr Magalhães. He would like to see the process for authorising foreign investors to invest and divest through the stock exchange simplified. “For example, some investors interested in Mozambique are restricted by covenants that require them to invest only in listed assets,” he says. “Simplifying the process would make the stock exchange a channel for bringing in more foreign investment.”

Despite its recent setbacks, Mozambique has unquestionably taken giant steps forward. “I don’t know a country that has changed so much for the better over the past decade,” says Mr Magalhães. The challenge now is to keep on improving.

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Read more about:  Africa , Mozambique , Regulations