When the Covid-19 pandemic first hit, Morocco was already in the grips of a persistent drought that had badly affected its economy. The pandemic compounded the economic challenges facing the country, a largely service-based economy and major regional tourism destination, and put its banking sector — one of the most mature and robust in Africa — in the spotlight.
Bank Al-Maghrib (BAM), the country’s central bank, responded with a series of policies that have ensured that the sector remains resilient into the middle of 2021, despite the challenges facing both banks and the economy as a whole. Short-lived loan moratoria were supplanted by an expansive state-guaranteed loan programme, which underpinned modest credit growth seen over the previous year. The central bank also acted swiftly to cut interest rates and took measures to shore up liquidity as economic activity slowed in the early months of the pandemic.
Yet the country’s banks still took a hit in 2020, with profits falling and non-performing loans (NPLs) rising.
“We believe the impact of the pandemic on banks’ financial profiles has been manageable so far,” says Jamal El Mellali, a banking analyst at Fitch Ratings. “It was mostly felt on asset quality and profitability, whereas capitalisation and liquidity remained reasonably sound during 2020 — in particular due to timely and strong support measures taken by Morocco’s central bank.”
The cost of credit will inevitably be impacted by the rise in the cost of risk
Asset quality is set to deteriorate further in 2021, with lending set to slow as stimulus spending winds down. International rating agencies have already downgraded Morocco’s four largest banks, warning that government support for them will be much more constrained in 2021.
Yet the mid-term outlook is positive. Morocco remains a major financial hub for the region and the continent, and the banking sector is stable, with banks remaining profitable and well provisioned.
Pandemic policies support credit growth
Morocco’s banking sector plays a key role in its economy, with banking assets accounting for 124% of gross domestic product (GDP) in 2019. This gave the government considerable leeway in rolling out a strong response to the Covid-19 crisis in early 2020.
One of the first measures the BAM introduced at the onset of the pandemic was a loan moratorium scheme. It was one of the shortest in the region, expiring at the end of June 2020, with the exception of loans in tourism and transport sectors. Loans under moratoria represented just 10% of total loans as of December 2020, according to the International Monetary Fund (IMF).
The BAM focused more of its efforts towards providing liquidity to businesses affected by the crisis. It released $3.3bn of emergency spending, and channelled support to the banking sector through liquidity support for micro, small and medium-sized enterprises, and with the launch of the Caisse Centrale de Garantie, or state-guaranteed loan (SGL), scheme.
“These measures, taken quickly, have had an extremely positive impact on all banking activity, both on the dirham and foreign exchange positions,” says Brahim Benjelloun-Touimi, managing director at the Bank of Africa (BMCE), the country’s fourth largest lender by assets.
Brahim Benjelloun-Touimi, BMCE
The SGL scheme played a critical role in supporting the banking sector, with the BAM extending Dh55bn ($6.1bn) of SGLs in 2020 — equivalent to between 5% and 6% of GDP, according to Fitch Ratings. These loans benefited from state guarantees for between 80% and 95% of the total amount, with interest rates set at 3.5% and repayment spread over seven years, as well as a two-year grace period.
“Contrary to other countries in the region, Moroccan authorities favoured SGLs as a lynchpin of support measures,” says Ramy Habibi Alaoui, a senior analyst at Fitch Ratings. “This contributed, in our view, to the only mild increase in NPLs between January and April 2021, compared with around a Dh10bn increase reported in 2020.”
Banks were also given freedom to refinance in dirham or foreign currencies, and collateral criteria was relaxed to support both bank and business refinancing. The BAM announced it would maintain until June 2022 the minimum threshold of two solvency ratios, core Tier 1 and core Tier 2, at 8.5% and 11.5%, respectively, against 9% and 12% previously. Similarly, the central bank authorised the use of high-quality liquid assets below the minimum liquidity coverage ratio of 100%. Between December 2019 and June 2020, it also cut its key lending rate by a cumulative 75 basis points, to 1.5%, in an effort to underpin credit growth.
All these policies had the desired effect; private sector credit growth was close to 4% in 2020, mainly supported by the SGL scheme. Debit and cash loans accounted for 40% of the increase in gross outstanding loans, followed by loans granted under repurchase agreements. When adjusted for the latter category, gross outstanding loans rose by a more moderate 3.4% in 2020, according to analysis by local investment bank CDG Capital.
“From a credit rating agency perspective, debt relief measures are in some senses credit negative because they cloud transparency of reported asset quality metrics, but from borrowers’ perspective, it positively relieves short-term pressures on their cash flow, and for banks, it temporarily eases pressures on their credit profiles,” says Mr El Mellali.
Banks’ performance
Morocco’s largest lenders have weathered the crisis reasonably well, maintaining modest credit growth and profits despite a concurrent rise in NPLs. Banking system liquidity remained healthy with no major deposit outflows or stress on the interbank market, owing mostly to BAM’s liquidity injections. While reliance on central bank funding briefly increased at the onset of the pandemic, it has subsequently reduced as market conditions stabilised.
“Funding and liquidity are ratings strength for Morocco’s banks, and liquidity is expected to remain reasonably sound in 2021,” says Mr El Mellali.
The country is home to around two dozen banks, five of which are majority state-owned. The banking sector is highly concentrated, with the country’s four largest lenders — Attijariwafa Bank, Groupe Banque Centrale Populaire (BCP), BMCE, and Crédit du Maroc (CDM) — accounting for 88% of total loans. There are 10 credit institutions listed on the Casablanca Stock Exchange, including six banks and five finance companies, and they account for the largest single slice of market capitalisation, 33.8% as of December 2020, according to data from Attijariwafa.
According to BMCE Capital Research, the overall net income of Morocco’s six listed banking groups rose by 2.7% in the year to April 2021, hitting just over Dh66bn. In total, the BAM made Dh400bn — more than 40% of the sector’s total balance sheet — available to the sector, of which nearly Dh100bn was taken up. This underpinned liquidity improvements, with BMCE reporting that banks’ liquidity deficit fell from Dh90bn in March 2020 to Dh67bn in April 2021.
Despite taking a hit in 2020, Morocco’s four largest banks were still profitable. Moody’s reports their aggregate net profits fell to $357m, from $771m in 2019. The rating agency notes that such a drop is at least partly explained by provisioning efforts and banks’ contributions to the government’s Covid-19 solidarity fund, rather than a severe deterioration in their financial positions.
Asset quality worsens
Modest growth in credits and continued profitability aside, the sector faces a sustained deterioration in asset quality in 2021. While the sector’s NPL ratio rose by one percentage point in 2020 to end the year at 8.5%, the IMF had slightly more sobering news. In its latest Article IV consultation, published in December 2020, the IMF reported that 25% of loans that benefited from government loan moratoria are experiencing payment delays but have not yet classified as NPLs, or Stage 2 loans under IFRS 9 (introduced by the BAM in January 2018).
There is a risk these loans will deteriorate, and some banks are more heavily exposed than others. Attijariwafa’s NPLs rose by 239% in the year to September 2020 to hit Dh4.6bn, with total NPLs in the country increasing by Dh10bn over the whole of 2020, according to Fitch.
However, sharp surges in NPLs are more indicative of banks’ proactive provisioning efforts, with provisioning costs at the four largest banks rising by 138% year-on-year in 2020, according to Fitch. Mohamed El Kettani, CEO of Attijariwafa, told the Financial Times in late-2020 that NPLs had spiked not because of delinquency, but because risk models were revised to reflect an anticipated increase in the number of bad loans. This is in keeping with a broader theme of prudent policy-making under the BAM, which has underpinned sectoral stability throughout the worst of the crisis.
Some also argue that Morocco’s NPL increase was moderate under the circumstances.
“One interesting thing to note is that between September 2020 and December 2020, impaired loans only marginally increased, which shows that support measures have worked and the borrowers that benefited from loan moratoria have shown good repayment behaviours since measures ended,” says Mr Habibi Alaoui.
But NPLs remain a cause for concern, and Moroccan banks may struggle as government stimulus support wanes. In April 2021, for example, a report from debt collection firm Atradius Collections found that while provisions have been made for nearly 70% of bad loans, and the largest banks have substantially raised provisioning levels recently, the banking sector’s pre-crisis capitalisation ratio was just 15.6% at the end of 2019, which “seems to be somewhat low, given the asset-side risks”.
“BAM measures have limited the rise in the claims rate initially, however, the evolution of customer defaults in 2022 and 2023, when the moratoria and public aid come to an end, will need to be carefully monitored,” says Mr Benjelloun-Touimi.
Inflation rate targeting
The pandemic has also had negative consequences for an important planned reform that would see the country shift to inflation rate targeting and a looser foreign exchange regime.
At present, the dirham is pegged to the euro and the dollar. The BAM had been working to liberalise its regime, moving in January 2018 to increase flexibility by extending the daily band of fluctuation in dirham, as measured against a basket of 60% euro and 40% dollar. The changes boosted flexibility from plus or minus 0.3% to plus or minus 2.5%. Since then the bank has further increased flexibility, widening the band again in March 2020 to plus or minus 5%.
Fears over post-pandemic volatility have put these plans on ice, however, and BAM governor Abdellatif Jouahri has made it clear that any plans for further liberalisation have been suspended due to concerns about instability in global financial markets and the potential for sharp movements in exchange rates — especially once the European Central Bank and US Federal Reserve roll out massive monetary stimuli.
“The BAM acted diligently and proactively to try to contain the crisis impact. The view of the IMF and many others is that the bank is, or was, at a good point to drop the exchange rate as a monetary anchor and adopt an inflation targeting framework,” says Javier Diaz Cassou, an economist at the World Bank.
The central bank is pressing ahead with its adoption of international best practice for the banking sector. Having already moved to IFRS 9 in 2018, the BAM is also currently finalising the introduction of the net stable funding ratio and Basel III leverage ratio, in keeping with a mandate that has helped it develop a reputation as one of Africa’s best regulators. “Fitch considers Morocco’s bank regulation to be one of the most advanced in Africa,” says Mr El Mellali. “The BAM is focused on moving towards international standards, and our assessment is that the pace of reform is thorough.”
Outlook for Morocco
Credit growth is expected to moderate this year to about 3%, according to Fitch, since state guaranteed loans will not provide the same shot in the arm as they did last year, while the country’s recovery prospects remain uncertain. “It’s difficult to predict because it will go hand-in-hand with economic growth in Morocco as well as in its main trading partners, in particular Spain, France, Italy, and the EU in general,” says Mr El Mellali. “As European economies reopen, growth in Morocco will come from export-oriented industries, manufacturing and services sectors.”
Fitch downgraded Morocco’s three largest banks to BB in November 2020, while Moody’s reported in February 2021 that its negative outlook for the country’s three biggest banks reflected the potential weakening in the government’s capacity to extend financial support to the banks. Pressure on asset quality will intensify.
Stage 2 and Stage 3 loans are expected to increase in 2021, according to Fitch, as loans that benefited from the moratoria migrate and already-weak companies fail. Courts have been closed, which might also have delayed official bankruptcies. Loans to the tourism and transportation sector, in particular, will be under pressure — Morocco only very recently reopened to international flights, and the tourism season in 2021 will still be subdued compared to 2019.
As European economies reopen, growth in Morocco will come from export-oriented industries, manufacturing and services sectors
However, there are many reasons for optimism. Fitch reports bank profitability metrics picked up in the first quarter of 2021, with profitability expected to be reasonably sound this year because provisioning efforts are winding down, and because banks will not be contributing to the state’s Covid-19 solidarity fund as they did last year.
“The cost of credit will inevitably be impacted by the rise in the cost of risk. Indeed, the economic consequences of the health crisis should extend from 2020 to 2022,” says Mr Benjelloun-Touimi. “However, the fall in the cost of resources, linked to the strong rise in non-interest-bearing deposits, has allowed an improvement in the intermediation margin.”
Furthermore, Moroccan banks are well positioned to rebound over the medium term because many of them have a strong pan-African presence. Moody’s notes that sub-Saharan Africa accounts for 18% of the combined lending of Morocco’s big four banks. Roughly 40% of BMCE’s banking activities are located elsewhere in Africa, while pan-African operations represent a third of Attijariwafa’s net banking product.
Moody’s has warned that more vulnerable operating environments could further contribute to asset quality deterioration. However, Fitch disagrees, predicting that over the medium term, sub-Saharan Africa will continue to be a strong growth driver for Morocco’s pan-African banks because loan penetration is low and interest rates are much higher in other African countries, a view BMCE supports.
“Sub-Saharan Africa has accounted for an average of more than one-third of the group’s profits over the last five years,” says Mr Benjelloun-Touimi. “Moreover, our operations are geographically diversified, since we cover the five main regions — west, central, east and southern Africa, in addition to a native presence in north Africa — thus diversifying the sources of growth and limiting the risks.”
Continue reading: Morocco bounces back from 2020’s perfect storm
