All things considered, Mozambique’s banks should be struggling. In an environment of cooling economic growth, currency volatility and high inflation, their immediate prospects are far from rosy.
But the banking sector’s performance over the past year is, if anything, a testament to the resilience of the country’s lenders. Healthy capitalisation levels and relatively low rates of non-performing loans have gone hand in hand with strong asset and deposit growth.
Long-term potential
This performance has been supported partly by the fundamentals of a domestic economy that had until recently been registering strong growth. Even in light of Mozambique's current economic travails, international banking groups are buying into the country with an eye to its longer term potential. The development of offshore gas fields in the north, with an estimated revenue value of about $212bn, is just one of the prizes on offer. Meanwhile, a fast-growing and largely unbanked population remains ripe for financial inclusion initiatives.
It is little wonder then that most bankers in the capital, Maputo, remain upbeat about their prospects.
“Mozambique has been witnessing high economic growth. The financial sector, led by the banking sector, has been the second fastest growing sector in Mozambique after the extractive industry, with an average growth rate 22% in the past 10 years,” says Dr Tomas Matola, chief executive of state-owned investment and development bank Banco Nacional de Investimento (BNI).
Small players take a hit
But this confidence is accompanied by the knowledge that a more challenging economic environment will moderate the growth of most banks in the near term. Indeed, recent steps taken by the central bank, the Banco de Moçambique, to combat rising inflation and the devaluation of the metical have already hit some smaller operators in the banking system.
These interventions include dramatic interest rate hikes from a base rate of about 7.5% in mid-2015 to 17.25% in early August 2016. In addition, the central bank increased the mandatory reserve requirement for both local and foreign currency holdings to 10.5% and 15%, respectively.
“Through these two measures, the central bank has essentially sought to discourage increases in loans by making it harder for companies and individuals to acquire credit because of the added financial cost. It has also made it harder for banks to issue credit, in light of their reduced liquidity,” says José Reino da Costa, vice-chairman of the board of directors at Millennium bim, Mozambique’s largest bank. “[This has] had a huge impact on the economy. We saw small banks with liquidity issues towards the end of the year, and credit clearly slumped.”
Negative perceptions
Other challenges have also emerged. Mozambique’s reputation has taken a hit in recent times, off the back of an $850m government bond that was designated for the development of a state tuna fishing fleet but was used instead to fund the acquisition of naval patrol vessels.
In addition, revelations earlier this year that the government was presiding over about $1.4bn in undisclosed sovereign debt has not helped to improve investor perceptions. Key international donors have now suspended their support for Mozambique.
These developments have been unhelpful for an economy that is continuing to weather a lower commodity price environment. “The main challenges facing the banking sector [are] related to the restoration of investor confidence [in Mozambique], as well as improved political stability and the recovery of commodity prices,” says Mr Matola.
But despite these problems, most lenders, including BNI, are still posting positive growth numbers. In 2015 alone, BNI increased its net income by 255% year on year to 323.7m meticals ($4.4m), underpinned by a jump in net operating income, which increased 134% to 795.2m meticals over the same period.
With a mandate to finance innovative projects to contribute to the sustainable development of Mozambique, BNI’s role is set to expand as the country pursues an ambitious national development plan.
“Mozambique’s economy is expected to grow at a rate above 8% from 2018, driven mainly by coal mining and investment in transport infrastructure and oil and gas," says Mr Matola. "But this growth will depend on the existence of good infrastructure – mainly for oil and gas – and since BNI’s focus is on infrastructure finance, it will play a significant role in [these developments].”
Universal model
Meanwhile, Mozambique’s universal banks are faring similarly well. Banco Único, a newer entrant in the country's banking market (established in 2011), has emerged as the sixth largest lender in the country. In 2015, the bank’s assets grew by 35% against a system-wide average of 26%, while deposits jumped by 38% against a 24% market average, according to figures from the bank.
“Our vision and our aim is to be the first choice for our customers. Though we are growing, we have to keep growing in a sustainable way,” says Banco Único chief executive Antonio Correia.
In a market that has traditionally been dominated by the four or five largest players, Banco Único has looked to digital banking offerings, among other services, to distinguish itself from the competition.
“Banco Único is a universal bank and we are targeting all segments of the economy but in a different way. In some segments we have to be more relationship focused and in others we have to be more digitally focused,” says Mr Correia.
And in the current economic slowdown, the bank has prioritised small and medium-sized enterprises (SMEs). It believes this strategy has the dual benefits of promoting the country’s economic growth while diversifying the lender’s customer base and loan book.
“Now that the economy is facing a slowdown, we are looking to target SMEs. We have invested in a daily TV programme that helps SMEs to improve their governance. If they can do this they will have better access to the financial system. This show has now become the most viewed programme in the country,” says Mr Correia.
Foreign investors
And while the performance of Mozambique’s larger banks points to the relative strength of the sector, the interest of foreign lenders in the banking market is a barometer of the country’s long-term growth potential. While foreign direct investment may have cooled in Mozambique in 2016, international banks have nevertheless been actively buying into the market in recent years.
South Africa’s largest lender, Nedbank, has acquired a majority stake in Banco Único, for instance. “Nedbank has acquired a 50% stake in Banco Único plus one share. The agreement is a partnership with our existing shareholders and we are waiting on final approval with the central bank. This shows that big outside players still believe in Mozambique,” says Mr Correia.
Portugal’s Banco de Investimento Global (BiG) is another foreign player that has recently entered Mozambique. According to Sergio Magalhães, BiG Mozambique executive director, the bank first applied for a full licence at the end of 2013 following initial exploratory visits to the country in 2012. In January 2015, BiG began to develop its presence on the ground, including prospecting local clients, before officially launching its subsidiary unit in 2016.
“When looking at Mozambique, we found that the local market was mainly focused on pure commercial and mass retail banking. But there was no one looking at the corporate and institutional space and servicing those clients,” says Mr Magalhães.
“As a new and specialised player in the market, we are now explaining to prospective clients that our offering includes services such as bond issues, asset management and project finance. People aren’t used to seeing those capabilities in local banks.”
Growth in diversification
Indeed, the arrival of new players is helping to accelerate product and service diversification in Mozambique’s banking sector. Bankers in Maputo speak of the relative sophistication of local banks compared with many regional peers. They expect this trend to play a small part in the wider development of the economy, including a much-needed maturation of the stock exchange. With a more developed suite of capital markets offerings, the banks are expected to play a role in supporting future listings.
Though private sector participants describe the stock exchange, the Bolsa de Valores de Moçambique, as well run and investor friendly, it lacks both depth and liquidity. As Mozambique’s funding requirements grow, particularly in relation to major oil and gas contracts, having a liquid and well-functioning bourse will be crucial.
“There will be a lot of opportunities [for capital markets offerings] in the coming years because funding sources will have to be diversified. The economy cannot continue on its current path of relying on the banks’ balance sheets. This diversification will bring more market depth to the stock exchange,” says Mr Magalhães.
Even the country’s largest banks share this view. According to the International Monetary Fund, Mozambique’s nominal gross domestic product in 2014 was $17bn. This figure is dwarfed by the long-term investment requirements for the country’s offshore gas development, as well as future power generation and critical infrastructure projects. As such, when it comes to Mozambique’s future mega-projects, many lenders are keeping a close eye on the business to be generated from their associated value chains.
“Local banks have limited capital resources for directly financing the so-called ‘mega-projects’. In order to benefit from the investment in those areas, local banks should focus on the supply-chain funding associated with mega-projects, especially those in the mining and gas sectors,” says Mr Reino da Costa.
Looking ahead, Mozambique’s banks can expect to be operating in a more challenging environment. Higher reserve requirements are adding to an already challenging liquidity situation, while the system’s asset quality is expected to deteriorate over the coming year even if most lenders are in a good position to weather the downturn.
“In 2016, we will continue to see the metical devalue, as well as increases to the rate of inflation. It won’t be at the same pace witnessed towards the end of last year, but we're bracing ourselves for a challenging year ahead,” says Mr Reino da Costa.
Parental pressures
But alongside environmental factors, there are new regulatory pressures on the horizon. Banks with a foreign parent – which include most of Mozambique’s major lenders – will be subject to Basel III regulations in the coming years. As Banco Único’s Mr Correia points out, this will require that local units of these banks abide by these capital requirements in the coming years.
“If we look to the mother companies of some of the local banks, they will have to abide by Basel III regulations in the coming years. This will demand that extra capital be raised in a more challenging economic environment by many of the local lenders,” he says.
Yet these difficulties will be ameliorated by the fundamentals of a country that is still underbanked. With a young, dynamic and entrepreneurial population that is growing fast, and massive amounts of investment required across almost all sectors of the economy, the role of the country’s banks is only set to become more important.
“In Mozambique it is not just about competition with other banks but it is about working alongside the central bank to grow the market for the future,” says Mr Correia.
Though the country’s lenders are ready to assume this responsibility, much will depend on the government’s approach to economic and political development in the coming months. After suffering a number of hits to its reputation, Mozambique needs meaningful reform. Greater transparency will be needed to win back the trust of key international donors and to encourage foreign direct investment.
Mozambique’s current leadership – particularly in the Ministry of Economy and Finance – is widely respected by private sector leaders in Maputo, and there is every indication that the authorities are at least heading in the right direction. Strong dialogue has been established with various international agencies and investor-friendly reforms are being enacted. The hope now is that the government can stay the course.
