African banks face a new year with renewed hope of revenue growth and improved returns to shareholders.
However, analysts are forecasting just a slight acceleration in revenues as well as stricter regulations that could see weaker lenders fall on the wayside.
Global rating agency Moody’s Investor Service, in its latest Banks’ Outlook Report (2019) says African banks face increased pressure to shore their capital base and implement International Financial Reporting Standard (IFRS 9), which calls for increased provisioning for loan loss.
Increased provisioning for loan loss is expected to impact the profitability of banks, a matter which could be compounded by rising global interest rates, increased government debt, domestic currency pressures, political uncertainties and rising trade tensions.
It is estimated that loan loss provisions for most African banks will range between one per cent and two per cent of the gross loan book.
“Banks’ credit profiles remain sensitive to such developments, including through inter-linkages with their sovereigns, particularly given their large holdings of government securities,” says Moody’s.
According to the agency, African lenders are also required to stock up capital buffers to withstand both domestic and external shocks under the new Basel III banking rules.
“While growth across Africa is recovering, it is still below potential. Our stable outlook for African banks reflects expectations of a slight acceleration in growth and stricter regulation that supports financial stability,” says Moody’s.
“Asset risks will remain high, while we also expect some renewed tightening of foreign currency liquidity.”
The agency says stricter regulation and better supervision will help address legacy governance issues.
A number of African banks have faced solvency issues in the recent past, largely due to volatile operating conditions, slow growth and low isk appetite, and weak governance issues, potentially signalling under-provisioning for potential loan losses and lack of an effective internal assessment of capital needs.
“We expect fewer incidents of this kind as supervision capabilities improve, minimum capital requirements increase, and Basel II &III regulations are implemented,” says Moody’s.
According to Moody’s legacy corporate governance issues and patchy credit underwriting were behind the recent failure of banks in Angola and of second-tier banks in Kenya, Tanzania and Nigeria.
According to the global consultancy firm McKinsey, Africa’s overall banking market is the second-fastest-growing and second-most profitable of any global region, and a hotbed of innovation.
However, Africa lenders face multiple challenges, including low income levels in many countries, widespread use of cash in most economies, and poor coverage by credit reference bureaus.
It is argued that although competition is heightening and regulation is tightening, there is still room to grow.
Africa’s retail banking penetration is estimated at just 38 percent of the gross domestic product, and half the global average for emerging markets.