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IHS Markit has released a new banking risk report for Algeria,
with a final risk rating indicative of Very High Risk. Regional
peer Tunisia is also in this rating category. Oman is rated more
favourably than Algeria in the Significant Risk category, while
Lebanon has an Extreme Risk rating. Algeria's indicative banking
risk rating is generated by elevated credit risk primarily driven
by related-party lending risks from the sovereign, medium liquidity
risk because of reliance on government and state-owned enterprise
(SOE) funding and low deposit mobilisation, and moderate capital
buffer risk driven by the sector's shareholders' equity's extreme
exposure to non-performing loan (NPL) write-downs in the short
term. Additional risks stem from weak regulatory environment, and
an elevated stock of pre-existing NPLs along with low levels of
provisioning going into the dual coronavirus disease 2019
(COVID-19)-virus pandemic and low oil-price shocks in 2020.
Despite government support measures, Algerian banks are
extremely exposed to risk from the COVID-19 pandemic and moderately
low oil price environment. In March, the Bank of Algeria announced
several measures to mitigate the impact of the COVID-19 pandemic on
businesses and the banking sector. The measures include a loan
moratorium which is in place through end-March 2021, a reduction in
capital adequacy requirements, and lowering reserve requirements.
While these measures will serve to delay the impact of COVID-19 on
the Algerian banking sector, banks will see a large uptick in NPLs
when measures expire due to severe credit risk from exposure to
SOEs. Algerian bank lending is highly concentrated in lending to
SOEs, at 51% of total banking-sector loans. This share is
substantially higher than other peer banking sectors in North
Africa. Lending to SOEs is highest at state-owned banks, which
account for 99.8% of loans to the public sector, yielding
related-party lending risks. Some of this risk to banks is
mitigated by government guarantees on bank loans to SOEs that
exceed 25% of a bank's capital base and are used for project
financing, as well as repeat historical carve-outs of SOE NPLs, but
this process also creates moral hazard and crowds out
private-sector lending. According to the International Monetary
Fund (IMF), SOEs are concentrated in the oil and gas, construction,
and tourism sectors. Although the more optimistic oil-price outlook
as of mid-March 2021 signals improvement in the oil and gas sector,
construction and tourism are likely to be slow to recover from the
global COVID-19-virus pandemic, driving increased credit risk for
public banks. Additionally, despite NPL carve-outs, Algerian banks
still maintain a higher NPL ratio than most regional peers.
Notably, however, direct lending to COVID-vulnerable sectors such
as services (including tourism and transportation) and is expected
to be much lower in Algeria than other regional peers such as
Egypt, where services lending represents 24% of banking sector
total loans.
Banks will require recapitalisation in the near term. With a
tier-1 capital adequacy ratio (CAR) of 15% and a 9.7% ratio of
shareholders' equity to total assets, the Algerian banking sector
maintains an ample capital buffer. However, despite strong capital
adequacy indicators, the ratio of net NPLs to shareholders' equity
is nearly 43%, signalling that a concerning share of banks' capital
is exposed to NPL write-downs. We expect that capital buffers will
deteriorate in the short term, given the anticipated increase in
NPLs and the fact that Algeria's banks maintain the lowest level of
provisioning in the region (loan-loss reserves are just 50% of
total NPLs), necessitating recapitalisation.
Government deposit drawdown is the biggest liquidity risk to
Algerian banks. With deposits from SOEs and the government
representing 43% of total deposits, banks are heavily reliant on
the government for funding. Government deposit data are released at
a lag, but we believe that a drawdown of government deposits in
2020 contributed to headline deposit growth slowing slightly to
1.1% from 2.1% in 2019. In 2021, we expect that deposits will
contract as government deposit drawdowns outpace deposit
mobilisation in other areas. However, this will be met with a
contraction in lending and we expect that the loan-to-deposit ratio
(LDR) will remain constant around 92%. Additionally, the domestic
deposit insurance scheme does not provide reliable insurance
against depositor losses, with the IMF reporting that customers
have not been repaid following bank closures in 2003. As such, IHS
Markit assesses that Algeria would be at a higher risk of sudden
deposit withdrawals if a loss of confidence in the banking sector
were to occur.
Going forward, government NPL purchases and increased
provisioning costs are key indicators to watch. As COVID-19-related
support measures expire at the end of March, a positive indicator
for the Algerian banking sector would be government NPL purchases,
reducing asset quality risks while allowing banks' capital buffers
to remain intact. Conversely, a negative indicator would be NPL
write-downs and increased provisioning costs, causing capital
buffer deterioration. This risk could be mitigated by large-scale
government recapitalization, as has occurred repeatedly in
Algeria.