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Banking sectors in Cote d'Ivoire, Ethiopia, Senegal: Significant to High Risk
22 June 2021Gabrielle VenturaGreta ButaviciuteRonel Oberholzer
Our Banking Risk Service has expanded its coverage of
Sub-Saharan Africa (SSA), launching risk ratings
forCôte d'Ivoire, Ethiopia, and
Senegal.
Côte d'Ivoire and Senegal are each rated as Significant Risk,
while Ethiopia is rated as High Risk. Regional peer Mozambique is
rated less favorably than Ethiopia in the Very High Risk Category,
while Tanzania and Kenya are rated more favorably than Ethiopia in
the Significant Risk category. In the region, only South Africa is
rated more favorably than Côte d'Ivoire and Senegal, in the Medium
Risk category. Côte d'Ivoire and Senegal's banking risk ratings are
both driven by large lending concentration, a large stock of
unprovisioned for non-performing loans relative to capital, and the
regulator's lack of enforcement and transparency. Ethiopia's
indicative banking risk rating is generated by low credit risk
owing to rapid nominal credit growth, moderate liquidity risk
primarily driven by maturity mismatch and bank funding of SOEs,
medium solvency risk, and moderate qualitative risk factors
including an outdated regulatory environment. The overall banking
risk rating for Ethiopia is constrained by risks to the sovereign's
creditworthiness.
Banking sectors in Côte d'Ivoire, Ethiopia, and Senegal
face similar challenges as the rest of SSA.
Overall banking performance in the SSA countries has been mixed.
Countries such as Nigeria, which are dependent on oil exports, for
instance, have seen short-term liquidity constraints and foreign
currency risks. Nevertheless, most banks across the region are
adequately capitalized and limited earnings deterioration through
the retainment of dividends and good management practices. The most
pertinent risk across all SSA countries has been the deterioration
of asset quality and credit risks. These risk factors are
intertwined with the ongoing Covid-19 pandemic and resultant modest
economic growth outlook.
Overall for SSA banks, NPLs have been structurally high,
primarily due to macroeconomic volatility, a legacy of problem
loans that are not written off, government arrears, and poor credit
risk management practices.
The ongoing COVID-19 crisis is likely to aggravate the NPL
problem even further, even though the effect may be delayed due to
regulatory forbearance measures in most SSA countries. Another
concern centers around the level of restructured loans that are
past due, of which figures are sparse at this stage that is likely
to progress to NPLs. Therefore, asset quality is expected to
deteriorate over the near to medium term as borrowers' debt
servicing capacity stays strained, given a modest economic recovery
expected in most SSA countries. The SSA-economic growth outlook is
primarily driven by the slow vaccine rollout across the region and
supply-side constraints despite a rebound in world growth. Economic
recovery will not only be impacted upon by the ongoing pandemic but
also by the diminished multiplier effect that lower credit growth
has on economic activity. The elevated level of NPLs is likely to
slow credit growth through banks' risk-averse stance.
Despite strong credit growth in the wake of the
coronavirus disease 2019 (COVID-19)-virus pandemic, related-party
lending represents a significant risk to Ethiopian
banks.
Credit growth in Ethiopia held relatively constant in 2020, at
29% year on year (y/y) despite the negative macroeconomic outlook
in the wake of the COVID-19 virus pandemic. IHS Markit anticipates
that credit growth will slow to 16% in 2021, as loan provisions to
SOEs slow and the government refocuses on fiscal consolidation
efforts. Lending to SOEs represents 30% of total banking-sector
loans in Ethiopia. Although the Ethiopian government is currently
in the process of reforming and privatizing SOEs, these
corporations are historically underperforming and are not held to a
consistent standard of financial reporting. This is particularly a
concern at the sector's largest bank - the Commercial Bank of
Ethiopia (CBE) - which has 40% of assets tied up in energy-sector
SOEs, according to the International Monetary Fund (IMF), a
significant related-party lending risk. It is believed that some of
these financing arrangements are unsustainable and will thus become
non-performing. In fact, the CBE is reportedly undergoing an
asset-quality review to determine the scale of these
vulnerabilities.
Credit riskin Côte d'Ivoire and Senegal
is driven by lending concentration and significant exposure to
government securities.
Côte d'Ivoire and Senegal are members of the West African
Economic and Monetary Union (WAEMU) and have the largest and the
second largest banking sectors in the WAEMU, respectively. In
Senegal, lending concentration is the major vulnerability to the
banking system as bank portfolios are concentrated among a handful
of borrowers, including SOEs. Concentration of lending also remains
elevated in Côte d'Ivoire. The large exposure limit was tightened
in both countries from 75% to 25% as of 2018 by WAEMU's regional
regulator, the Central Bank of West African States, but risks will
remain elevated in the medium term as existing loans mature.
Furthermore, Ivorian and Senegalese banks are likely to continue
increasing their exposure to government securities, which was
further exacerbated by the COVID-19-virus-related economic
slowdown. We forecast that credit extension will slow marginally in
Côte d'Ivoire in 2021 as the real GDP growth outlook is favorable
but contingent upon the global economic outlook, while we expect
Senegal's credit growth to pick up slightly given fiscal and
monetary policy support that improved the health system and
cushioned the pandemic's economic shock.
All three countries have capital ratios above the
regulatory minimum; however, inferior regulatory standards blur
underlying weaknesses in Ethiopia, while asset quality
deterioration will weigh on capital buffers inCôte
d'Ivoire and Senegal.
With a sector-level Tier-1 capital adequacy ratio (CAR) of 17.2%
when last reported in December 2019, the Ethiopian banking sector
appears well capitalized. However, given that the National Bank of
Ethiopia's regulatory framework uses Basel I standards, it is
likely that the regulatory CARs overstate the sector's buffer
against insolvency. This is underscored by the sector level
leverage ratio of 7.9% in December 2020, indicative of moderate
solvency risk. The capital adequacy ratio stood at 10.5% in Côte
d'Ivoire at the end of 2019, while in Senegal the ratio was 13.9%
at the end of 2020. While Senegal's CAR ratio is higher than Côte
d'Ivoire's, so are non-performing loans (NPLs), and a sharp
asset-quality deterioration could quickly diminish capital buffers
given low provisioning. In Côte d'Ivoire, particularly weak
capitalization of small state-owned banks also presents
vulnerabilities to the banking system and diminishes confidence in
the banking sector overall.
Outlook
The largest risks to Ethiopia's banking sector stem from the
sovereign because of related party lending risks. These risks are
likely to materialize if there is a large deterioration in the
sovereign's external position including additional short-term debt
restructuring or currency devaluation. Additionally, a
deterioration in the sovereign's financial position will impact the
sovereign's ability to repay SOE debt owed to the banking
sector.
In Côte d'Ivoire and Senegal, the greatest near-term risk stems
from likely asset quality deterioration, although the favorable
economic outlook and anticipated robust recovery will sustain
credit growth in 2021, supporting profitability and provisioning
against new loan losses.
Posted 22 June 2021 by Gabrielle Ventura, Economist and
Greta Butaviciute, Senior Economist, Banking Risk and
Ronel Oberholzer, Principal Economist, Sub-Saharan Africa Economics