Industry Forecast - Weak Lending Environment Will Remain Drag On Sector Growth - MAR 2017

BMI View: A lack of confidence amongst the population and a challenging economic climate will see growth in Mozambique's banking sector remain well below its historic trend over the coming quarters. In this environment, it is likely that smaller banks will face a growing risk of liquidation by Banco de Mocambique .

Mozambique's commercial banking sector will continue facing headwinds to growth over the coming quarters, as the economy's weak performance and waning trust in the industry weigh on the lending climate. The impact will be compounded by high interest rates, which the country's central bank has raised in response to growing inflation over the course of the past 12 months. Year-on-year inflation climbed to 26.8% over November, up from just 2.5% at the beginning of 2016. While increasing prices are often a boon for borrowers, Banco de Mocambique's (BM) efforts to keep the real interest rate close to positive territory have negated much of this impact.

Although credit growth has remained nominally high over 2016, reaching 20.8% year-on-year its latest print in October, this is partly a reflection of sustained weakness in the local currency as almost a fifth of banks' assets are denominated in foreign currency. In US dollar terms, the volume of client loans on banks' balance sheets has been in decline since Q315. With the Mozambican metical looking set for a more stable 2017 and interest rates likely to remain at their highest in years, we believe that loan growth in local currency terms will see some decline over our short-term outlook. The BM's key policy rate now stands at 23.25%, which will see asset growth slow to just 7.0% according to our forecasts following a projected 10.0% in 2016.

Asset Growth Set To Continue Its Decline
Mozambique - Commercial Banking Sector, Total Assets
e/f = BMI estimate/forecast. Source: BMI/Bank of Mozambique

In addition to the likelihood of further weakness in client loan growth, we are sceptical towards the prospects of banks' bond portfolios adding any significant weight to the sector's balance sheets. In our previous Commercial Banking report for Mozambique, we wrote that "demand for borrowing from the Mozambique sovereign will offer some support to banks' asset sheets" ( see 'Poor Lending Environment Will See Banking Sector Decelerate ' , September 14). However, since writing this, the government has announced an inability to service payments due on debts in 2017, requesting that creditors agree to some form of restructuring. In doing so, the government hopes to re-engage with the IMF who have refused to resume lending to the government while it remains under 'debt distress' status. Fiscal austerity is likely to feature heavily as part of any new terms negotiated between the government and its creditors, and we no longer believe the government will be so dependent on domestic banks to finance its budget deficit. Although growth of just 1.3% in October in the banking sector's bond portfolio was likely something of an anomaly, we do not believe bonds will make up for weak client loan growth.

Government Austerity Will Limit Bond Issuance
Mozambique - Commercial Banking Sector Bond Portfolios

Weak Deposit Growth Could Leave Banks Exposed

Banks will face further headwinds in the form of weak deposit growth in 2017, as the population's savings decline in real terms due to the persistence of high inflation. BM's deposit rate stands at just 16.3% at the time of writing, and with prices expected to grow by an average of 26.3% according to our forecasts, savers will face losses as long as they keep their money in domestic banks. Deposit growth, while still fairly high at 21.2% in October, has nonetheless been on a clear downtrend in 2016, having peaked in January at 31.5% ( see chart below).

Deposit Growth Will Remain In Downward Trend
Mozambique - Commercial Banking Sector Deposits

The decline in deposit growth will likely be driven by the public's lack of trust in the banking sector. In November, BM liquidated Nosso Banco (NB) on the grounds of mismanagement and inadequate capitalisation. While the BM's Deposit Guarantee Fund secures deposits up to 20,000 meticais for individual savers, a bank's corporate clients are not covered under the scheme. Since the liquidation and dissolution of NB, confidence in the country's banking sector has fallen, and customer fears over the safety of their accounts will add further headwinds to deposit growth over the coming quarters.

Structural Breakdown:

Asset Quality: Asset quality is high by regional standards, but has deteriorated marginally over recent years. The sector's non-performing loan (NPL) ratio rose from 2.3% of total loans in 2013, to 4.3% in 2015 (when data was last made available by the World Bank), but has probably risen further on the back of rising interest rates and weak economic growth. This reflects an unstable labour environment and historically high loan costs, with sudden or seasonal unemployment affecting people's ability to repay debt. Although data is sparse, a 2012 report by the Open Society Foundation estimated that 70.0% of people under the age of 35 ie the bulk of the labour force, were unable to find stable employment.

FX Exposure: Mozambique's banking sector has moderate direct exposure to foreign exchange fluctuations. Foreign assets accounted for around 17.4% of total assets as of October 2016, while foreign liabilities accounted for 8.0% of total liabilities over the same period. While the metical will likely enjoy greater stability over the coming two years than it has seen over 2016, the currency remains highly volatile to swings in investor sentiment and exposed to the government's frequent scandals.

Funding Structure: The banking sector's funding structure has declined in recent months/years but remains robust. The sector's loan-to-deposit ratio (LTD) ratio sits at 79.0% as of October 2016. This implies Mozambique's banks are predominantly domestic deposit funded and less reliant on external financing, and less exposed to external shocks. Deposit growth peaked at 31.5% in January 2016, and overall.

Sovereign Support Capacity: We note heightened risks to the banking sector from a relatively uncertain sovereign backdrop. We forecast Mozambique's budget deficit to reach 6.1% of GDP in 2017, from an estimated 10.3% in 2014, however, the increasing debt servicing costs would weaken the government's ability to prop any failing banks. The public debt-to-GDP ratio was an estimated 42.2% in 2014 and we estimate an increase to an unsustainable 110.2% of GDP in 2017 following the revelations of the recent debt scandal.

Ownership Structure: Mozambique's banking sector is predominantly owned by six large foreign owned banks, Millennium BIM, BCI, Standard Bank, Barclays, and Banco Unico. These banks own around 90.0% of the sector's assets, which we view as a net positive from a financial stability perspective. Foreign owned banks tend to possess more sophisticated management and technology to mitigate risks. They also offer a source of funding before turning to lenders of last resort.