Industry Trend Analysis - Limited Credit Demand Will Constrain Banking Sector Growth - JUNE 2017


BMI View : Demand for credit from both the public and private sectors will remain weak over the next two years in Mozambique. This will pose a headwind to asset growth in the country ' s commercial banking sector over this short-term outlook.

Mozambique's commercial banking sector is set to face a challenging two years, as the weak economy weighs on demand for credit and decreases asset quality on the sector's balance sheets. A deceleration in economic growth (expected to fall to 3.0% over 2017 from 6.6% in 2015 before climbing to just 3.5% in 2018) and an ongoing fiscal crisis will see both the public and private sector pull back from the rapid rate of borrowing that has typified the commercial banking sector over recent years. Year-on-year total asset growth averaged 22.9% per annum between 2010 and 2015, before falling dramatically in 2016 to just 7.9%. While the largely unbanked population will offer opportunities for long-term growth (only 24.0% of the urban population had access to financial services in 2016), sector growth will be slow over our short-term outlook, reaching just 4.8% and 7.9% y-o-y in 2017 and 2018 respectively.

Banking Sector Will Suffer In Weak Economy
Mozambique - Banking Sector Asset Growth
e/f = BMI estimate/forecast. Source: BMI/Bank of Mozambique

This relatively negative outlook is largely a result of the government's ongoing debt crisis that culminated in a default on a coupon payment on the country's USD 2023 eurobond in January 2017. In October 2016, the government announced its incapacity to meet its substantial debt obligations, which we believe have grown to 109.0% of GDP in 2017. Any future negotiations with creditors and the IMF are likely to stipulate severe cuts to government spending in a bid to stabilise the public debt burden, tempering demand for credit from the domestic banking sector ( see ' Restructuring Of Debt Burden Will Dictate Fiscal Policy ' , February 02, 2017). This will see bond portfolio growth slow considerably over the coming months after averaging 23.0 y-o-y each month between January 2015 and October 2016. When the government announced its inability to service outstanding debt in October, the sector's bond portfolio grew by just 1.3% y-o-y, compared to 26.5% the previous month.

Government Default Will Keep Bond Growth Low
Mozambique - Commercial Banking Bond Portfolio
Source: B anco Mocambique, BMI

Credit demand from the private sector is also likely to decline over our short-term outlook, as key sectors underperform. Contagion from the government's debt crisis will be most severely felt in Mozambique's construction industry. Beyond the commodities space, we believe the development of large infrastructure projects will be a rarity for the construction sector over the next two years due to the government's constrained fiscal position and weak investor sentiment ( see ' Commodities Exports Sustaining Construction Industry Expansion', Jan 31, 2017). Headwinds in other key industries will also dampen balance sheet growth for commercial banks over the coming two years. Adverse weather conditions have hurt harvests amongst Mozambican farmers, and the agricultural sector's demand for credit will likely be slow while farmers recover. Finally, the persistence of high interest rates in 2017 - we expect the central bank to hold its key policy rate at 23.25% through the year - will shut out much of the household and private sector from the domestic credit market.

Structural Breakdown

Mozambique - Banking Sector Risk Snapshot
Poor Sub-Optimal Adequate Good Excellent
Source: BMI
Asset Quality x
FX Exposure x
Funding Structure x
Capital Adequacy x
Sovereign Support Capacity x
Ownership Structure x

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 2.9% of total loans in 2013, to 4.3% in September 2015 (when data was last made available), 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. Nevertheless, NPLs remain within sustainable levels with the level of capitalization of most banks considered favourable.

FX Exposure: Mozambique's banking sector has moderate direct exposure to foreign exchange fluctuations. Foreign assets accounted for around 10.0% of loans to the private sector in June 2015, while foreign liabilities accounted for 6.9% of total liabilities over the same period.

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 December 2016, down from 85.0% in February 2015. This implies Mozambique's banks are predominantly domestic deposit funded and less reliant on external financing, and less exposed to external shocks. In particular we highlight the proportion of 'time deposits', currently comprising 38.0% of the total deposit base as positive for the sector, given these deposits cannot be withdrawn before a set date without notice, reducing the scope for any potential bank runs if financial conditions suddenly deteriorate. Deposit growth slowed towards the end of 2016, but remains more immune to the weak economy than client loans or banks' bond portfolio.

Capital Adequacy: According to the IMF, the average bank regulatory capital to risk-weighted assets ratio in September 2015 was 15.0%. These rates are comfortably above global standards, such as the EU's 8.0% capital adequacy target. As such, the sector is relatively well positioned to cope with shocks.

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 6.3% of GDP in 2017, from an estimated 8.8% in 2016. 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 compared to 40.4% in 2013 and we project an increase to over 100.0% 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, Moza, 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.