Mozambique Banks

Mozambican Banks : Challenging times ahead?

Downturn in 2016

Economic activity in Mozambique slowed markedly in 2016 mostly as a result of the sharp decline in commodity prices, including aluminum and coal (the country's main exports) and lower FDI. Real GDP growth decelerated to 3.8%, considerably lower than the 6.6% in 2015 and the 7.3% annual average recorded in the previous decade. Investor sentiment deteriorated following the revelation in April of illegal public borrowing that lead to donor aid freezes. The country also suffered successive downgrades from international rating agencies, affecting its currency and the level of international reserves at the Banco de Moçambique, the central bank.

Restoring imbalances

The priority for local authorities has been restoring macroeconomic stability after the sharp increase in external debt levels, the strong decline in capital inflows and the economic downturn. This has also included rebalancing the local FX market, which saw the metical depreciate more than 32% against the US$ last year (on top of the near 20% depreciation in 2015) that lifted inflation to multi-year highs. At the same time, the central bank aggressively raised its key interest rate by 1,050 basis points in a 10-month period to 23.25% earlier this year (and from 7.5% in mid-2015) to tackle rising inflationary pressures. The central bank also raised the mandatory reserve requirement for local and foreign currency holdings by unifying both rates at 15.5%.

Resilient operating performance (again)

Despite the more challenging economic backdrop, the combined net profit of the five largest banks in the country (accounting for more than 80% of the sector) continued to record double-digit growth. This was due to a resilient operating performance that more than offset much higher loan loss provisions (resulting from deteriorating asset quality and for precautionary reasons) and taxes. Revenues were mostly supported by a significant improvement in net interest income, as banks benefitted from higher interest rates and robust loan growth. On the other hand, costs were impacted by the depreciation of the metical, as some expenses are indexed to foreign currency.

Asset quality hit by macro conditions and higher interest rates

The combined net assets of these five banks continued to advance nicely in 2016 and nearly trebled since 2010. This has been largely supported by strong lending growth, with loans representing more than half of the total assets of these banks. Both loans and deposits in meticais continued to represent roughly two thirds of their total. It is also worth noting the significant deterioration in asset quality ratios last year, which reflect a more adverse macro environment and the impact of higher interest rates on household affordability ratios. The total NPL ratio of these banks stood at nearly 5% (up from 3% in 2015). Solvency ratios remained well above the legal requirement.

Central bank intervenes

The central bank introduced new capital and liquidity rules after having to intervene in four financial institutions (three of which ceased operating) in less than a year. Local institutions are now also required to disclose more information on a more regular basis to improve transparency in the sector. The central bank governor stated these measures may lead to consolidation in the banking sector, a scenario we concur with as we believe the current 19 banks still operating in the country may prove to be an unsustainable number in the medium-term.