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02 October 2018

Angolan Banks Results 2017

Angolan Banks

Adverse economic conditions hurt 2017 results

Challenging macro environment

Angola’s economy has clearly struggled in recent years in the aftermath of the sharp drop in oil prices since mid-2014. The lower proceeds from the oil sector (also from falling production) and the need to secure some fiscal deficit adjustment led to a marked decline in capex levels. This strategy only exacerbated the downturn in the economy, as the country fell into a recession in 2016-17. Growth was also hindered by tighter monetary conditions to contain rising inflation levels not seen in over a decade. The central bank raised the BNA rate nine times (a total of 900bps) since end-2014, lifting its benchmark rate to a multi-year high of 18% (it has recently been lowered to 16.5%). It also imposed restrictions on hard FX currency supplied to commercial banks that led to a widening of the gap between the official FX rate and the parallel market rate. The latter reached a level above 600 kwanzas to the USD in 2016, resulting in a spread of over 180% to the official rate.

Some indicators deteriorated, but solvency remained intact

This more challenging macro backdrop in the country has been a major headwind for the banking sector. Profitability has declined from the levels seen earlier this decade (ROE at c15% vs. 30% in 2010) while NPLs have more than trebled in the last three years (the NPL ratio stood above 35% in 2017). The more limited availability of FX currency and an increase in funding costs (including from higher deposit rates) have also hindered activity in the sector. That said, banks have remained well capitalized, as their solvency ratio stands well above the regulatory requirement of 10%.  

Key takeaways from 2017 results

In 2017, the total assets of the Angolan banking sector increased at the slowest pace in recent years. This was mainly due to a sharp fall in foreign currency denominated loans, as the local authorities continue to de-dollarize the economy. This decline also evidences a greater aversion to risk-taking by the sector in terms of lending policies, namely in the latest economic downturn, as well as the impact of higher interest rates on demand for loans. Meanwhile, deposits also decreased in the period, contrasting with a positive evolution in previous years, but clearly remained the main source of funding for the sector. Figures for 2017 showed that more than 80% of loans and 2/3 of deposits were in kwanzas while more than half of deposits were sight deposits. In terms of the P/L, we note a very modest revenue improvement that reflected a strong drop in other banking income. This was due to lower gains in FX operations as well as the impact from the revaluation of assets and liabilities in foreign currency. All in all, it meant that the sector’s continued cost cutting efforts were insufficient to avoid a decline in operating income and subsequent fall in net profit in 2017. 

The role of the central bank

The BNA will continue to have a critical role in not only improving bank regulation and supervision, but also in strengthening the financial system. We believe the sector could finally see some M&A activity in 2019-20, as the existing number of banks is likely to prove to be unsustainable in a more competitive and tougher regulatory business environment. One of the challenges for the BNA remains to try to recoup the relations with correspondent banks. In the meantime, the normalization of the FX market where the BNA will give back to commercial banks the role of selling FX currency to clients is positive news. Also worth highlighting is the gradual correction recently witnessed in the differential between the exchange rate of the kwanza in the official and parallel markets, with this spread now standing at slightly below 20%.