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02 October 2019

Angolan Banks

Angolan Banks

Results boosted by new FX regime in 2018

Challenging economic environment persists

Economic activity in Angola contracted for a third straight year in 2018 mainly due to a sharp decline in oil production that reflects recent underinvestment in the sector. The lower oil proceeds and the need to secure some fiscal deficit adjustment led to a marked decline in capex levels. This only exacerbated the downturn in activity, as public investment remains a key source of growth for the non-oil sector, which now represents more than 65% of the country’s GDP (vs. less than 45% a decade ago). Meanwhile, inflation benefitted from persistently tight monetary conditions, slowing to about 20% (vs. 30% in 2017). This despite a sharp depreciation of the kwanza and the impact of adjustments in some administered prices.

Key takeaways from 2018 results

The Angolan banking sector disclosed a very significant improvement in net profit in 2018, with results being largely influenced by a sharp depreciation of the kwanza during the year. The combined net profit of the 26 banks operating in the country more than trebled to AKZ 500,383 million (US$ 1,621 million). This performance was mostly due to an abnormally large contribution from income in FX market operations in the period. Revenues were also boosted by an improved evolution in net interest income, including stronger receipts from the investment in financial instruments and wider loan spreads. This helped to offset the impact of softer loan growth and, in some cases, higher funding costs from deposit rates. On the other hand, total costs advanced at slightly below the inflation rate, despite a large part of the cost structure of the banking sector being denominated in foreign currency. This allowed a marked improvement in efficiency levels, as the cost-to-income ratio fell to 30.9% from 53.3% in the previous year.

Asset quality ratios remain elevated

The asset quality indicators of the sector improved slightly in 2018. This reflects the transfer of part of the problematic assets of BPC (the country’s largest public bank) to Recrédit (a financial vehicle created to manage the NPLs of the sector) in June 2018. Still, the combined NPL ratio of these banks stood at historically high levels of close to 30%. It is worth highlighting that more than 90% of the NPLs of the sector are concentrated in five large banks and, therefore, present clear systemic risks. The conclusion of the BNA’s asset quality review of the 12 largest banks operating in the country is expected by year-end. This will hopefully provide a better assessment of the current situation in terms of NPLs for the sector as well as some guidelines as to how this issue will be addressed by the local authorities in the months ahead.

Strengthening the banking sector

The central bank is expected to continue to play an active role in order to safeguard the stability of the sector. Apart from the asset quality reviews, the BNA is expected to continue to work on the restructuring plan for BPC while Recrédit is likely to play an increasing part in the recovery of distressed assets. We believe that NPLs have likely peaked, but the issue is far from being resolved. Moreover, we believe that weaker (and sometimes under-capitalized) banks will continue to find it increasingly more difficult to operate in the current environment. We see consolidation (and/or possible changes in shareholder structure) as a topic that could gain more traction in the foreseeable future, namely as the local authorities also continue to implement more legislation to strengthen the banking sector.