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29 June 2020

Mozambican Banks - More challenging environment impacts 2019 results

Banks faced a slowing economy and lower interest rates

The Mozambican banking sector continued to face a slowing domestic economy and a lower interest rate environment during 2019. Economic growth reached 2.2%, well below the 3.75% recorded in 2016-17 and the 3.4% in the previous year. The gradual drop in inflation also allowed the central bank to continue easing monetary policy, with its reference interest rates cut an additional two times (for a combined 150bps) after already aggressive reductions in 2018 (525bps in the MIMO rate). Moreover, the central bank lifted its reserve requirements in foreign currency by 900bps to 36%, while slightly reducing the ones in meticais (100bps to 13%) towards year-end. Although commercial banks adjusted their interest rates in response to lower central bank rates, these adjustments were not as material as the ones witnessed in 2018. Still, the lower interest rates and significantly more demanding reserve requirements impacted margins and, as result, net interest income. 


Net profit was hit by (quite) muted revenue growth and higher loan provisions

The combined net profit of the six largest banks in the country (representing 85-90% of the sector) reached MZM 16,168 million (US$ 263 million) in 2019. This is 7.6% below the bottom-line of the previous year. It reflects a very modest improvement in revenues (just over 1% YoY) as well as higher loan impairments, which results from an increasingly more challenging economic environment. Overall, the combined ROE of these banks stood at an estimated 16.1%, while ROA reached 2.90%.


Efficiency levels deteriorated slightly  

The operating performance of these banks showed that revenue growth was clearly impacted by a slightly weaker contribution from net interest income (71.1% of total revenues vs. 72.3% in 2018) and other banking income. On the other hand, they saw another double-digit increase in fees that reflects, in large part, higher retail banking activity. Costs expanded above the inflation rate once again, as the sector continued to expand its branch network and hire more staff (this time at a faster pace than in recent years). This means that the combined cost-to-income ratio rose to 51.9% from 48.9% in 2018, which still compares favorably with other African countries.


L/D ratio falls further below 50%, despite slight recovery in loans

The combined net assets of the six banks reached MZM 556,798 million (US$ 9,058 million), advancing slightly more than 10% YoY, as the sector increased the amount of cash and deposits at the central bank and, in some cases, the portfolio of treasury instruments. Loans recovered slightly (after contracting in the previous two years) as lower interest rates made these more accessible to companies and households. Still, net loans represented only 34% of the total assets, remaining at a multi-year low. In particular, foreign currency loans fell sharply yet again, while loans in meticais were up by nearly 12% YoY. Deposits grew at a double-digit pace, with another healthy improvement in local currency deposits. Overall, loans and deposits in meticais represented over 70% of their respective total while 60% of total deposits were sight deposits. The loans-to-deposits (L/D) ratio stood further below 50% (at 45.6%) after falling below this level for the first time in many years in 2018. Asset quality ratios deteriorated slightly in the period, with the NPL ratio reaching 6.24% and the NPL coverage ratio 152.9%. Finally, the total solvency ratio of the six banks stood at an estimated 28.6%, with all banks recording a ratio above the required 10% minimum.