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11 July 2018

Mozambican Banks : Net Profit Driven by Higher Interest Rates

Mozambican Banks

Net Profit Driven by Higher Interest Rates


Challenging macro environment persists

The Mozambican banking sector continued to face a challenging economic backdrop in 2017, with real GDP growth slowing to historically low levels of 3.7% mainly as a result of lower domestic demand. This was due to weaker public investment levels, lower availability of credit, a reduction in consumer purchasing power and falling confidence levels of both consumers and companies. As in 2015-16, the central bank continued to raise interest rates in the first part of the year to contain inflationary pressures, lifting its benchmark interest rate to historical highs of 23.25% in March. More positively, a favorable political environment contributed to some stabilization of the metical while a slowdown in inflation levels eventually allowed the central bank to partly reverse its highly restrictive monetary policy with a total of four rate cuts in the year placing the key rate at 20.50% by end-2017.

Net profit nearly trebles in 2017

Despite the adverse economic environment, the combined net profit of the six largest banks operating in the country (accounting for 85-90% of the sector’s total assets, loans and deposits) improved significantly. Bottom-line growth was mostly boosted by a strong increase in revenues (25% YoY) that clearly offset the impact of a more modest rise in costs (5% YoY) and lower headwinds from loan impairments. This allowed ROE and ROA to reach multi-year highs of 18.4% and 3.10%, respectively.

Robust operating performance offsets higher loan provisions

Most banks said that their robust revenue performance was due to a sharp increase in net interest income, as a larger exposure to treasury instruments yielded attractive profitability levels in the current high interest rate environment. However, they also said that non-interest income like fees and other banking income were pressured by a weaker economic activity that led to a lower number of transactions during the year. Meanwhile, banks continued to expand their branch network and hire more staff, but at a slower pace than in previous years. The sector’s cost performance also reflected some stabilization of the metical as some expenses are indexed to foreign currency. Overall, the combined cost-to-income ratio of these banks declined to 48.5% from 58.2% in 2016. Below the operating income line, loan impairments rose once again at a strong pace after more than doubling in 2016, as cost of risk stood at 379bps (vs. 255bps in 2016). Net profit was also impacted by lower other provisions and a more modest increase in taxes (effective tax rate stood at only 23.8% vs. 45.3% in 2016). 

Macro conditions and high interest rates hit asset quality

The combined net assets of these banks advanced at a much slower pace (4.7% vs average of c20% in 2010-16). This resulted from a sharp decline in the loan portfolio of all banks, as both loans in meticais and in FX saw a sharp contraction (-17% and -19%, respectively). Most banks said this reflected a lower demand from their clients, as demand was clearly affected by the high interest rate environment. Provisions in the balance sheet continued to rise rapidly (22.9% after surging 66.9% in 2016) due to the loan growth in recent years and a further (although more muted) deterioration in asset quality levels. The total NPL ratio reached 6.76%, up from 5.42% in 2016 (and c3% in the years prior to that). This is explained by the weaker economy since the second half of 2016 as well as the impact from higher interest rates on household affordability levels. All in all, the combined solvency ratio of the six banks recouped quite significantly to 19.3% (from 5.5% in 2016) after the recapitalization of Moza Banco in 2017 and stood well above the regulatory requirement of 12%.