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07 Junho 2021

Mozambican Banks: Economic Recession and Pandemic Hit Results

Banks continued to face a more challenging environment

The Mozambican banking sector faced an increasingly challenging macroeconomic environment in the last couple of years. Real GDP growth slowed to 2.3% in 2019 (from an average of 5% in the previous five years) and economic activity contracted -1.3% in 2020 mostly due to Covid-19. The central bank had to implement several measures aimed at mitigating the impact of the pandemic, including (1) the reduction in mandatory reserves in local and foreign currencies, (2) the decision in terms of monetary policy to cut reference interest rates, (3) the exemption of the requirement to build provisions on restructured loans associated with Covid-19 and (4) the reduction in banking commissions. Despite these efforts, the results of the domestic banking sector were clearly affected, as a weak operating performance and the need to significantly build loan impairments and other provisions impacted net profit.


Net profit impacted by a lower operating income contribution

The operating performance of the six largest banks operating in the country showed that revenue growth remained almost flat in 2020, with a further decline in interest rates continuing to affect margins. Fee income was impacted by some extraordinary measures adopted by the central bank to mitigate the impact of Covid-19. These included a temporary exemption and reduction of certain transaction fees on ATMs and POSs, as well as transactions made in digital channels. These measures were announced at the end of March 2020 and lasted until September 30. The double-digit increase in other banking income was largely due to a strong contribution in terms of operations in the foreign exchange market. Meanwhile, costs expanded above the inflation rate once again in 2020. The evolution in costs was influenced by (1) larger investments implemented in the digitalization of the sector, (2) the impact from extraordinary expenditures and investments associated with the combat against the pandemic and (3) the depreciation of the Metical, as some costs are linked to foreign currency. This meant that the combined cost-to-income ratio rose to 55.0% (from 51.9% in 2019), which still compares favorably with other African countries.


Higher loan impairments and other provisions also affected the bottom-line

The banking sector significantly increased its loan impairment levels in 2020, while other provisions also surged in the period. This reflected a precautionary approach taken by several banks to take into consideration potential risks resulting from the pandemic, including the impact on the country’s real estate market, and the more challenging economic environment in recent years. Overall, the combined net profit of these six banks fell by 16.6% YoY, reaching MZM 13,487 million (US$ 180 million) in 2020. This net profit represents a ROE of 12.8% and a ROA of 2.08%.


Business environment likely to remain challenging

The economic and social impact from Covid-19, including the changes in consumer behavior and demand for banking services resulting from the pandemic, will bring greater challenges for global banks in 2021-22. This is likely to accelerate the need to implement digital transformation programs. In particular, it will be important to adjust the services provided in mobile apps and internet banking to clients in an increasingly more competitive business backdrop. Mozambique’s economic growth outlook is also likely to remain relatively subdued (possibly at 2-3%/year), making it more challenging for domestic banks to generate revenues and increasing the need to implement cost containment measures to secure adequate profitability levels.