Morocco: African Expansion Weighs on Moroccan Bank Credit Profiles

Moroccan banks' ambitions to further expand across Africa are a drag on their credit profile, at least in the short term, Fitch Ratings says.

Moroccan banks that establish or acquire banks in markets with lower sovereign ratings are exposed to the large portfolios of local government bonds that these subsidiaries will typically hold.

In most African markets, domestic sovereign bonds are rated several notches lower than Moroccan sovereign bonds (BBB-). Operating environments are also typically more risky, exposing banks to greater asset risk, and regulatory standards may be less developed than they are in Morocco.

Fitch's assessment of risk appetite, capturing our view of the risks of African expansion, has a high influence on the standalone Viability Ratings of Morocco's Attijariwafa Bank (bb-) and BMCE Bank (b+). We do not rate Morocco's other systemically important bank, Groupe Banque Populaire Centrale (GBPC). Attijariwafa and BMCE's Long-Term Foreign-Currency Issuer Default Ratings of 'BB+' reflect our view of potential support from the Moroccan state, if needed.

Attijariwafa closed on its acquisition of Barclays Egypt business last week, marking another step in its African expansion plan, a strategy also followed by GBPC and BMCE.

African subsidiaries have helped to offset weak credit growth and narrowing margins in these banks' Moroccan units, and are becoming increasingly important contributors to overall earnings, generating 32% of 2016 net income for BMCE, 29% for Attijariwafa and 12% for GBPC.

If Attijariwafa's new Egyptian subsidiary continues to be as profitable as it has been recently, African banks' contributions to consolidated group results could become even more important.

However, this boost to Moroccan banks' profits is not risk-free and the steady growth of African lending means that these loans accounted for about 20% of loans at Attijariwafa, 15% at BMCE and 12% at GBPC at end-2016.

In 2016, according to Attijariwafa, Barclays Egypt reported net income equivalent to 6.5% of Attijariwafa's net income, and in 1Q17 it reported a 4.3% annualised return on assets, considerably higher than the 1.4% achieved by Attijariwafa in 2016.

Its consolidation into the Attijariwafa group from 2Q17 could mean that well over one third of the group's profits are being generated by its African network. However, the Egyptian business is unlikely to maintain such high profitability once yields on Egyptian government bonds fall.

Net interest margins for Egyptian banks were boosted in 2016 by the 300bp increase in policy rates to tighten monetary conditions following flotation of the Egyptian pound.

We expect yields on Egyptian treasury bills to decline this year as the operating environment stabilises after the currency depreciation that followed the free float, translating into lower margins for banks.

Moroccan banks' network of African subsidiaries, mostly in sub-Saharan countries, is considerable. BMCE has subsidiaries in 19 African countries, Attijariwafa in 13 and GBPC in eight.

The subsidiaries vary in size and franchise. For example, BMCE's subsidiaries in Benin, Burundi and Djibouti are market leaders controlling over a quarter of banking sector deposits, while its banks in Ghana

The above article originally appeared as a post on the Fitch Wire credit market commentary page.

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