Moroccan Covered Bonds Market Would Boost Housing Finance: Fitch

The introduction of a covered bonds market in Morocco would support continued strong growth of retail mortgage lending, Fitch Ratings says.

Covered bonds could be an important new source of funding for banks, particularly if growing demand for credit outstrips deposit growth, as deposits provide about 70% of banks' funding.

Retail mortgage loans by banks totalled MAD188 billion (USD18 billion) at end-2016, with growth running at about 5% a year, reflecting strong demand.

Deposit growth was 6% in 2016. Some banks have told us they looking into issuing their first covered bonds in 1H18 as they hope the necessary legislation will be in place by then, although progress with legislation has been slow, with asset valuation a sticking point due to data limitations.

Investor appetite for covered bonds is untested, but Morocco's capital markets are reasonably deep and well developed, and institutional investors already buy long-term senior and subordinated bonds issued by Moroccan banks.

Covered bonds would lessen the maturity mismatches between banks' assets and liabilities, reducing liquidity risk - a credit positive.

Retail mortgages loans have maturities of 15 to 25 years but most deposits are contractually short-term, albeit with a high degree of stability.

Draft legislation for covered bonds has not been published, but media reports indicate that eligible assets for mortgage covered bonds will include primary mortgage loans with a maximum loan-to-value ratio of 80%.

This would mean that most mortgage loans would qualify as collateral. Asset quality in the Moroccan banking sector is weak by international standards, with impaired loans in retail housing loan books at about 8%.

We would therefore expect the covered bonds legislation to include high collateralisation requirements.

The high impairment levels reflect long debt-servicing delays, a common practice in Morocco. Write-offs are far lower at about 1% a year. Growth prospects for Morocco's retail housing finance market are positive, supported by strong housing demand, banks' appetite for retail lending and relatively low interest rates.

Regulation of the mortgage market is becoming tighter, which is credit-positive for banks, and, although property prices can be volatile, there are no signs of a bubble.

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