Angola: Increase in capital levels insufficient to address banks’ weaknesses

LUANDA (Capital Markets in Africa) – Fitch Ratings expected Angola’s banking sector to remain weak and fragmented in coming years, despite the Banco Nacional de Angola’s (BNA) recent efforts to increase the banks’ capital requirements. It said that eight out of the 29 banks operating in Angola will have to increase their paid-in capital this year in order to comply with the BNA’s latest capital requirements. It noted that Angolan banks will be required to have at least AOA7.5bn, or $35m, in paid-in capital by the end of 2018, which is three times the current minimum requirement. However, it considered that the new capital requirement is still low by international standards, and is insufficient to address fundamental weaknesses in the banking sector. Also, it anticipated that increasing capital internally could be difficult for some banks unless they cut dividends, while the new minimum requirement could force some smaller banks to close. It considered that bank closures could be positive for the credit quality of the banking sector, as it would reduce the prevailing competitive pressure on the banks.

In parallel, Fitch pointed out that the banking sector’s capital adequacy ratio reached 23.2% at the end of 2017. But it noted that the banks’ exposure to country risk is high, given that they operate almost exclusively in the domestic market and have a high proportion of their assets invested in domestic government securities. Further, it said that the sector’s asset quality is weak, volatile and closely linked to local economic cycles. It also indicated that the banks’ single-name loan and deposit concentrations are elevated, which would expose the banks to significant default risks in case of a loan impairment, as well as to substantial liquidity risks in case of sudden deposit withdrawals. In addition, it noted that Angolan banks face difficulties in managing foreign currency liquidity and rely instead on BNA auctions. Overall, the agency considered that the outlook for Angolan banks is negative amid a decrease in lending, difficulties in accessing foreign currency and outflows of deposits.