Banking: Pressure on Currency Intensifies, Banks Earnings Decline

Lagos (Capital Markets in Africa) – Citi Research indicated that the pressure on the naira intensified in early March 2020 following the sharp decline in global oil prices. It noted that the Central Bank of Nigeria (CBN) devaluated on March 20 the official exchange rate from NGN306.5 per US dollar to NGN360.5 against the dollar. It added that the exchange rate on the NAFEX market weakened from about NGN365 per dollar in late February to about NGN388 per dollar currently. It noted that, despite the currency adjustment, the parallel market exchange rate is already trading above NGN400 per dollar. As such, it anticipated that the CBN may have to further devalue the currency in case oil prices remain at their current low levels. It said that the pressure to further adjust the currency could increase, given that the government is currently seeking about $7bn in external financial support from multilateral financial institutions, including $3.4bn under the IMF’s Rapid Financing Instrument, in order to cope with the COVID-19 outbreak and low oil prices. Further, it said that the probability of a more significant currency devaluation in the next six months could significantly increase if foreign currency reserves drop from about $33.8bn currently to below $30bn. But it considered that the exact timing and extent of this adjustment is difficult to predict and will depend on oil price developments and current account dynamics in the coming 12 months. It expected authorities to gradually adjust the naira to between NGN450 per dollar and NGN500 per dollar this year, depending on the pace of decline in foreign currency reserves.

Tunisia: Difficult operating conditions to weaken banks’ performance in 2020
Moody’s Investors Service indicated that the challenging operating conditions in Tunisia, exacerbated by the outbreak of the coronavirus, will significantly impact the banking sector’s asset quality, profitability and solvency in 2020. It added that the historically weak regulations, regulatory forbearance, and poor governance continue to pose risks for Tunisian banks. It anticipated the banks’ credit growth to slow down from 5% in 2019 to between 3% and 4% this year, and to be constrained by the regulatory cap of 120% on the loans-to-deposits ratio in local currency. It added that lending growth could further weaken in case inflationary pressures re-emerged. It expected the banks’ problem loans to remain elevated in 2020, amid slow credit growth and higher interest rates, and to be concentrated in the tourism, manufacturing, retail and real estate sectors. In parallel, it projected the banks’ capital buffers to be stable this year. But it considered that, under a stress scenario, the capital buffers of most banks would fall below the minimum regulatory requirements, reflecting the banks’ modest loan-loss provisioning levels. In addition, it expected the banking sector’s profitability to come under pressure in 2020 amid high provisioning needs, slow lending growth, strong competition for deposits, as well as lower investment revenues due to reduced  Treasury issuances. Further, it noted that the banks’ reliance on short-term collateralized central bank funding is gradually declining, which will reduce asset risks and provide some financial flexibility in times of stress.

Egypt: Earnings of five banks to decline by 21% in 2020
Regional investment bank EFG Hermes projected the aggregate earnings of the five Egyptian banks that it covers to decline by 21.2% to EGP18.5bn in 2020, compared to a growth rate of 20% in 2019. The five banks are Commercial International Bank, Qatar National Bank ALAHLI, Crédit Agricole Egypt, Abu Dhabi Islamic Bank-Egypt, and Housing & Development Bank. EFG attributed the anticipated decline in the banks’ aggregate net income this year to a narrower interest margin after the Central Bank of Egypt cut interest rates by 300 basis points in March, as well as to weaker lending growth and higher provisioning costs. It forecast aggregate lending to expand by mid-single digits in 2020, relative to a 14% growth in 2019, due to lower demand for loans amid the coronavirus outbreak, with local currency loans rising by mid-single digits and foreign currency loans expanding by low single digits. It considered that upside potential to lending growth could come from an easing of the containment measures in the second half of 2020, given that the borrowing rates are currently at very attractive levels. In addition, it anticipated provisioning costs this year to be close to their 2016 peak levels that followed the 60% devaluation of the Egyptian pound at the time, as it expected banks to be fairly conservative amid the current crisis. It projected the banks’ earnings to grow by 33% in 2021 in case the impact of the virus dissipates, while it forecast lending to increase by about 14% next year.