EM EMEA Bank Asset Quality to Weaken as Forbearance Is Withdrawn

LAGOS(Capital Markets in Africa) –   Emerging market (EM) banks in the Europe, Middle East and Africa (EMEA) region should see meaningful increases in reported nonperforming loan (NPL) ratios in 2021 with the expiration of moratoria and loan forbearance programmes, Fitch Ratings says. Our new report What Investors Want to Know: Loan Moratoria in Emerging EMEA outlines the extent to which these banks have utilised moratoria programmes and highlights risks to asset quality as forbearance measures are withdrawn.

Impaired loan ratios saw minimal increases in most EM EMEA markets in 2020, as regulators provided forbearance to banks in respect to classification of loans subject to moratoria, masking asset quality deterioration. NPLs have yet to increase sharply, as many forbearance measures are still in place or have only recently expired.

However, we expect NPLs to increase across the region in 2021 as the moratoria programmes roll off and the effect of forbearance on loan classification is withdrawn. Any further extensions of payment holidays would be most likely be limited to the most vulnerable sectors.

Loan moratoria programmes have been extensively used across the EM EMEA region, with significant variance in uptake levels. Utilisation has been highest in Georgia, Hungary and Nigeria (where between 40% and 60% of loans were subject to moratoria at peak levels) followed by South Africa and the UAE (each at close to 20%). We view the risk of asset quality deterioration as most significant in Nigeria and also material in Turkey, Georgia, Hungary, South Africa, the UAE and Qatar.

Loan impairment charges increased in 2020 across all markets from the prior year as banks pro-actively increased loan provisions, which is positive for bank credit. The expected economic recovery across the region in 2021-2022 should mitigate the negative impact on asset quality of loan seasoning following the downturn in 2020.