itch: Pan-African Moroccan, South African Banks Benefit from Regional Operations

Fitch Ratings-London-31 May 2024: The African subsidiaries of large pan-African banking groups based in Morocco and South Africa will continue to have good profitability in 2024 and 2025, supported by still-high interest rates, stabilising currencies and steady balance-sheet growth, Fitch Ratings says. This will help to offset some ongoing underperformance in the groups’ domestic markets.

Morocco-based Bank of Africa (BOA; BB/Stable), Attijariwafa Bank (AWB; BB/Stable) and Groupe Banque Centrale Populaire (GBCP; unrated), and South Africa-based Standard Bank Group (SBG; BB-/Stable) and Absa Group (ABSA; BB-/Stable) all have strong regional franchises in Africa. This diversifies their revenue and supports their performance when their home markets are underperforming.

Rising interest rates, regional business expansion and robust balance-sheet growth – often outpacing growth in domestic markets – boosted the contributions of the African subsidiaries to their parent groups’ results in 2023. This was despite volatility in regional currencies, particularly in key markets including Egypt, Nigeria and Ghana, which limited the benefit to varying degrees.

BOA and SBG had the highest contributions from their African subsidiaries, which accounted for 62% and 42% of headline earnings, respectively (2022: 57% and 36%). The contribution of ABSA’s regional operations also increased markedly, to about 30% of the group’s normalised headline earnings (2022: 14%), partly due to slowing revenue growth and rising impairments in South Africa. In contrast, the contribution of African subsidiaries to AWB’s and GBCP’s net profits declined to 41% and 18%, respectively (2022: 43% and 36%). This was due to revenue recovery in their home market, combined with higher non-loan impairment charges at some subsidiaries, reflecting increased country risks and sovereign rating downgrades.

African subsidiaries’ returns on assets were superior to those in the home markets over 2019–2023 for most groups, and we expect the returns on regional operations to remain attractive over 2024 and 2025, underpinning the groups’ regional expansion strategies. Overall, BOA, SBG and ABSA reported the sharpest improvements in returns on assets from their regional operations, supported by stronger revenue growth, a fall in loan impairment charges (SBG, ABSA), and shrinking assets at BOA, reflecting the bank’s cautious growth in some markets.

 We expect still-muted credit and revenue growth in the banks’ home markets over 2024–2025 due to subdued macroeconomic conditions. The African subsidiaries should continue to boost their parents’ results, helped by still-high interest rates in some jurisdictions supporting wide margins (despite likely rate cuts in 2H24 in many markets) and solid real GDP growth. Fitch forecasts median real GDP growth of 4% in 2024 in sub-Saharan Africa, compared with 0.9% for South Africa and 3.2% for Morocco. Stabilising regional currencies should also support the subsidiaries’ contribution to the groups’ profits.

Some of the subsidiaries’ markets will undergo further policy rate increases in 2024 as inflationary pressures persist, which could put pressure on asset quality. Geopolitical tensions, sovereign debt sustainability and foreign-currency liquidity pressures in some (mostly low-income, high-debt) regional economies also pose risks, and further volatility in impairment charges is likely. Nevertheless, there have been recent positive sovereign credit developments in two key markets, Egypt and Nigeria.

The Viability Ratings of the pan-African banking groups reflect both the benefits and the risks from their subsidiaries. Fitch assesses the earnings diversification by income stream and geography due to the subsidiaries as positive for all groups’ business profiles. However, Fitch’s operating environment score for AWB and BOA is ‘bb-’, one notch below that for domestic Moroccan banks, reflecting the two banks’ high exposure to lower-rated and more volatile markets.