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My column this week is an interview with Janine Dow, head of francophone African banks at Fitch Ratings in mid-January on the outlook for the Angolan banking sector and implications of the West African currency ECO for WAEMU banks. In its most recent report at the time, Fitch had a stable outlook for the Angolan banking sector and a negative outlook for the Angolan sovereign. Amongst other things, I wanted know the reasons for the divergent outlook. With the onset of COVID-19 and consequent restrictions around the continent and the world, however, many things have since changed. Almost all forecasts and ratings of firms and sovereigns have been downgraded owing to COVID-19 effects. Some of the points Fitch’s Dow raised in the conversation are still relevant, though.
The Angolan sovereign-banking sector divergence in your recent report is curious; kindly explain.
Operating conditions for banks are tough in Angola, but have not necessarily deteriorated following the revision to Negative of Angola’s sovereign rating. Angola’s sovereign rating was affirmed at ‘B’ in July 2019 but the Outlook was revised to Negative from Stable. This reflects worsening debt metrics, a continued fall in external reserves and delayed economic recovery.
Fundamentally, operating conditions for banks have not changed since the Outlook revision. Opportunities for new lending are meagre, the process of tightening banking regulation is on-going, corporate taxes are rising and high inflation puts pressure on overheads. This is not new. The outlook for the banking sector is Stable as banks are still able to generate substantial profits because yields on government bonds are very high.
A solution may well also be found about how to resolve capital shortfalls at the sector’s systemically important and troubled bank – state-owned Banco de Poupanca e Credito – now that the AQR is completed. This, too, would be positive for the sector because the bank’s financial metrics weigh heavily on overall sector metrics
Our assessment is that Angola’s operating environment for banks would be in the ‘b’ range (we do not publish a public score). A downgrade of Angola’s sovereign rating would not necessarily trigger a downgrade of the operating environment for banks as domestic systemically important banks would still likely continue to do business and report profits.
Consolidation of the Angolan banking sector – to be triggered by tougher minimum paid-in capital requirements and results of the Central Bank’s (Banco Nacional de Angola) asset quality review (AQR) concluded in December 2019 – could ease competitive pressures for banks and bring some mild opportunities for banks to better price their business. This would be somewhat positive for the sector.
A solution may well also be found about how to resolve capital shortfalls at the sector’s systemically important and troubled bank – state-owned Banco de Poupanca e Credito – now that the AQR is completed. This, too, would be positive for the sector because the bank’s financial metrics weigh heavily on overall sector metrics. This is especially true for asset quality metrics and capital adequacy.
The BNA’s data for August 2019 shows impaired sector loans as a percentage of gross sector loans reaching 29.4 percent. We understand that BPC is responsible for a large portion of impairments in the sector. Similarly, BPC’s weak capital position weighs on sector equity/assets data which is 11 percent at end-September 2019 (according to preliminary BNA figures).
Angola is over-banked. There are 26 banks in operation, serving a population of 30 million, 60 percent of which is under 15 years old. The pool of bankable customers is small as many Angolans are employed in the ‘informal’ segments of the economy (notably agriculture). IMF-inspired banking sector reform could also be positive for governance aspects in the sector.
How do you see the West African currency ECO affecting banks in that region?
Our assessment is that there will be no immediate increase in market risk in the WAEMU region’s banking sector as a result. WAEMU banks operate mainly in local currency (now the ECO). As long as there is no risk of talk of removing the euro/ECO peg, our assessment is that reform of the currency will not alter this practice. As long as exchange rate confidence is maintained, we do not see heightened risk of deposit flight.
