Moroccan banks’ profitability recovered strongly in 1Q21 with loan impairment charges (LICs) easing and contributions to Morocco’s Covid-19 relief fund having ended, but full recovery to pre-pandemic levels is unlikely until at least 2022, Fitch Ratings says.
Aggregate net income for the seven largest Moroccan banks was up 86% yoy in 1Q21. The improvement was driven by a 28% yoy decrease in LICs following the significant front-loading of provisions in 2020, when banks recalibrated their IFRS 9 models in light of the pandemic and also applied management overlays.
The seven banks’ LICs/pre-impairment operating profit ratio fell to 39% in 1Q21(2020: 62%; 2019: 25%). While we expect the declining trend in LICs to continue, a return to pre-pandemic profitability levels is unlikely until at least 2022 given the slow economic recovery and the still uncertain course of the health crisis.
Stronger profitability in 1Q21 also reflected a base effect due to banks’ contribution to Morocco’s Covid-19 relief fund in 2020. The banking sector’s contribution amounted to about MAD3.8 billion, equivalent to about 11% of its 2019 operating expenses.
Revenues for the seven largest banks were modestly up in 1Q21, mostly owing to gains from market activities, while net interest income was slightly down. However, further improvement could be slow. The banks’ funding costs are not benefiting significantly from Morocco’s pandemic-related interest rate cuts as most funding is from current account and savings account deposits, where there is limited scope to reduce interest rates. We also expect loan growth to remain modest in 2021, continuing to be a constraint on fee income generation.
We therefore expect cost control to be crucial for earnings recovery in 2021-2022. Banks with wider geographical footprint and product diversification are more likely to return to pre-pandemic profitability quickly, owing to cross-selling capabilities and faster business growth in some of their African markets.
Private sector credit growth in Morocco was fuelled in 2020 by two large-scale state-guaranteed loan programmes, known locally as ‘Damane Oxygene’ and ‘Damane Relance’. More than MAD60 billion (equivalent to over 5% of GDP) of loans were extended under these programmes in 2020, but there will be no such impetus in 2021 as the bulk of the available amount has been used.
Private sector lending decreased by 1% in 1Q21 and we expect it to remain subdued in 2021 in line with the prevailing economic conditions. However, banks with international operations could see consolidated loan growth boosted by their operations in faster-growing markets. International operations account for 20%-30% of the banks’ consolidated assets.
