Moroccan banks are still suffering from high credit and asset risk, with even major banks having financial weaknesses, according to the latest Fitch report on Morocco’s credit rating.
The Fitch credit rating for Morocco has not changed much since 2007, according to the latest Fitch report. Nonetheless, the report noted that high credit risk and relatively low reserves impact the success of Moroccan banks.
Meanwhile, the probability of creditors being able to collect debts in Morocco is significantly lower than in developed countries.
High credit risk
Moroccan banks are still suffering from low asset quality and insufficient capital, according to the new Fitch Ratings report.
Over the past five years, Morocco’s seven largest banks have reported an average ratio of impaired loans to total, gross loans of just under 10 percent. The ratio was 9.8 percent at the end of the first half of 2018.
Compared to developed markets, this rate of impaired loans, or loans that creditors may not be able to collect, is high. Fitch further estimates that with better reporting, “true impairment ratios … are likely to be higher at 15%-18%.”
High asset risk
As well as having high credit risk and low reserves, Moroccan banks lend a significant portion of their loans to just a few entities, giving them a heavy “single obligor concentration risk.” The concentration of loans with just a few entities makes banks’ credit rating even lower.
At the end of the first half of 2018, “the top 20 loans represented on average 20 percent of the total loans” of the banks rated by Fitch. For banks that specialize in lending to big companies, the concentrations could be much higher.
On a positive note, banks increased their reserves in comparison to their risky loans. The average reserve coverage for impaired loans in the seven largest banks was 83 percent at the end of the first half of 2018, compared with 73 percent at the end of the same period in 2017.
Fitch measured the capital ratio and found that banks have low reserves.
Fitch says that the average tier 1 core capital ratio, the ratio of reserves and equity to risk-weighted assets, of the seven largest Moroccan banks was only 10 percent at the first half of 2018.
The largest seven banks represent about 85 percent of the banking sector’s assets.
Major banks lack financial strength
The Fitch core capital ratios are in the low range for some major national banks, including Attijariwafa Bank and BMCE Bank.
Moroccan banks are sound in terms of profitability, financing, and liquidity. However, as shown in their high concentration of loans, their assets are of low quality and their equity capital is insufficient, according to the report.
The major banks posted an average annualized operating return of 2 percent on risk-weighted assets in the first half of 2018, driven by an average margin of 3.6 percent and a cost to income ratio of 53 percent. Stable deposits are the main source of funding for banks.
Morocco’s sovereign rating has been stable at BBB- since Fitch first assigned it in 2007. Underpinning this rating are macroeconomic stability, comfortable external buffer margins, and a small share of foreign-currency debt in the public sector.
However, these factors are counteracted by weak development, high public debt, and higher current account deficits than those in the BBB category.
In the report, Fitch projects Morocco’s annual GDP growth to average 3.2 percent in 2018-2020.