Moroccan bank profitability continued to recover in 1Q22, with the aggregate net profit of the seven largest banks reaching pre-pandemic levels, boosted by lower loan impairment charges (LIPs), Fitch Ratings said. We expect the positive trend to continue, but it may slow as adverse global economic conditions trickle down to the local economy and put pressure on asset quality.
The seven banks’ aggregate net profit rose 21% year-on-year in 1Q22. The improvement was driven by a 21% year-on-year decline in LICs, which continued to fall from high levels in 2020-21, when banks pre-applied large provisions to offset pandemic-related risks. We believe that the decline in LICs reflects a stabilization in asset quality. The sector’s non-performing loan (NPL) ratio was 8.7% at the end of March 2022, broadly unchanged from the end of 2021, and absolute NPL growth slowed to 1.4% in 4M22.
However, annualized LICs in 1Q22 were still 44% above the 2019 level, reflecting risks in the operating environment and cautious provisioning in an uncertain economic outlook. The ratio of PFR to operating profit before impairment of the seven banks decreased to 32% in 1Q22 (2021: 40%), which is low compared to many markets in Sub-Saharan Africa – but still well above the ratio of 24% in 2019.
The normalization of LICs to 2019 levels will depend on the pace and depth of Morocco’s economic recovery. We expect LICs to continue to decline, but remain above historical averages in 2022 due to weaker economic growth. Fitch forecasts real GDP growth of just 1.1% in 2022 (2021: 7.4%), reaching 3% in 2023. However, weaker than expected growth in the Eurozone (Morocco’s main trading partner) or sustained high energy and food prices could pose risks to the forecast.
The average return on banks’ equity improved to 8.6% in 1Q22 (2021: 8.1%). We expect it to improve further by the end of 2022, but remain below the 2019 level of 9.9% as low-income countries remain high holding back a stronger recovery. This could lead some banks to expand their operations across Africa in a bid to increase their profitability.
Banks’ overall net interest income rose 0.6% in 1Q22, reflecting lower interest rates and limited loan growth. The average lending rate fell to 4.3%, the lowest in several years, but banks still managed to achieve positive operating results, on average, despite an average 5% year-on-year increase in spending. operations due to rising personnel costs.
We expect lending rates to rise in 2022-23 due to increased credit risk and inflationary pressures. The Moroccan central bank could raise its key rate in 2022, as real interest rates have been negative since October 2021. A rate hike could be triggered by the ECB key rate hike scheduled for July 2022, or by further hikes later in 2022, given that the Moroccan dirham is pegged to a basket of currencies weighted 60% by the euro and 40% against the US dollar.
Moroccan banks will benefit as higher interest rates will fuel lending rates. Around 30% of domestic loans mature within 12 months, with revaluation likely to be at higher rates, while funding costs are not expected to rise significantly as banks are largely funded by deposits at low cost in “current account and savings account” (84% of sector deposits at the end of 2021).
However, weak loan growth and competition between banks could limit the benefits of higher interest rates. We expect loan growth of 3% to 4% in 2022 (2021: 2.8%), primarily driven by short-term working capital facilities to meet business demand due to rising inflation and commodity prices.