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Link to Fitch Ratings' Report(s): Major Moroccan Banks: 2018 Peer Review
Fitch Ratings-London-July 03: Moroccan banks' first financial statements since the introduction of IFRS 9 on 1 January 2018 are likely to highlight weak loss-absorption capacity at some banks, Fitch Ratings says. IFRS 9 will provide greater clarity about loss expectations and force higher loan-loss provisions and coverage, putting pressure on regulatory capital buffers, which are already thin.
We believe the full IFRS 9 impact would take some banks below regulatory minimum capital requirements but the central bank is allowing banks to spread the impact over five years, giving them time to adapt. Banks are due to publish their end-March 2018 financial statements this month.
We have long highlighted capital weakness as a characteristic of the Moroccan banking sector, and capital weakness has a high influence on some banks' Viability Ratings. Moroccan banks must comply with a minimum 9% regulatory Tier 1 capital ratio, which is tougher than international standards, but the country's systemically important banks tend to operate with ratios barely above this minimum and their capital plans suggest that this will remain the case.
We calculate that the average Tier 1 capital ratio across Morocco's seven largest banks (representing about 85% of sector assets) was only 10.7% at end-2017, and our discussions with banks indicate that loan-loss reserve shortfalls under IFRS 9 could reduce ratios by up to 2pp, which would take some below the 9% minimum on a fully loaded basis.
The average impaired loans/gross loans ratio reported by Morocco's largest seven banks over the past five years has hovered around 9.6%. This is considerably higher than in developed markets and we estimate the true impairment ratio to be higher still, at 12%-14%, because restructured and watch-listed loans are not systematically captured in the reported figures. Asset risk is exacerbated by the sector's high single-obligor concentration risk. At end-2017, the top 20 loans represented an average 27% of total loans across the banks we rate and concentrations can be far higher for banks that focus on large corporates.
Loan-loss cover is modest, with reserves on average covering 74% of impaired loans across the seven largest banks at end-2017. Banks cite access to collateral as providing an adequate buffer for loss absorption, but asset sales and legal procedures can be lengthy in Morocco and realisation of collateral can be difficult.
Morocco's banking regulatory framework compares favourably with those of most African peers. Basel III implementation began in 2014 and is due to be completed in 2018/2019. Deposits up to MAD80,000 are covered by a deposit insurance scheme, which supports deposit stability and banks' liquidity (Moroccan banks are mainly funded by deposits). There is no resolution legislation but domestic systemically important banks submit resolution plans to the central bank and will have to maintain a 2.5% additional capital buffer (over the minimum 9% capital requirements) from end-2019. Comparability of asset quality across banks should improve when the central bank introduces guidelines, expected this year, on how to report troubled watch-listed loans.
Poor asset-quality and capital adequacy ratios weigh heavily on Moroccan banks' standalone viability and all the banks' ratings are driven by our assumption that the banks would receive support, if needed, from the Moroccan sovereign (BBB-/Stable) or their institutional shareholders. The domestically owned banks are rated 'BB+', with Viability Ratings at 'bb-' or 'b+'.
The report "Major Moroccan Banks: 2018 Peer Review" is available at
Fitch is holding a teleconference discussion on the Moroccan banking sector on Friday, 6 July at 10:00 UK time. Participants can register here:
Contact:
Janine Dow
Senior Director, Financial Institutions - Banks
+44 20 3530 1464
Fitch Ratings Limited
30 North Colonnade
London E14 5GN
David Prowse
Senior Analyst, Fitch Wire
+44 20 3530 1250
Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at
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