African banking systems will remain deposit-funded and liquid, supporting financial stability for the majority of the countries, according to Moody’s Investors Service.

Foreign currency liquidity will, however, still be a challenge in the case of Nigerian and Egyptian banks, the ratings agency said in a statement.

The outlook for banking sectors in South Africa and Morocco were revised to “stable” from “negative”. The outlooks for Nigeria, Egypt, Kenya and The West African Economic and Monetary Union (WAEMU) remained stable.

Moody’s noted that these are based on the banks’ deposit-based funding structure, capital and profitability remaining steady despite a challenging operating environment.

“Profitability will be supported by improving net interest margins from rising interest rates that will compensate for higher costs and loan loss provisions,” said Constantinos Kypreos, Senior Vice President at Moody’s Investors Service.

The reported capital ratios will be stable, with banks potentially reducing dividend payouts if required, he stated.

On the other hand, local currency depreciation has been an additional headwind in many of these countries.

Moody’s believes asset quality for most banks will deteriorate, reflecting households’ reduced disposable incomes and businesses’ declining earnings.

Prospects for economic growth are mixed, with a continued low growth forecast for South Africa, and more robust growth for WAEMU, Kenya and Egypt, the report said.

(Editing by Seban Scaria )