African Banks’ Downturn Resilience Dependent on Sovereign Debt Risks

African Banks’ Downturn Resilience Dependent on Sovereign Debt Risks

African banks’ credit drivers will be undermined by both global and domestic shocks in 2023, says Fitch Ratings in its 2023 Outlook report. According to the rating agency, operating environments will be affected by a combination of high inflation, rising rates, currency depreciation and hard currency shortages, but moderate GDP growth, with no major African economy entering a recession.

Fitch Rating added that these, combined with banks’ relatively good fundamentals and buffers, will prevent a significantly more negative scenario. Banks’ sovereign debt risks have increased, with some African governments struggling with debt-servicing burdens and unfavourable external funding conditions, it said in a note.

It also noted that Banks could be downgraded due to further sovereign downgrades but the biggest risk comes from potential sovereign defaults that could affect banks in these countries as well as regional banking groups.

“Asset quality risks will return to be more prominent in 2023”, Fitch said. Nevertheless, the firm assumes only a moderate increase in impaired loan ratios in most countries.

According to Fitch, a sharp fall in commodity prices as a result of the global slowdown or economic developments in China could cause a faster increase in loan quality weakening.

Banks will remain profitable, benefitting from rising interest rates and still-satisfactory loan growth (above GDP growth) which will mitigate a moderate rise in credit costs.

However, capitalisation, funding and liquidity remain sufficient, with the latter in particular, underpinning banks’ standalone creditworthiness. External funding will be scarce and expensive.

In the report, Fitch stated that deteriorating global and domestic shocks will undermine credit drivers for African banks in 2023.

It said these will add to existing operating environment risks, but the rating agency believes moderate GDP growth with no major African economy entering a recession, combined with banks showing a good degree of resilience over the past two years, will prevent a more material downside scenario.

“Weakened African sovereigns and significant contagion risks to banks play a large part in our deteriorating sector outlook for 2023. Political risk will remain high and could bring further market uncertainty. READ: Interest Rate Trend Key to Banks Performance in 2022– Analysts

“Asset quality risks will return and be more prominent, with households and businesses continuing to be hit by high inflation, rising rates, currency depreciation and US dollar shortages”.

Nevertheless, Fitch said it assumes only a moderate increase in impaired loan ratios.

High commodity prices will be supportive of many African economies and banks’ operating environments but a key risk to asset quality would come if there was a sharp fall in commodity prices triggered by a global slowdown, especially with economic developments in China, a major trade partner.

Rising interest rates and still satisfactory loan growth (above GDP growth) will be supportive of banks’ revenue generation and profitability and mitigate moderate rises in credit costs. It stated that sovereign debt distress is the major risk to African banks’ financial profile.

“We are most concerned about potential sovereign defaults with many African governments facing very high and increasing debt servicing burdens exacerbated by rising interest rates, US dollar strength and unfavourable external funding conditions”, it said.

The Ghana debt restructuring will affect domestic as well as regional banks, Fitch Ratings said.# African Banks’ Downturn Resilience Dependent on Sovereign Debt Risks