Stable outlook for Moroccan banks

The credit outlook for rated Moroccan banks is stable, reflecting banks’ improving financial performance, opportunities for growth in light of currently low banking penetration and the positive participation of foreign, international banking groups, Moody’s Investors Service said in its new Banking System Outlook for Morocco.

“Favourable macroeconomic conditions have supported buoyant credit growth over the past year, and the regulatory framework is improving. The operating environment remains challenging, however, primarily as a result of a relatively undiversified economy,” said Stathis Kyriakides, a Moody’s Analyst and author of the report.

Moody’s notes that banks’ positive regional expansion also incurs an increased level of risk, while asset quality is still weak and remains exposed to cyclical downturns.

“Nevertheless, if the burden of non-performing loans continues to contract at current rates, asset quality-related pressure on ratings should gradually start to ease,” added Kyriakides.

The banking system in Morocco is concentrated, with the eight largest banks controlling more than 96% of banking system assets, and the three largest a considerable 64.4%. As highlighted in Moody’s report, aggregate reported profitability has rebounded to a more acceptable level on the back of the recovery of specialised banks, whose sizeable losses of 2005 were not repeated in 2006. GDP in 2006 grew by a strong 8.1%, mainly as a result of a good agricultural output, booming real-estate market conditions, controlled inflation and good exports and tourism receipts.

At the same time, the strong participation of foreign (notably French) banks in the Moroccan banking sector provides a valuable source of know-how and expertise, supporting the sector’s drive for modernisation and improved industry practices and ultimately contributing to desired convergence with international standards. Moody’s expects international strategic investors holding controlling stakes in Moroccan banks to provide financial support to their Moroccan subsidiaries in case of need.

The benefit of such support is currently not reflected in the banks’ foreign currency deposit ratings, however, as the ratings are capped by Morocco‘s country ceiling for such deposits.

Some of the bigger domestically-owned banks’ recent endeavours to expand in the African continent have also been supported by the experience of large international financial institutions that participate in these banks’ capital structures, albeit with minority stakes. This, together with the fact that the remaining private Moroccan banks of material size are subsidiaries of large foreign banks, results in a more dynamic and competitive banking environment with an increasingly regional feel, acknowledges Moody’s.

“At the same time, while we recognise the opportunities for growth and diversification provided by regional expansion, particularly as it is occurring in underbanked systems, we recognise that such expansion also carries heightened risks and uncertainties given the region’s unpredictable operating environment,” cautions Antoine Yacoub, a Moody’s Senior Associate and co-author of the report.

According to Moody’s report, Morocco‘s own operating environment remains challenging, due in part to the country’s exposure to the agricultural sector, which still contributes 15-18% of GDP. Agriculture harvests (and in particular drought conditions) can have a significant impact on economic growth, although this is showing signs of easing as the government’s recent economic policies have aimed to reduce the country’s exposure to this sector.