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True Picture Of North African And Jordanian Banks' Creditworthiness Will Emerge In 2021

The COVID-19 pandemic pushed most economies in North Africa and Jordan into a deep recession in 2020, while Egypt saw its economy significantly slow down. Extraordinary fiscal and monetary measures preserved banks' credit quality in 2020, but we now expect their gradual phasing-out to reveal the real impact of COVID-19 on banks' asset quality.

We think these countries' banking sectors will face similar challenges, but to differing extents (see table 1).

Table 1


We expect a sharp increase in problematic loans and credit losses for most North African and Jordanian banking systems. We believe that most rated banks will be able to absorb the shock without hampering their capital base. A few banks, particularly in Tunisia, might be showing losses.

This explains, among other reasons, why our ratings on most of these countries' banks carry a stable outlook; we downgraded Tunisian banks in 2020 (see

"Ratings On Three Tunisian Banks Lowered On Expected Weakening Financial Profiles," published May 6, 2020) because they entered the pandemic in a weaker position than their regional peers, following years of sluggish economic growth.

We expect profitability will remain depressed in 2021 and will start to improve only from 2022 for most banks. The trajectory of banks' recovery, however, will be highly dependent on several factors, including: the evolution of the pandemic in the next months; the shape of the economic recovery; and the final impact of the recession on borrowers' resilience and ability to recover.

Asset Quality Impact Will Become Visible In 2021

Regulatory forbearance measures shielded banks' balance sheets and bottom lines in 2020. We saw a moderate decline in profitability and an increase in cost of risk as banks started to set aside provisions to prepare for asset deterioration. Central banks injected liquidity and asked their banks to provide subsidized loans to corporates sectors to preserve their countries' productive capacity. They also asked banks not to shift exposures to nonperforming categories unless the risks related to survivability were evident (see table 2 in Appendix). Since governments are likely to begin lifting these measures over the coming quarters, we expect to start observing asset quality deterioration in all of these countries over the next 12-24 months, as borrowers face more pressure on their debt-servicing capacity.

Small and midsize enterprises (SMEs), corporates operating in the hospitality, construction and real estate, and the transportation sector will fuel the nonperforming loans' (NPLs') formation, in our view. Moreover, we expect retail lending to contribute, as the job markets are still healing from the negative repercussions of the pandemic. The already low debt-payment capacity, as demonstrated by the low GDP per capita, will exacerbate the risks. Positively, household indebtedness remains limited in most of these countries compared with other emerging markets (see charts 1 and 2).

Chart 1


Chart 2


In our view, Tunisian banks will be hit hardest by the pandemic's impact, as they entered the crisis in a more vulnerable position. Their risks are exacerbated by an already weaker asset quality (with a high level of legacy exposure to NPLs from the tourism industry), higher corporate debt, and fragile economic environment where social and political uncertainties are growing.

Tunisian banks, which are lagging in terms of regulation and still applying local generally accepted accounting principles, will likely only gradually recognize asset quality deterioration, since regulators recently extended their forbearance measures. The Central Bank of Tunisia (BCT) asked banks to set aside some provisions on the exposures that were affected by the pandemic, but in our view, these will prove insufficient to cover the full extent of the risks. We expect the NPLs ratio to exceed 20% by 2022, and provisions to gradually increase over the coming years, reaching the peak level of about 350 basis points (bps) in 2022, eroding the banks' already small capital buffer (see chart 3).

Similarly, in Morocco and Jordan, risks are heightened by significant single-name concentration, given the structure of their economies. For Moroccan banks, exposure to the rest of Africa is another source of risk that will lead to additional impairments, particularly in countries with limited stimulus measures.

Some Moroccan and Jordanian banks, reporting under International Financial Reporting Standards (IFRS) 9, have already started to set aside provisions in 2020 in anticipation of asset quality deterioration. For these banks, we expect credit losses to remain elevated in 2021, at a similar level to 2020.

For Egyptian banks, we expect losses will stem mainly from their exposure to SMEs, which has increased over the past few years due to the Central Bank of Egypt's recommendation to expand lending to SMEs to 20% of total financings. At the same time, limited exposure to COVID-19-sensitive industries compared with peers, low private sector debt, and low penetration of the banking sector will support asset quality metrics.

We anticipate that credit losses will continue to increase in Egypt in 2021, since the country will absorb a large part of the pandemic's economic effect (Egypt's data is presented on a fiscal year [FY] basis, ending June 30, thereby spreading the impact over FY2020-FY2021).

Chart 3


A Profitability Event For Most Banks

Under our base-case scenario, we expect banks' profitability will remain weak in 2021 (see chart 4), while lending growth will remain sluggish due to the economic uncertainties. Credit expansion for households will be constrained by lower purchasing power and increased unemployment, while private sector companies that survived have already cut their capital expenditure. Added to the lower interest rate environment, this will further weigh on banks' margins. Finally, higher impairment charges will also reduce profitability.

However, we expect most banks to remain profitable, and only a few to show losses, underpinned either by legacy exposures or by higher exposure to risky counterparties such as SMEs or sectors that were directly affected by the pandemic.

Chart 4


In Morocco, we forecast that credit losses could double, reaching 180 bps in 2020 before gradually declining to 150 bps by 2022. This will weigh on banks' profitability, leading their return on assets to decline to 0.5%-0.6% for 2020-2022, from 0.9% in 2019. We do not expect lower earnings to be detrimental to their capitalization, but we think Moroccan banks have less buffer to absorb higher-than-anticipated asset quality deterioration or aggressive resumption of dividend payment.

Egyptian banks will continue demonstrating better profitability metrics relative to peers, largely thanks to the greater proportion of high-yield government bonds on their balance sheets. We also think the limited number of branches allows Egyptian banks to maintain operating costs at a lower level than regional peers.

We expect some banks in Tunisia would show losses if they were to address the full extent of the problems, and we might also see increasing solvency issues. The system whereby banks still report their capital adequacy under Basel I is already severely undercapitalized, in our opinion (see chart 5), with a few banks operating in breach of, or very close to, the minimum capital requirements.

Our assumptions exclude any additional support from governments, either to corporates or banks, as we have no indication that governments will provide this. We also think that countries with already-high public debt levels--such as Tunisia and Jordan, with a debt-to-GDP ratio reaching 85% and 91.5%, respectively, as of Dec. 31, 2020--will have limited ability to further support their economies without external support.

Chart 5


The Rocky Road To Recovery

The pace of the economic recovery and the potential structural damage to some sectors will be crucial factors in banks' ability to rebound. We project economic activity will only slowly pick up from 2021 in North Africa and Jordan, based on our assumptions of a global recovery--especially in key trading partners such as the eurozone--and gradually resuming foreign direct investment (see chart 6). Tunisia and Jordan were already lacking economic dynamism and performed poorly before the COVID-19 outbreak, while Morocco has suffered two years of drought. We therefore expect the full recovery to be longer in these three countries. In contrast, Egypt's growth prospects are comparatively stronger, and we expect a gradual recovery in public and private investment from 2021. Overall, the economic impact of the pandemic has been less severe for Egypt than for other emerging markets, partly because of the country's relatively limited lockdown measures and resilient remittances in early 2020.

Chart 6


We believe that the pandemic will continue to dominate the credit story for these banking systems. Widespread immunization, which certain countries might achieve by mid-2021, will help pave the way for a return to more normal levels of social and economic activity. We use this assumption about vaccine timing in assessing the economic and credit implications associated with the pandemic (see our research here: As the situation evolves, we will update our assumptions and estimates accordingly.

Another factor that will determine the pace of economic recovery in the region is sociopolitical stability. High unemployment, lack of reforms, and deep income disparities that intensified with the pandemic could lead to additional disorder in Tunisia, which is currently facing high social discontent. Security risks remain elevated in the region, particularly for Tunisia and Egypt. Any potential terrorist incidents affecting civilians or tourists could also significantly harm the recovery in tourism for those countries and dampen investor sentiment.

Limited Lending Expansions Will Benefit Banks' Funding Profile

Customer deposits, which constitute the main source of funding for most of the region's banking sector (see chart 7), have continued to increase as corporate and household spending reduced. We expect them to remain high in Egypt; and at a level sufficient to fund lending activity in Jordan.

External financing needs are limited for most of those banking sectors. They are largely covered by nonresident deposits and multilateral lending institutions, and we expect this funding to remain available. For example, Moroccan banks have enjoyed resilient remittances from abroad, and we expect them to continue benefiting from a high amount of deposits from Moroccans abroad (19.4% of total deposits as of Dec. 31, 2019), if the recovery in the EU does not experience major setbacks.

In Tunisia, banks' funding profiles are relatively weak, with customer deposits constituting barely 60% of the funding base and being insufficient to finance lending activity. We expect the central bank to continue providing liquidity. In order to push banks to rebalance their funding profile, the BCT introduced a loan-to-deposit ratio limit of 120% in 2018. While we observed some improvement in 2019, we expect the difficult operating environment to put the rebalancing at risk. Also, some deposits competition will continue to weigh on the cost of funding in the short-term, with small banks facing stronger funding pressure, in our view. In this context, we expect the BCT to continue providing support in case of need.

Chart 7


Given the limited lending opportunities, we expect most banks to increase their exposure to the government (see chart 8). This is particularly true for Egypt where banks already have a significant exposure; Jordan, where the debt level is progressively increasing; and to a lesser extent Tunisia. For Tunisia, this would mean that the BCT would have to provide the liquidity to the banking system, since direct financing to the government would require an overhaul of the existing laws. Should that occur, the BCT's independence would be affected, in our view.

While higher exposure to the government might help margins, it would increase banks' exposure to sovereign risks. Recent experiences of Lebanese banks have shown how detrimental high exposure to the government could be to banks' liquidity and solvency, in a scenario where sovereign debt become unsustainable.

Chart 8


Structural Reforms Will Fall Down The Priority List

Regulators in North Africa and Jordan have put on hold ongoing reforms amid the crisis. As such, there is a strong likelihood that the adoption of Basel III and IFRS standards in Tunisia, initially scheduled for 2021, will be delayed. Similarly, the harmonization of NPLs classification in Morocco--initially planned for 2021--might also be postponed, since banks are still digesting the impact of IFRS 9 standards on their capital (it was adopted in 2018, but the impact on capital was spread across five years). On top of delayed reforms, we also see increasing risks that regulators will further extend the forbearance measures adopted in 2020, or introduce new ones. While such decisions might continue alleviating the pandemic's impact on banks' balance sheets and capitalization in the short term, this could further delay the recognition of problem loans, hamper the convergence of banking regulations toward international standards, and eventually destabilize banking systems.

While the pandemic seems to have paved the way for further consolidation in Europe, we do not expect similar developments in North Africa and Jordan. In Morocco, Jordan, and Egypt, the systems are already concentrated, with limited room for consolidation. Egypt has recently attracted some foreign ownership, amid the sales of subsidiaries of Lebanese banks. Given the small size of the targeted banks (accounting for about 2% of total system assets), we do not anticipate major changes in the competitive dynamics of the system. In Tunisia, the regulators have excluded such a possibility, and are trying to resolve the weaknesses of the system over time. While the Tunisian authorities plan to divest from some public sector banks in the medium term, investors' appetite remains limited. Instead, foreign investors are leaving, as demonstrated by the exit of some European banks in Tunisia.

We also expect the restrictions introduced during the peak of the pandemic will accelerate the banking systems' digitalization in North Africa. This will help banks to enhance cost efficiency. We view large banks in Morocco and some banks in Egypt--which are relatively ahead of peers in digital innovation--to be better positioned for a faster recovery than their competitors in the region, assuming no other shock. Although we see digitization as an opportunity rather than a threat for most banking systems in North Africa and Jordan-- where the population is young and rapidly growing--we think physical banking will continue to prevail in the mid to long term. This is because, banks are trying to increase their coverage in small cities and regions, where a vast part of the population is still unbanked and needs physical interactions to access banking services.

Table 2 - Appendix

Support Measures Introduced In 2020
Morocco Egypt Jordan Tunisia
Moratorium on loans - For SMEs and self-employed people until June 30, 2020. - An extension until December 2020 was decided for the hospitality sector. - For all borrowers, ended September 2020. - For the tourism sector, extended until the end of 2021. - Optional moratoria for the sectors most-affected by the pandemic until June 2020, then extended until June, 2021. - For all borrowers, until September 2020, then later extended until September 2021.
Government-backed loans scheme - Damane Oxygene (until end-2020): loans to (V)SMEs with a max guarantee of 95%. - Damane Relance (until end-March 2021): a post-crisis facility to support businesses. Includes subsidized interest rates with sovereign guarantee of maximum 95%. - Damane Relance Promotion Immobilière: A new facility to provide financing to real estate firms. - A guarantee fund of EG£2 billion: to mortgages and consumer loans, and consumer finance companies. - A government guarantee of EG£3 billion announced for the tourism industry soft loans. - The central bank has approved an EG£100 billion guarantee to cover lending at preferential rates to the manufacturing, agriculture and contracting loans. - CBJ reduced the cost and expanded the coverage of guarantees provided by the Jordan Loan Guarantee Corporation on SME loans, including JOD150 million ($211 million) credit facilities made available for the tourist sector. - State guarantee for new credits (TND1,500 million), of which TND500 million to the tourism sector. All corporations hit by the pandemic are eligible for loans granted between March and December 2020. The guarantee ranges from 80% to 100%.
Liquidity injections - Expanded the range of collateral accepted for repos and credit guarantees to include public and private debt instruments (including mortgages). - Increased and lengthened central bank refinancing operations. - Provided foreign exchange swaps to domestic banks. - Reserve requirements reduced to zero (from 2%) to increase liquidity provision - Injection of additional liquidity of JOD550 million ($776 million) by reducing the compulsory reserve ratio on deposits from 7% to 5% and JOD500 million ($705 million) by redeeming its CDs held by banks. - Expanded the sectoral coverage and reduced interest rates on its refinancing program from 1.75% to 1% in Amman and from 1% to 0.5% in other governorates. - BCT made it clear that it will inject additional liquidity in the banking system if needed.
Suspension or postponing of dividend distribution - Mixed approach. We understand the central bank allowed large banks to distribute dividends unless this was detrimental to their regulatory capital. Most banks opted for a dividend mix of mostly in stock and the rest in cash from their 2019 earnings. - Dividend distribution suspended for FY2020. - Dividend distribution suspended for FY2019. - Dividend distribution suspended for FY2019.
Easing of regulatory or accounting requirements - Banks have been authorized to go below the 100% liquidity coverage ratio (LCR) until end-June 2020; - The capital conservation buffer (CCB) has been reduced by 50 bps for one year. - - -
bps--Basis points. EG£--Egyptian pound. JOD--Jordanian dinar. TND--Tunisian dinar. Sources: S&P Global Ratings, IMF, Central Banks.

Related Research

This report does not constitute a rating action.

Primary Credit Analysts:Anais Ozyavuz, Paris + 33 14 420 6773;
Regina Argenio, Milan + 39 0272111208;
Secondary Contacts:Alessandro Ulliana, Milan + 390272111228;
Eugenio Manzoli, Paris + 33 1 40 75 25 53;
Emna Chahed, Paris + 33 14 075 2524;
Goksenin Karagoz, FRM, Paris + 33.1.44206724;
Mehdi El mrabet, Paris + 33 14 075 2514;
Pierre Hollegien, Paris + 33 14 075 2513;
Research Contributor:David Szalai, Paris;

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