Dubai: In the face of the protracted political turmoil in the region that has been hampering policymaking and economic recovery, banking sector in the Arab Mediterranean region has shown extraordinary resilience according to rating agency Standard & Poor’s.
“We continue to believe that banks in the region are poised for recovery if political and geopolitical risks abate, because of the real economic growth potential of supportive demographics, educated workforces, increasing financial inclusion, and product sophistication. Our expectations are supported by our observation that the region’s banking sectors, unlike its political institutions, have resisted the crisis well,” Paul-Henri M Pruvost, Associate Director for Financial Services Group EMEA at S&P.
S&P’s ratings on Arab Mediterranean banks have been dragged down since the end of 2010 by the deteriorating creditworthiness of their respective sovereigns, especially given the concentration of government debt that banks carry on their balance sheets. But the rating agency said that many other risk metrics for the banks have remained fairly resilient, from profitability to funding and asset quality.
The overall capacity of governments of these countries to provide any kind of extraordinary support to banks in case of need remains uncertain, except Morocco where the authorities have more financial flexibility and capacity.
Main instrument
Across all these countries domestic sovereign securities are the main instrument used for liquidity management. Banks play a crucial role in bridging the financing needs of the government, and this role has increased as sovereign creditworthiness has deteriorated.
The role that the domestic banks play in supporting the local economy has also increased because of foreign investors’ reduced appetite for the region’s sovereign debt, while for domestic banks those investments carry attractive yields and zero-risk weighting under local regulations. Consequently, domestic government debt represents a multiple of the Egyptian and Lebanese rated banks’ equity base, including more than 10 times equity for large Egyptian public sector banks. This situation effectively exposes banks to critical concentration risks.
“On a positive note, as long as governments keep servicing their debt obligations, banks continue to display supportive earnings metrics,” said Pruvost.
The rating agency expects slow economic recovery in the region over 2014-2015 because of the magnitude of ongoing political changes. The political scene is fraught with uncertainties in Egypt, Tunisia, and Lebanon. Conflicts or severe internal tensions in neighbouring countries Syria, Libya, and Iraq also spill over into domestic economic prospects. Economic momentum is also dependent on the improvement of economic conditions in Europe, the region’s main trading partner.
In keeping with the slow economic growth, lending growth is expected to be sluggish across the region. In Morocco, lending growth has slowed since 2012 as a result of banks’ more conservative underwriting standards, weaker economic growth, and funding constraints. Morocco’s economy depends largely on Europe, and weak economic conditions there continue to dampen credit demand. Retail loan growth remains resilient, however, and Moroccan banks’ mortgage loan portfolios, which account for about 20 per cent of loans, continue to expand as demand remains high in the middle-income segment.
In Egypt, credit growth is supported by continuously growing customer deposit gatherings and improving retail banking penetration from a low level. In the absence of dynamic domestic private sector credit demand, crowding out of the private sector appears limited, a situation which is not sustainable in the long run.
In Lebanon, S&P expects political turmoil to keep nominal growth of credit to the private sector at about 10 per cent over 2014-2015, primarily owing to trade and services, internal consumption, and real estate-related lending. In Tunisia, loan growth will not only depend on the economic and political environments but also on the continued liquidity support extended by the Central Bank of Tunisia to the system.
