Lhe war in Ukraine, the problems in the supply chains, the rise in inflation as well as the surge in interest rates that accompany it have greatly occupied the banking sector in 2022, which has nevertheless shown of resilience. In 2023, inflationary pressures will remain strong. And with reduced purchasing power, households will be in defensive mode. Business investment will also weaken in the face of the slowdown in consumption. This context will lead banks to remain vigilant on their exposures, especially as economic agents have high levels of indebtedness. In addition to this set of risks, there are a few challenges that banks will have to face.
Rates
Perhaps the biggest concern in financial markets right now is rising rates. If the latter is structurally favorable to the banks, it should contribute for the moment to lowering the results of the sector. This is due to a discrepancy between the very slow evolution of the return on bank assets and a more rapid rise in the cost of resources on the liability side. Moreover, according to a study by Fitch Ratings, the positive impacts of the rise in interest rates on the profits of Moroccan banks will take time to be felt. These rate hikes will take time to translate into higher lending rates, as more than 90% of loans are fixed rate and about 70% medium to long term. For the rating agency, net interest margins should decline slightly in the short term due to a revaluation of liabilities faster than that of assets. According to BAM, a 200 bps rise in interest rates would lead to a short-term reduction of 3% in banks’ net interest income, on average.
The climate transition
The transition to a green economy, which Morocco has been engaged in for several years, may affect the investment portfolios of banks by reducing the value of their equity and the bonds they hold in the affected companies. Indeed, according to a World Bank study, the direct and indirect exposure of Moroccan banks to physical risks is estimated at around 35% of total assets. Direct exposure reaches 8% of assets, and covers loans to the agriculture, agro-industry and agri-food sectors. In addition, the tourism sector and household mortgages are indirectly exposed to physical risks, reaching an additional 27% of assets.
The catastrophe scenarios simulated by the World Bank would lead to an increase in non-performing loans and a decline in the capital adequacy ratio. Thus, the different drought scenarios could lead to an increase in system-wide non-performing loans between 2.1 (three-year historical drought) and 3.3 percentage points, and a decrease in the loan adequacy ratio. own funds between 1.0 and 1.6 percentage points. In turn, the flood scenarios result in an increase in system-wide non-performing loans ranging from 1.2 to 1.7 percentage points, and a decline in the capital adequacy ratio ranging from 0, 4 to 0.6 percentage points.
Digitization
Digitization, which has occupied banks for years, remains on the agenda in 2023. Between the metamorphosis of bank branches and the development of new digital services, projects to improve the customer experience are multiplying. From now on, omnichannel is at the heart of the strategy of most Moroccan banks. The mobile channel (M-banking) clearly stands out as the reference digital channel ahead of Internet banking, which is nevertheless a precursor. Following the new regulations of Bank Al-Maghrib allowing a completely digital relationship, we can expect a confirmation of this trend for the years to come.
According to a recent study on the digitization of the banking sector in Morocco, particularly on the subscription channels for financial products, M-banking comes first among those under 35, while the agency takes first place among 36- 55 years old, in competition with M-banking/e-banking. As for those over 56, the agency is undoubtedly the preferred channel. True place of commerce and vector of the customer/banker relationship, in Morocco, the bank branch must nevertheless reinvent itself. In addition, it should be kept in mind that this digitization can also induce risks related to financial stability, consumer protection, money laundering or cybersecurity.
Outstanding debts
Last but not least: the problem of bad debts, which is not a new subject for banks. Inflation and the economic slowdown have contributed to increasing the slate of non-performing loans at banks over the past year. These peak at the end of November 2022 at MAD 89 billion, i.e. 8.7% of outstanding loans to the economy. On the one hand, these loans weigh on the profitability of banks, and on the other, hinder their ability to finance the economy properly. For now, the establishment of a secondary market has emerged as the only solution to free banks’ balance sheets from non-performing loans.
The complexity of the non-performing receivables recycling project initially planned for 2022 has delayed its implementation. This project concerns the identification and implementation of the preconditions for the creation of this market with a view to reducing the portfolio of outstanding debts carried by the banks, through an assignment to interested investors. These disposals would increase the ability of banks to finance the economy.