Mozambican Banks: Healthy margins and lower provisions boost net profit

Improved economic environment, despite higher inflation

The Mozambican banking sector faced an improvement in domestic economic growth in 2022. However, a lot of uncertainties on the international front, namely related to geopolitical factors and persistently high inflation levels, also impacted the domestic economy and activity in the sector. Real GDP growth accelerated to 4.1% in the period from 2.3% in 2021 thanks to stronger growth in several key sectors of the economy, including agriculture and fishing, mining, transport and communication and retail. On the other hand, annual inflation in the country continued to rise, reaching double-digit figures in the second half of the year for the first time since the end of 2017. This led the Banco de Moçambique to continue to raise its benchmark interest rate on two occasions for a total of 400bps, with the MIMO rate currently standing at 17.25%. The reserve requirements at the central bank were left unchanged during 2022. However, already in 2023, they were significantly increased in order to try to absorb the excess liquidity in the banking system, which tends to generate some inflationary pressures.

Revenues lifted by higher net interest income

The combined profit and loss account of the six largest banks in the country showed a strong improvement in net profit (44.6% YoY) in 2022, reaching MZM 23,404 million (US$ 366 million). This net profit represents a ROE of 19.4% and a ROA of 3.36%. The evolution in net profit continued to reflect the favorable impact of higher interest rates on margins from customer loans and profitability from debt instruments. It also reflected a sharp fall in loan provisions (-61.9% YoY), especially from the reversal of impairments at BCI and the large drop in provisions at Moza. Overall, the combined operating income of these banks advanced 17.3% YoY, with revenues rising 11.5% YoY and costs 5.8% YoY, with the latter staying well below the average inflation rate of 10.91% recorded in the country in 2022. The cost performance of the sector largely reflected a higher increase in staff costs (roughly half of the total cost base) than in the previous year. This was due to the stabilization of the metical exchange rate, as an important part of these costs is linked to foreign currency. This meant that the combined cost-to-income ratio of the six largest banks improved to 47.7% from 50.3% in 2021.

The combined NPL ratio of the largest banks remains elevated

Balance sheet data showed that total net loans remained roughly unchanged from the previous year. In part, this reflects the higher interest rate environment in the country, which led to a lower demand for credit and a more prudent lending policy approach by the main players in the sector. On the other hand, deposits rose 7.5% YoY in the period and clearly remained the main funding source of these banks, as they accounted for 93.9% of their total liabilities. All in all, the loans-to-deposits ratio declined further and reached a level below 40% for the first time in 2022. Other data showed that the combined NPL ratio of these banks continued to deteriorate, increasing to 10.92% from 10.19% in the previous year. We note that the NPL ratio remains well above the 5% benchmark ratio and thus lowering this ratio remains a challenge for Mozambican banks, also when compared with the NPL ratios witnessed in other countries in Sub-Saharan Africa. Our estimates indicate that the combined solvency ratio of the six banks remained well above the required 14% after standing at 27.3% in 2022 (up from 25.6% in the previous year). Also, liquid assets (including cash and balances at the central bank and other credit institutions as well as financial assets) represented more than 63% of total assets.