Mozambican Banks - Net profit recovers to pre-pandemic levels

MOZAMBICAN BANKS - NET PROFIT RECOVERS TO PRE-PANDEMIC LEVELS

Banks continued to face a challenging economic environment

The Mozambican banking sector continued to face a challenging economic backdrop in 2021. Although activity recovered following the recession (-1.2%) in the previous year, the country’s first since 1992, real GDP growth of just 2.3% in the period stood well below the levels recorded in the years prior to the pandemic. The international economic environment also remained demanding, as it was impacted by geopolitical tensions, new Covid-19 variants, disturbances in global supply-chains and increasing inflationary pressures that also affected prices domestically. This led the Banco de Moçambique to raise its benchmark MIMO interest rate by 300bps to 13.25% at the start of the year and to lower reserve requirements at the central bank (from 11.5% to 10.5% for local currency deposits and 34.5% to 11.5% for foreign currency).   

Improved operating performance thanks to higher interest rates and activity

The combined profit and loss account of the six largest banks in the country showed an improved operating performance in 2021. This evolution was due to the favorable impact of higher interest rates on margins from customer loans and profitability from debt instruments. Revenues were also boosted by both higher commissions and other banking income. The former benefited from the end of the extraordinary measures adopted by the central bank in 2020 to mitigate the effects of the pandemic and the latter from an increase in activity, together with stronger gains from operations in the foreign exchange market. Meanwhile, total costs advanced relatively in line with the average inflation rate of 5.69% recorded in 2021. The cost performance of the sector continued to be partly influenced by the impact of extraordinary expenditures and investments associated with Covid-19. However, the sharp appreciation of the metical allowed for an important reduction in foreign currency related costs, namely in terms of staff costs that represent about half of the cost structure of the banking sector. This meant that the combined cost-to-income ratio of the six largest banks improved from 55.8% in 2020 to 50.3% in the period.

Higher impairments and other provisions continued to affect the bottom-line

The banking sector continued to significantly increase loan impairments during 2021 while provisions for other assets also surged in the period. This reflects the persistent precautionary approach taken by several banks to consider potential risks associated with the pandemic, including the impact on the country’s real estate market, and the more challenging economic backdrop in recent years. Overall, after declining in both 2019-20, the combined net profit of the six banks recovered 26.7% YoY last year, reaching MZM 16,185 million (US$ 254 million). This net profit represents a ROE of 13.9% and a ROA of 2.47%.

Lowering the NPL ratio remains a challenge for the sector

Despite Covid-19 and the military instability in some parts of Mozambique, the local banking sector remains solid, liquid, and profitable. The solvency and liquidity ratios remained above the regulatory requirement levels in 2021. Our estimates indicate that the combined solvency ratio of the six banks stood at 25.6% (almost unchanged from the 25.8% in 2020), well above the required 12%. Also, liquid assets (including cash and balances at the central bank and other credit institutions as well as financial assets) represented more than 50% of total assets. Still, NPLs remain elevated, with the NPL ratio surpassing 10% in 2021 and standing above the 5% benchmark ratio. Thus, improving asset quality remains a challenge for Mozambican banks, also when compared with the NPL ratios witnessed in other countries in Sub-Saharan Africa.