Mozambican Banks

Mozambican Banks

Lower provisions drives net profit higher in 2018

Banks faced a slowing economy and lower interest rates

The performance of Mozambican banks in 2018 was affected by a slowing economy and a lower interest rate environment in the sector. Economic activity in the country expanded at a more moderate pace of 3.3%, standing below the 3.75% growth rate recorded during 2016-17 and the annual average of 6% in the last decade. A gradual drop in inflation allowed the central bank to continue easing monetary policy in the period, with its reference rates cut multiple times during the year and returned to 2016 levels. Commercial banks also adjusted their interest rates in response to lower central bank rates, particularly towards the latter part of 2018. This had an impact on margins and net interest income, which is by far the largest contributor to revenues.

Net profit was largely boosted by lower loan provisions

The combined net profit of the six largest banks in the country (representing 85-90% of the sector) reached MZM 17,492 million (or US$ 285 million) in 2018. This is nearly 23% more than the bottom-line recorded in the previous year. It partly reflects another (although softer) improvement in the operating performance of these banks, but, more importantly, it resulted from a sharp drop in loan impairments. We recall that most banks significantly raised provisions in 2016-17 to face the deterioration in credit quality and as a precaution to tackle a more challenging macro environment. This impact was largely reversed last year and had a very meaningful contribution to the total net profit of the largest banks. 

Efficiency levels hit by softer revenue growth and higher costs

The operating performance showed that revenue growth slowed to mid-single digits. This was due to a marked deceleration in net interest income, which still accounted for over 70% of total banking income. These banks also saw a recovery in fees (after falling in 2017) that, in some cases, reflects higher retail banking activity and greater use of electronic banking platforms. Costs expanded above the inflation rate, as the sector continued to expand its branch network and hire more staff. Still, as in 2016-17, this was done at a much slower pace than in previous years. This means that the relatively softer revenue improvement led to an increase in the cost-to-income ratio to 49.2% in the period (up from 48.1% in 2017). 

L/D ratio falls below 50% after another contraction in loan portfolio

The combined net assets of the six banks reached MZM 504,591 million (US$ 8,209 million), a near 10% increase from the previous year. However, the deceleration in economic activity and more restrictive lending policies from several banks resulted in a contraction in their total loan portfolio. We highlight that net loans stood at just 36.8% of total assets (a multi-year low). Specifically, foreign currency loans dropped sharply again while loans in meticais recovered modestly after a significant decline in 2017. On the other hand, deposits grew at a quicker double-digit pace, as deposits in meticais and foreign currency both expanded at a healthy pace. Overall, loans and deposits in meticais represented over 70% of their respective total while 60% of total deposits were sight deposits. The loans-to-deposits (L/D) ratio stood below 50% for the first time in many years. Asset quality ratios improved slightly in the period, with the NPL ratio reaching 5.95% and NPL coverage ratio at 165.9%. Finally, the total solvency ratio of the six banks stood at an estimated 22.8%, as all of them recorded a ratio well above the required 10% minimum level.