Fitch Ratings: 2021 outlook for African banks stable

The African banking sector is poised for a stable outlook in 2021, as projected by Fitch Ratings. The Ratings Agency sees a gradual normalization in business volumes and revenues for African banks, signaling a glimmer of hope amidst the ongoing pandemic challenges. Mahin Dissanayake, Senior Director at Fitch Ratings, shed light on the key projections and concerns for the year ahead during an interview on CNBC Africa. The 2021 outlook for African banks reveals a degree of optimism, attributed to the resurgence of economic activities across the region. Fitch Ratings forecasts a median average GDP growth of around 4% for Sub-Saharan Africa, a significant rebound from the anticipated 3% contraction in 2020. The upturn in economic activities is expected to translate into higher business volumes and revenues for banks, leading to an overall optimistic outlook for the sector. Improved business revenues and household incomes are likely to drive loan growth and benefit the banks. Looking back at the challenges faced by banks in 2020, Dissanayake highlighted the significant shock experienced by the sector due to plummeting loan growth amid lockdown measures and business disruptions. As banks strive to rebuild their earnings in 2021, loan growth is expected to be a key driver, with projections indicating a potential 10% growth in some key markets, particularly in Nigeria. However, profitability may face pressure from loan payment charges and rising credit costs, particularly following the expiration of debt relief measures implemented by governments post-COVID. Foreign currency liquidity risks, a major concern during the crisis, seem to have improved in recent months. Though liquidity remains tight, banks have been managing their foreign currency positions effectively, especially in Nigeria where inflows from exporters and domiciliary accounts have provided some cushion. The management of foreign currency challenges has prevented significant disruptions in the banking sector thus far. In terms of asset quality, the forecast for Pair loan ratios in Nigeria projects a rise to 10-12% by the end of 2021. The expected increase in Pair loans, particularly from SMEs and consumers, reflects the global trend seen in credit markets post-pandemic. While higher credit costs may pose challenges, Nigerian banks' profitability levels offer a buffer to absorb these costs to a large extent. Addressing the issue of non-performing loans in the oil and gas sector, which constitutes about 30% of sector loans in Nigeria, Dissanayake noted that banks have managed to mitigate risks through debt relief measures and stable oil prices. However, any downturn in oil prices or production levels could pose medium-term risks to banks heavily exposed to the sector. Despite the gradual recovery expected in 2021, Fitch Ratings does not anticipate a return to pre-pandemic performance levels for African banks for at least two years. The persisting challenges in Pair loan ratios and the associated credit losses are likely to keep profitability levels below pre-pandemic levels in the near future. However, countries like Nigeria, Ghana, and Kenya are expected to experience a faster recovery compared to markets like South Africa. The increase in banks with negative outlooks, now at 50% compared to 35% a year ago, is indicative of the lingering impact of the COVID-19 shock on the sector. Multiple downgrades since the onset of the pandemic have left some banks vulnerable, with expectations of continued pressure on their credit fundamentals as businesses strive to recover from the economic fallout of 2020. These challenges underpin the cautious optimism surrounding the performance of African banks in the year ahead.