Moody’s: Outlook for WAEMU banks stable

Moody’s, a renowned financial rating agency, recently announced a stable outlook for the banking sector in the West African Economic and Monetary Union (WAEMU) region. The region's economy is expected to grow robustly, driven by continuous structural reforms, supportive monetary and fiscal policies, and an overall economic program across the eight member countries. The economic and monetary union in the region also contributes to macroeconomic and currency stability, further supporting growth. Despite these positive trends, challenges such as high inflation, particularly related to imported food and energy, pose risks to the social and political landscape. There have been recent coups in the region that add to the socio-political risks affecting the banking sector. However, Moody's remains optimistic about a stable outlook for the banking environment. On the banking performance side, Moody's expects stability, with some modest weakening in asset quality due to high inflation. This will be offset by improvements in capital ratios, along with consistent profitability, funding, and equity stability. Inflation, driven by higher prices of imported food and energy, has led the regional central bank to raise interest rates twice this year. While the higher rates may benefit banks' net interest margins, they also pose challenges in operating expenses and provisioning. Overall, Moody's predicts that profitability will remain broadly stable or experience a slight decline, striking a balance between the various factors. Regarding asset quality, Moody's expresses concerns about the vulnerability of borrowers, especially retail borrowers and small businesses, due to inflation impacting their repayment capacity. Additionally, the exposure of WAEMU banks to government debt has increased significantly during the pandemic, accounting for around 35% of their balance sheets. This elevated exposure ties the banks' creditworthiness closely to that of the sovereign, posing risks to their stability. While Moody's anticipates modest improvements in capitalization over the next year, the capital ratios of WAEMU banks remain lower than those of their broader emerging market peers. The gradual enhancement in capitalization is attributed to the implementation of Basel II/III international banking requirements. However, compared to other African counterparts like Nigerian banks, WAEMU banks have relatively lower capital levels. Looking ahead, Moody's highlights several risks to their outlook, including inflation pressures leading to social and political risks, recent political instability in the region following coups, challenges in asset quality and funding, along with concerns about banks not meeting regulatory requirements. Despite these risks, Moody's emphasizes a stable outlook for WAEMU banks, underlining the resilience and potential for growth in the banking sector. Overall, the outlook for WAEMU banks appears positive, with Moody's projecting stability in the face of challenges. The region's economic growth, coupled with ongoing reforms and supportive policies, is expected to bolster the banking sector despite inflation-related hurdles and political uncertainties.