African markets

Fitch confirms that Bank of Africa is “BB”; Stable outlook

Fitch Ratings confirmed Bank of Africa (BVC: BOA) Long-term issuer default ratings in foreign and local currency (IDR) at ‘BB’ with a stable outlook. Fitch also affirmed BOA’s sustainability rating (VR) at “bb-” and the national long-term rating at “AA- (mar)” with a stable outlook.

Fitch Ratings has removed BOA’s support rating of ‘3’ and support rating floor of ‘BB’ as they are no longer relevant to the agency’s coverage following the publication of its updated bank rating criteria. updated November 12, 2021. In accordance with the updated criteria, we have assigned BOA a Government Support Rating (GSR) of “bb”.

Main rating factors

BOA’s “BB” IDRs are driven by a moderate probability of Moroccan sovereign support (BB+/Stable), given BOA’s systemic importance as Morocco’s third-largest bank, but also the limits of financial flexibility of the sovereign. The stable outlook reflects that of the sovereign rating.

BOA’s VR takes into account its strong franchise in Morocco and pan-African presence, which brings diversification benefits to the business model but also exposes it to less developed markets and more volatile operating conditions. BOA’s stable track record and fairly strong funding and liquidity are offset by a weak capital position and asset quality pressures accentuated by the fallout from the Covid-19 pandemic.

The BOA’s national rating is in line with its direct local peers but lower than the subsidiaries of the major French banking groups because they benefit from the potential support of their foreign shareholders.

Sovereign support: Fitch considers BOA a National Systemically Important Bank (D-SIB) in Morocco, based on the bank’s 13% share of loans and deposits at the end of HY21. BOA’s GSR is therefore in line with the D-SIB GSR of ‘bb’.

Adequate franchise in Morocco: BOA has a strong franchise and D-SIB status in its home market (which accounted for 67% of total assets at the end of HY21), but its market share of 13% is lower than that of the other two D-SIBs. BOA operates in 32 countries (including 20 in Africa), which contributed 47% to total net income in 1H21, well above its domestic D-SIB peers.

Improvements in the risk profile: Evidence of the improvement in the risk profile includes greater harmonization of risk controls across the group, a cautious approach to growth in recent years with the aim of preserving capital, as well as several series of issues of capital instruments, including seed capital through rights issues. .

Asset quality pressures: BOA’s Stage 3 loan ratio (end HY21: 9.8%) is higher than that of other major Moroccan banks due to higher writedowns in its African subsidiaries. Stage 2 loans are high at 7.8% of gross loans but remain broadly in line with the peer average. The total reserve coverage of Stage 3 loans (87%) is reasonable. Our assessment also takes into account assets other than loans, mainly government securities, both Moroccan and held in African subsidiaries.

Strong recovery in profitability: BOA’s operating profit to risk-weighted assets ratio fell to 1.7% in HY21 from 0.7% in 2020, mainly due to lower loan impairment charges , which consumed 37% of operating profit before impairment compared to 66% in 2020. BOA’s cost/income ratio of 53% in HY21 was above the industry average of 49%.

Weak core capitalization: BOA’s Common Equity Tier 1 (CET1) ratio of 8.7% at the end of HY21 was below the industry average (9.2%) and tightly managed compared to the minimum regulatory requirement (7.5% until June 2022). The BOA carried out capital reinforcement measures in 2019 and 2020 and issued 1 billion dirhams of additional Tier 1 securities in 3Q21. The latter contributed to a rise of around 40 bps in the Tier 1 ratio of 9.1% at the end of 1H21.

Good funding and liquidity: BOA is mainly funded by granular deposits. Liquidity is adequate with a good loan/deposit ratio of 92% and a short-term liquidity ratio of 171% at the end of 1H21. In HY21, deposits increased by 3.3% and favorable liquidity conditions helped the BOA reduce its dependence on Central Bank funding (end HY21: 5% of total funding; end HY20: 9%).

Real GDP growth of 3.2%: Pressures on the operating environment from the pandemic have diminished and Fitch forecasts real GDP growth of 3.2% in 2022 and 2023. Disruptions from the health crisis ease and improved rainfall after a two-year drought will support the rebound. We expect fiscal policy to remain expansionary until at least 2023.

Rating sensitivities

Factors that could, individually or collectively, lead to a negative rating action/downgrade:
BOA’s IDRs and GSRs would be downgraded if the Moroccan state’s ability or willingness to support the bank weakens.

BOA’s RV is susceptible to further deterioration in the operating environment and adverse developments surrounding the future of the health crisis. The RV could be lowered if the quality of the BOA’s assets deteriorates sharply, in particular if the stage 3 loan ratio exceeds 14% for a long time, leading to a significant weakening of the bank’s profitability and capital position. A decrease in CET1 buffers from minimum regulatory requirements would also be negative.

The domestic rating could be downgraded if the bank’s local currency IDR were downgraded and Fitch believes that BOA’s creditworthiness has weakened relative to other Moroccan issuers.

Factors that could, individually or collectively, lead to positive rating action/improvement:
A BOA IDR upgrade could be primarily driven by a GSR upgrade. However, the latter would require an upgrade to the Sovereign’s IDRs. This is not our base case given the stable outlook on Morocco’s sovereign rating.

A VR upgrade is unlikely in the short term, although it could result from a sustained improvement in the medium-term operating environment or from a sustained and significant strengthening of the beneficiary capacity and position of the capital of the bank.

The national rating could be upgraded if Fitch believes BOA’s creditworthiness has improved relative to other Moroccan issuers.

VR ADJUSTMENTS

The operating environment rating of “bb-” was assigned above the implied category “b” rating, for the following adjustment reasons: “macroeconomic stability” (positive) and “sovereign rating” (positive ).

Best/Worst Case Evaluation Scenario

Global credit ratings of financial institutions and covered bond issuers have a best-case scenario for a rating upgrade (defined as the 99th percentile of rating transitions, measured in the positive direction) of three notches out of a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured negatively) of four notches over three years. The full range of best-case and worst-case credit ratings for all rating categories ranges from “AAA” to “D”. Worst case and worst case credit ratings are based on historical performance. For more information on the methodology used to determine sector-specific best and worst-case credit ratings, visit https://www.fitchratings.com/site/re/10111579

REFERENCES FOR A MOSTLY MATERIAL SOURCE CITED AS A KEY SCORING FACTOR

The main sources of information used in the analysis are described in the applicable criteria.

Public ratings with credit link to other ratings

BOA’s IDRs are driven by a moderate likelihood of support from the Moroccan sovereign.

ESG considerations

Unless otherwise specified in this section, the highest level of ESG Credit materiality is a score of “3”. This means that ESG issues are credit-neutral or have minimal impact on BOA’s credit, either due to their nature or the way they are managed by BOA. For more information on Fitch’s ESG materiality scores, visit www.fitchratings.com/esg.