Moody’s: BCEAO’s tighter monetary policy to weigh on banks’ liquidity

Moody’s recent report sheds light on the challenges regional banks in the West African region are facing due to the shift in monetary policy by the Central Bank of West African States. According to the report, the tighter monetary policy is straining banks' liquidity and is expected to soften their profitability throughout the year. Mik Kabeya, Vice President and Senior Analyst at Moody’s, discussed the key points of the report in an interview with CNBC Africa. Kabeya pointed out that the high global commodity prices have fueled inflation in the region, while a currency deficit and reduction in international capital flows have led to a decline in the financial reserves of the region. In response to these challenges, the central bank has increased its policy rates and reduced liquidity support to banks, which will likely impact the profitability of regional banks. Kabeya highlighted the importance of a further decline in inflation and a recovery in financial reserves to allow for a relaxation in the central bank's tight grip on local currency funding. When discussing the refinancing operations of the BCEO, Kabeya emphasized the impact of high funding costs on banks' interest margins. He noted that the mismatch between short-term funding and long-term assets could put pressure on net interest margins, affecting the overall profitability of banks. Kabeya suggested that a partial recovery in financial reserves supported by the IMF and recent Eurobond issuances may help ease the liquidity situation. The report also addressed recent developments in the region, such as Niger, Burkina Faso, and Mali exiting ECOWAS, and the concentration of Wolof leaving Wemba. Kabeya highlighted the risks these geopolitical shifts pose to the operating environment of banks, potentially affecting economic growth and trade in the region. In terms of the resilience of banks in the face of tighter liquidity conditions, Kabeya mentioned that larger banks and subsidiaries of foreign entities are better positioned to withstand the challenges compared to smaller banks. Larger banks typically have a stronger deposit franchise, are less reliant on central bank refinancing, and have experience in managing tight liquidity conditions across various jurisdictions. Looking ahead to 2024, Moody’s predicts a slight decline in profitability ratios for regional banks due to the pressure on net interest margins from the normalized liquidity conditions. Despite these challenges, Kabeya remains optimistic about the ability of larger banks to navigate the evolving landscape of the regional banking sector. As regional banks continue to adapt to the changing monetary policy environment, the report serves as a reminder of the importance of maintaining strong financial reserves and managing liquidity strategically to enhance long-term stability and profitability in the banking sector.