Fitch: WAEMU banks’ weak asset quality & capital outweigh growth
West Africa Economic and Monetary Union banks’ high asset-quality risks and capital vulnerabilities are only partially offset by their sound profitability and strong growth prospects. That’s according to Fitch Ratings in its latest report stating WAEMU banking sector’s impaired loans ratio has increased above that of most sub-Saharan African markets. Jamal El Emellali, Director for Africa and Middle East Banks at Fitch joins CNBC Africa to unpack the report and near-term outlook.
Wed, 10 Jul 2024 14:30:11 GMT
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AI Generated Summary
- WAEMU banks are grappling with high asset-quality risks and capital vulnerabilities despite strong profitability and growth potential.
- The introduction of new regulations, such as the 20 billion CFA franc minimum paid-in capital requirement, aims to enhance stability in the banking sector.
- Smaller banks may need to consider mergers or seek capital injections to meet the new requirements, leading to potential consolidation in the sector.
Fitch Ratings has released a report highlighting the challenges faced by banks in the West Africa Economic and Monetary Union (WAEMU) despite their strong growth prospects. The report pointed out that high asset-quality risks and capital vulnerabilities are major concerns for the banking sector in the region. According to Jamal El Emellali, Director for Africa and Middle East Banks at Fitch, WAEMU banks are facing increasing impaired loans ratios, surpassing those of most sub-Saharan African markets. While WAEMU banks have shown sound profitability and growth potential, their weak asset quality and capital levels remain a significant issue. The Regional Central Bank, BCEAO, has been working towards aligning banking regulations with international standards to promote stability in the financial sector. The introduction of the 25% single obligo limit and a minimum paid-in capital requirement of 20 billion CFA francs are steps in the right direction for regulation. However, there are still some flexibilities in terms of provisioning and classification of state-related exposures, making it challenging to compare asset quality with international peers and clouding transparency. Banks in the region have until the end of 2026 to meet the minimum paid-in capital requirement. While larger and more profitable banks can easily comply using their earnings or reserves, smaller and less profitable banks may need to seek capital injections from shareholders or consider mergers to meet the requirements. Fitch expects to see more consolidation in the banking sector within the next few years as weaker banks strive to comply with the new regulations. Economic growth prospects vary across WAEMU countries, with Senegal and Cote d'Ivoire leading in GDP growth projections. Senegal, in particular, has seen a boost with the recent discovery of oil. On the other hand, countries like Mali and Guinea-Bissau face economic challenges which could impact the growth of their financial systems. Geopolitical risks related to countries like Niger, Mali, and Burkina Faso potentially exiting the ECOWAS or the WAEMU pose threats to economic and financial stability in the region. Despite the uncertainties, recent efforts towards dialogue and negotiation between parties have provided some assurance to investors and stakeholders in the short term. The appointment of facilitators for discussions between the ECOWAS bloc and the Sahel State Alliance members signals a commitment to resolving issues and maintaining stability.
