A steady hand: Cash injections by the central bank kept financing strong amid a liquidity crisis

The growth of Morocco’s 19 banks slowed recently, with some indicators weakening. Overall, though, the sector continued to put in a resilient performance thanks to prudent regulation by the central bank, Bank Al Maghrib. The pressures brought about by exogenous slowdowns reduced liquidity, as domestic activity and trade volumes dipped, but a conservative exchange rate regime and steady expansion in African frontier markets over recent years has helped steady Moroccan banks’ balance sheets. In 2011 the size of the banking system was around 121% of the country’s GDP, and if new units and instruments are introduced over 2013 as expected – including sharia-compliant products – that figure may grow even larger.

BROADER EXPOSURE: While robust regulations have helped the banking sector avoid most of the global uncertainty of the past four years, the kingdom’s broader indicators have had a more challenging time grappling with the slowdown in trade demand and capital flows. This is particularly true in relation to the EU, Morocco’s single largest trading partner, where economic troubles have had the greatest impact.

Morocco remains in far better health than many of its neighbours, with steady if not stellar GDP growth. The country’s external finances remain in fairly good shape. Central government debt in 2010 was around 50% of GDP, lower than many OECD countries, and this consists of a large portion of concessional loans. The country also benefitted from a healthily subscribed $1.5bn sovereign bond and a $6.2bn precautionary credit line from the IMF, approved in August 2012, to hedge against additional external shocks.

Walter Siouffi, CEO of Citibank Maghreb, told OBG, “Many sectors such as tourism, aviation and manufacturing will see increased investment from abroad in 2013. We can expect most businesses to continue to diversify into new markets in Africa and the US given the softness in traditionally strong European markets.”

CHALLENGES: Despite these promising signs, worsening national indicators have contributed to a complicated outlook for the financial sector. Bank exposure to government finances remains a weakness, for example, however, banks have been reducing this exposure.

There is good reason for doing so as the government must tackle twin deficits and some serious structural concerns. The fiscal deficit around 6% of GDP in 2012 – driven in large part by an emphasis on subsidies, which by themselves are equivalent to around 6.2% of GDP, though government efforts to promote economic development also played a sizeable role. The current account deficit also grew, touching 8.8% of GDP in 2012 as imports, including energy products, outstripped the modest rise in export volumes.

This was not helped by the fact that Morocco’s main sources of income — tourism and agriculture — have been threatened by the unfavourable physical and political climates in the region An average crop year affected the country’s agricultural exports in 2012 compared to 2011 when (the crop year was exceptionally good), while unrest in North Africa and economic challenges in Europe have stagnated tourism visits, with 2012 showing just 0.4% growth. All in all, these factors contributed to lower international reserves, which fell steadily over the past 24 months, from seven months worth of import cover in 2010 to four months in 2012. While they appear to have stabilised, the drop has significantly affected liquidity.

LIQUIDITY LEVELS: Liquidity has been a frequent topic of discussion in the banking sector for several years, with concerns that overall liquidity is getting uncomfortably tight. Overall, there has been a steady fall in recent years, with the liquidity ratio going from 23.0 in 2009, to 16.0 in 2010 and 16.3 in 2011. Average capital adequacy ratios, however, have shown somewhat less concerning trends, rising from 11.7% in 2009 to 12.7% the following year and showing only a slight decrease to 12.4% by the end of 2011. Although they have a wide range of options for generating liquidity given Morocco’s comparatively sophisticated financial instruments, banks have become increasingly dependent on deposits (which represented nearly 70% of the banks’ resources by the end of 2011).

As a result, the central bank has taken a prudent but generous approach to rates. In September 2012, Bank Al Maghrib cut its reserve requirements by a third in order to add more liquidity, taking the ratio from 6% to 4% as of September 26, and freeing up some Dh7bn (€622.3m) into the banking system. This was the first reserve-requirement cut since March 2010. Bank Al Maghrib also kept its policy rate at 3% throughout most of 2012, following a 25 basis point cut after the first quarter of the year. Inflation has remained low – between 1% and 2% for most of the year.

A new source of refinancing was also approved in the form of certificates of deposits, added in 2011 to the list of securities that Bank Al Maghrib accepts as a type of collateral when giving advances.

These moves succeeded in keeping interest rates low, and domestic loans are thus on the rise, especially fixed-rate mortgage loans. Credits to the economy increased, although at a slower pace than the previous year-to-year period. Credit to the private sector remained fairly stable, at around 7% in 2012, following 9.9% the previous year and 7.5% the year before that.

RISK MANAGEMENT: Credit risk was affected by the global economic slowdown, particularly by the troubles in the eurozone, Morocco’s biggest trading partner. Despite the rising cost of risk, banks did relatively well.

To prepare the sector for Basel III (the central bank adopted the Basel II accord in June 2007), Bank Al Maghrib decided, in April 2012, to increase the minimum ratio of Tier 1 capital to 9% and the capital adequacy ratio to 12%, scheduled to take effect in June 2013. The expansion of some banks internationally, such as Attjariwafa Bank and Banque Populaire, has also led the central bank to increase risk monitoring.

In response to the concerns over liquidity, the debt crisis in Europe and challenges in the agriculture and tourism sector, Standard & Poor’s maintained Morocco’s investment grade, BBB-, but changed the outlook from stable to negative due to the increased risk in the banking sector. Fitch, however, confirmed Morocco’s investment grade BBB-, keeping a stable outlook.

EARNINGS: According to the central bank’s 2011 annual report on the control, activities and results of credit institutions, banks posted aggregate net banking income of Dh35.9bn (€3.2bn) for 2011, a 9% increase on the Dh32.8bn (€2.9bn) posted in 2010. This translated to a net income of Dh10.1bn (€897.9m), up 4% from the Dh9.7bn (€862.3m) posted the previous year.

Some 75.8% of the net banking income in 2011 was the result of interest earnings, compared to 76.3% in 2010 and 76.7% in 2009. Although official figures for 2012 were not available at the time of press, Hiba Zahoui, deputy director of banking supervision at Bank Al Maghrib told OBG, “The sector remained profitable and resilient despite the macroeconomic environment.”

DEPOSITS: Aggregate customer deposits have grown gradually in recent years, showing a 3.3% increase from Dh627bn (€55.7bn) in 2009 to Dh648bn (€57.6bn) the following year. In 2011, the central bank reported that total customer deposits had reached Dh677bn (€60.2bn), up 4.5% on the previous year. Foreign remittances in 2011 totalled some Dh58.6bn (€5.2bn) in 2011, which is equivalent to 8.7% of total deposits. The central bank anticipates that remittances will drop in 2012, in light of economic challenges in Europe, and this will likely reduce overall customer deposit growth.

The portion of demand deposits, out of total customer deposits, has grown over the last three years (54.4% in 2009, 55% in 2011, 57% in 2011), largely to the detriment of time deposits, which went from 28.5%, to 27.5% and finally to 25% from 2009 to 2011. The portion of savings accounts also grew from 14.1% to 14.5% and finally to 15% in the same period.

LOANS: Access to credit has historically been a challenge in most emerging markets, including Morocco, where a lack of transparency – and the associated high rates – has limited lending activity. However, Morocco has benefitted from a steadily improving credit environment, driven in large part by the establishment of a private credit rating agency and extended registry coverage. In 2007 Bank Al Maghrib issued the first private credit bureau licence to Ireland’s Experian, which began operations in 2009, backed by directives from the central bank mandating banks to provide current information on activities. As a result, the bureau covers over 17% of the adult population – more than triple the figure for the MENA region and well above the 4.2% the previous public registry covered.

Currently, short-term bank loans account for 41.5% of the overall total, while medium- and long-term loans account for 25.7% and 27.8%, respectively. Households receive the most funding, with 27.6% of total loans, ahead of manufacturing at 16.8% and construction with some 13.9% of loans. This distribution remained relatively stable for the preceding two years.

Non-performing loans reached Dh35.5bn (€3.2bn) as of December 2012, a slight increase from Dh32.5bn (€2.9bn) in the previous year. However, both figures represent roughly 5% of total loans, down from 5.5% in 2009 and a significant drop from 19% in 2004. The total dollar amount of bad debt rose by 20% between the 2010 and 2012, reflecting the degradation of the financial situation in sectors that felt the impact of the global credit crisis. However, the bad debt of households dropped to 1.4% due to improved financial information available via access to credit bureau ratings.

EXPANSION: Like emerging markets throughout the region, banking penetration may be modest by OECD standards, but Morocco nonetheless compares well against many industrialised countries and has one of the highest rates in Africa. In terms of retail usage, urban areas are well covered in terms of branches and ATMs, although rural expansion still lags and the large informal economy hinders attempts to boost usage.

Banks are working to develop products for lower-income earners to attract the unbanked, including speciality services for specific segments such as housing or SMEs. Abderrahim Bouazza, director of banking supervision at Bank Al Maghrib told OBG, “More banks are using access to credit as a tool to increase their client base.” Bouazza also suggested that the opening of Bank Al Barid, the post office’s bank, significantly improved the accessibility of the financial system. The use of mobile ATMs could also help improve financial inclusion in upcoming years. Banking penetration presently stands at 54%, according to central bank data, with the objective of reaching 66% by 2014.

The coverage of bank networks grew significantly in 2011, with the number of ATMs increasing from 4545 in 2010 to 5024 in 2011, five times the 1168 ATMs that existed in 2002. Despite the improved coverage, ATMs in Morocco do not take bank notes from clients, and deposits must still be made with tellers. Doing so is getting easier, with 326 new branches opened in 2011 (compared with 362 in 2010 and 400 in 2009), bringing the total to 5113 branches, or approximately one branch per 6300 members of the population.

In 2011 there were more than 8m bankcards in circulation, according to a bankers’ association report. The recent accreditation of Bank Al Barid in 2010 means that many post offices now serve as banks, benefitting underserved rural areas by bringing in services without needing to build new structures. Amin Benjelloun Touimi, the director general of Poste Maroc, advised local media that by the end of 2011 Bank Al Barid had opened some 480,000 new accounts across its entire network.

SECTOR STRUCTURE: Compared with most of the other banks throughout the region, Moroccan lenders have grown to reach a level of sophistication and size where they can fend off foreign competition and not only maintain their domestic market shares but also expand overseas. This has been helped in large part to the robust regulation of Bank Al Maghrib, which has fostered healthy capitalisation levels and encouraged consolidation. Indeed, the top three largest banks – Attijariwafa Bank, Banque Populaire and BMCE Bank – accounted for some 64.6% of total assets, 65.7% of total deposits and 64.1% of total loans in 2011. This domestic competition, however, has not deterred international players such as Citigroup, through their subsidiary Citibank Maghreb, from staying in the sector.

All 19 of the kingdom’s active banks are members of the Moroccan Banking Association (GPBM) and regulated by Bank Al Maghrib. Six are listed on the Casablanca Stock Exchange. Financial services firms on the bourse have generally followed the trend in advanced markets in recent times, meaning that growth slowed in comparison to past years – indeed, shares of the six listed banks declined in 2011.

Attijariwafa Bank continues to be the largest listed bank and alone accounts for roughly a third of both loans and deposits. It is followed by Banque Centrale Populaire, the centralised banking organisation that operates on behalf of a group of semi-autonomous, cooperative regional banks. The group, which was once fully publicly owned, was partially listed on the Casablanca Stock Exchange in 2004 to help raise funds for government social spending. BMCE Bank is the third-largest bank and has been listed since 1975. Two French subsidiaries, BNP Paribas unit BMCI and Credit Agricole unit Credit du Maroc, along with locally owned Credit Immobilier et Hotelier, make up the remaining three listed banks. While the government sold controlling stakes in at least four banks, it still sits on the board of more than four institutions, including Al Barid Bank, which became independent from Poste Maroc in 2010.

ACROSS AFRICA: Mirroring moves by South Africa’s commercial banks, Moroccan financial institutions have been acquiring new assets across the continent. Although a large number of the more than 70 branches that Morocco’s banks have abroad are in Europe, over the past eight years Moroccan-owned financial institutions have substantially increased their representation in Africa. As a result of these ambitious expansion plans, Moroccan banks now own branches in over 20 different African countries. In a single transaction in 2008, for example, Attijariwafa Bank bought majority stakes in five banks in Senegal, Congo, Cameroon, Côte d’Ivoire and Gabon from Credit Agricole. Bank of Africa, the African operation of BMCE Bank, which has a presence in 17 countries throughout the region, accounts for just over a third of its income. Moroccan banks have typically favoured acquisitions of existing institutions versus greenfield investments in Africa.

IN THEIR SIGHTS: In addition to the network of banks that it already controls, Banque Centrale Populaire has expressed interest in acquiring a 50% stake in Côte d’Ivoire’s lender Group Banque Atlantique, headquartered in Abidjan and with a footprint in Benin, Burkina Faso, Mali, Niger, Senegal, and Togo. There is also growing interest in Morocco, particularly from banks in the Middle East. Qatar National Bank (QNB) signed an agreement to buy a majority stake in Morocco’s Union Marocaine des Banques.

If the deal is approved by Qatari and Moroccan regulators, it would further expand the African presence of QNB, which already has operations in Sudan, South Sudan, Libya, Tunisia, Algeria and Mauritania. Outside interest in the banking sector is also being stimulated by the Casablanca Finance City (CFC). Brahim Benjelloun-Touimi, Executive Director General at BMCE Bank, explained, “The CFC project could have a major impact on stimulating growth in West Africa, by easing the harmonisation of investment standards and payment methods across the region and promoting formalisation of the informal economy.” The CFC aims to concentrate financial institutions and related services in a single location. Said Ibrahimi, CEO of the Moroccan Financial Board, told OBG, “Potential competition to the CFC comes from both Tunis and Cairo, although Tunis is much smaller and Cairo is more oriented towards the English-speaking world and the Middle East”

FINANCIAL SECURITY: Financial crime such as corruption, money laundering and fraud are relatively rare in Morocco. In addition to normal law-enforcement institutions, financial crime is monitored by the Central Authority for the Prevention of Corruption (Instance Centrale de Prévention de la Corruption, ICPC) and the Financial Intelligence Unit (l’Unité de Traitement du Renseignement Financier, UTRF). Since its creation in 2007, the ICPC has lead domestic initiatives and taken an active international role in preventing corruption.

The UTRF helps prevent money laundering and the financing of terrorism by taking an active role in providing domestic oversight and guidance, as well as facilitating international partnerships. In 2012 Morocco hosted the regional MENA Financial Action Task Force, which coordinates regional and international actions against money laundering. In regards to fraud, Mikael Naciri, director general of the Centre Monétique Interbancaire recently told local media that the country has one of the lowest rates of credit card fraud in the world.

Public trust also remains a concern. “One problem for the banking sector is that most people immediately withdraw all their money from their accounts once it has been received, partly because they don’t trust the banks with it, and because they are used to making payments in cash everywhere,” Mikael Naciri, the director-general of Centre Monetique Interbancaire, told OBG.

OUTLOOK: Banking penetration in Morocco has risen rapidly to reach its current rate of 54%, more than double the 2002 rate of 24%. Those who currently don’t have accounts likely earn too little to be bankable, so banks are now exploring ways of creating low-cost banking products that would require minimal labour or new infrastructure. This approach should help banks attract more participation from the informal sector, believed to hold a third of the kingdom’s money mass. Even with the country’s liquidity constraints and the knock-on effects of the exogenous instability, Moroccan banks have been healthy enough to ambitiously expand their presence within other African countries.