How global financial standards will impact Morocco's banking industry

In 2018 Morocco implemented the ninth International Financial Reporting Standard (IFRS) standard, effectively replacing the previous accounting regime. The new system covers three main topics: the classification and valuation of financial instruments, the impairment of financial assets and the hedging of accounts.

Impact Assessment

Regarding financial instruments, the impact on Moroccan banks’ balance sheets was somewhat limited. This was mainly due to the temporary leeway given to insurance companies consolidated by Moroccan banks. Bank Al Maghrib (BAM), the central bank, exempted such institutions from applying IFRS 9 standards until 2021. The new regime has also had a very limited impact on hedge accounts, as local banks do not use such instruments on a large scale.

The main impact has been felt with regard to the impairment of financial assets. Indeed, IFRS 9 introduced provisions on performing loans based on expected credit losses (ECLs) over 12 months, in addition to existing provisions on non-performing loans and performing loans with significant credit risk deterioration. Such provisions on existing outstanding loans have directly impacted banks’ shareholder equity through reserves. From January 1, 2018 every additional provision on new production will affect banks’ income statements through the cost of risk.

With the total impact for the Moroccan banking industry reaching Dh16.7bn (€1.5bn), moving from an incurred provisions model to a forward-looking one led to a 32% increase in bank provisions from December 31, 2017 to January 1, 2018. Moreover, the impact on listed banks’ shareholders equity reached Dh12bn (€1.0bn), with the three leading Moroccan banks – Attijariwafa Bank, Banque Centrale Populaire and BMCE Bank – representing 90% of this amount.

Nonetheless, the effects on regulatory capital are not as significant as those on accounting equity. Indeed, BAM gave Moroccan banks the possibility to amortise the impact of IFRS 9 on regulatory ratios over five years. As a reminder, bank regulatory ratios in Morocco are set at a minimum of 9% for core Tier-1 capital and 12% for core Tier-2 capital. However, even with this exemption, in 2018 domestic banks used more financial levers as well as production capacity, including capital increases, and subordinated and perpetual bond issuances, to maintain regulatory ratios above the minimum levels.

As loan production capacity is closely related to equity levels, the implementation of IFRS 9 standards will most likely lead to a lower-than-expected growth in loans portfolios in the short term, especially within the corporate segment, where ECLs are much higher than in the retail segment.

Adaptation

Considering these changes, we believe that banks will have to further adapt their business model to meet the new regulations. IFRS 9 will encourage banks to adjust their portfolio strategy and change their risk appetite as follows:

• The revision of commercial policies: Banks will likely adapt their pricing and/or products. Complying banks should expect a negative impact on margins, mainly due to higher provisions in exposures with high maturities caused by capital consumption.

• An adjustment of portfolio strategy: Some products and financial instruments might become less profitable under IFRS 9, taking into consideration collateral, their higher sensitivity to industry outlooks, the duration of impairments based on ECLs and counterparty ratings.

• A change in risk appetite: Over 2018 and 2019 banks are advised to change their risk appetite in such a way as to prevent greater ECLs. While IFRS 9 will lead to a better reading of bank performance, it could also cause a reduction in loan production in the context of macroeconomic uncertainties. In particular, caution is needed so as not to create a negative ripple effect on the ability of the private sector to promote growth through investment, which will be integral in revitalising Morocco’s economy in 2019.