Positive indicators: Although liquidity has fallen, the sector remains in good form

While its neighbours to the north have struggled with the slow recovery in Europe and continue to face hefty fines from aggressive regulators, Morocco’s banking sector remained resilient in 2013, benefitting from cash injections from Bank Al Maghrib (BAM), the central bank. The industry remains one of the most sophisticated on the continent, home to the headquarters of a number of Africa’s largest regional banks. Although liquidity is still less than ideal and non-performing loans (NPLs) have inched upwards, indicators have been positive for the sector, with capital adequacy requirements well above Basel III and deposits growing robustly.

In what was both a local and a regional first, 2013 saw a private Moroccan financial institution turn to the international capital markets to float $300m worth of bonds. The move could be prescient; given the limited liquidity in the banking sector, recourse to international bond markets could become less the exception and more the norm going forward. Walter Siouffi, the CEO of Citibank Maghreb, told OBG, “This represents an important step-change in Morocco’s banking sector, and we are likely to see more of Morocco’s banks tap into international capital markets in the future as they continue to expand their footprint across Africa.”

SECTOR STRUCTURE: Morocco boasts one of North Africa’s more competitive banking industries, with the sector having proven itself capable of withstanding the international financial crisis, fending off foreign competition and driving impressive growth through expansion in Africa. This success has been the result in large part of robust regulation by the BAM, which for years has advocated healthy capitalisation levels.

Data from BAM indicates that while regulation calls for a tier-1 capital ratio of 9% (which is in itself superior to Basel III requirements of 6%), the average for the sector in the first half of 2013 was 10.5%.

Likewise, while the minimum core solvency ratio is currently set at 12% (again ahead of Basel III requirements for 10.5%), the average across Moroccan banks in the third quarter of 2013 was in fact around 13.1%.

At present, a total of 19 banks are licensed to operate in Morocco, although the banking retail market is largely dominated by Attijariwafa Bank, Banque Populaire, BMCE Bank, BNP Paribas unit BMCI, Crédit Agricole unit Crédit du Maroc, Crédit Agricole du Maroc and Société Générale. The top three banks alone ( Attijariwafa Bank, Banque Populaire and BMCE Bank) accounted for some 65.6% of assets, 65.4% of total deposits and 64.5% of total loans in 2012, as per data from BAM.

A number of foreign banks, including Citibank, also have a strong presence in corporate banking in Morocco, while other banks such as Grupo Santander and Crédit Mutuel-CIC are present through stakes in some of Morocco’s major private banks.

With the Casablanca Finance City (CFC) – a large-scale initiative that looks to position the country as a financial services centre for the region with a combination of fiscal incentives, training programmes and turnkey facilities – opening its doors in 2013 and new regulations governing Islamic finance expected to be approved during the course of 2014, Morocco could see a number of new players within its banking sector over the coming years.

BROADER EXPOSURE: In 2012 the banking sector represented 126% of the country’s GDP, up from 121% the previous year. Although 2013 figures had not yet been released as of the time of writing, this figure is likely to slip somewhat for the calendar year, not because of a slowdown in banking activity – there is expected to be strong continued growth in total banking assets – but due to the significant agricultural-driven expansion of GDP. The banking sector is also expected to benefit from the spate of enabling legislation focusing on sharia-compliant products and the official 2013 opening of the CFC. While many expected the banking sector to be negatively impacted by the European financial crisis given that Europe remains Morocco’s primary trading partner, local banks have shown themselves to be resilient, as a result of a regulatory environment that focuses on banking fundamentals, rather than more exotic instruments, as well their strong emphasis on domestic lending. As Kamal Mokdad, the managing partner at Mazars in Morocco, told OBG, “Morocco’s banks have benefitted from the lack of toxic assets in their portfolios thanks to local legislation that limited investments in foreign assets. In addition, Moroccan legislation requires high levels of provisioning and an active central bank is highly responsive to market needs when liquidity is required.”

LIQUIDITY LEVELS: Since the outbreak of the crisis, Morocco’s ratio of liquid assets to short-term liabilities has fallen from a robust 23% in 2009 to 14.7% in 2012, according to figures from BAM. Average capital adequacy ratios, however, remain reassuring, increasing from 11.7% in 2009 to 12.3% in 2012 and estimated at 13.1% in the third quarter of 2013 – significantly ahead of Basel III requirements of 10.5%. Throughout 2013 the central bank continued its efforts to support banks, namely through seven-day and overnight advances. Benchmark interest rates were maintained at 3%, following the 25-basis-point cut in March 2012, and the monetary reserve ratio was kept stable at 4% until it was lowered to 2% at the end of March 2014. Despite these efforts, however, banks remain highly dependent on deposits, which represented around 67% of banks’ resources at the end of 2012. Similarly, even with an acceleration in the growth rate for deposits (up 5.2% year-on-year to end of third-quarter 2013 vs. up 2.9% in 2012), this growth is not a game-changer for banks’ liquidity as a result of the fact that the estimated average customer deposit equalled just over Dh18,000 (€1600) in 2012 – one of the reasons why BMCE Bank opted to raise funds on international capital markets in 2013 (see analysis).

Hiba Zahoui, the deputy director of banking supervision at BAM, told OBG that the issue is not simply one of liquidity tightening in the country’s banks, it is also due to reduced demand for credit in Morocco. While household demand for credit has remained buoyant, growing at 8-9% per annum, demand for credit from businesses has fallen as a result of planned spending cuts and reduced treasury needs thanks to lower order books. This outlook for businesses is expected to change in the near term, given forecasts for GDP growth of 4.5% in 2013 and 4.2% in 2014 (vs. only 2.7% in 2012).

RISK MANAGEMENT: Despite concerns about liquidity and a strained public balance sheet, Morocco’s credit ratings have remained stable with all three of the major ratings agencies, even as countries elsewhere in North Africa have worsened. In November 2013 Fitch affirmed its “BBB-” stable outlook rating, while Standard & Poor’s also maintained its “BBB-” negative outlook rating. In February 2013 Moody’s reaffirmed its “Ba1” rating but changed the outlook to negative from stable as a result of the rising public deficits since 2011.

From an operational risk side, banks continue to prepare for implementation of Basel III and regulation set by BAM in terms of capital requirements is not only in excess of Basel III, but is already being complied with by all banks. All told, the country is well on track to be fully Basel III compliant by the 2019 deadline.

The government has begun to turn to the sector to help reduce its exposure to commodity volatility. In an effort to manage the risk of fluctuating oil prices, in September 2013 Morocco hedged part of its fuel purchases through BMCE for the remainder of 2013 by buying call options on European diesel. This is a first for the country and effectively capped the price it paid for its fuel for the remainder of 2013. As oil prices have ballooned, government spending on fuel oil subsidies soared to represent some 6% of GDP, and spending on fuel subsidies is a major contributor to the fiscal and trade deficits. With subsidies representing 90% of the budget and fuel subsidies consuming almost 90% of the nation’s Compensation Fund, the government has taken steps to reform the subsidies system and announced in early 2014 the elimination of subsidies on petrol and fuel oil. Subsidies on wheat, sugar and cooking gas will be maintained, while diesel will remain on the indexation system (see Economy chapter).

EARNINGS: The resilience of Morocco’s banking sector, despite the challenging macroeconomic backdrop, is no better illustrated than by looking at BAM’s annual report on the control, activities and results of credit institutions, in particular at net income performance for the sector. In 2012 the banking sector posted aggregate net banking income of Dh38.6bn (€3.4bn) for 2012, a rise of 7.5% on the Dh35.9bn (€3.2bn) of 2011.

As in previous years, the majority (76.6%) of net banking income was derived from interest earnings. This translated to net income of Dh9.9bn (€879.1m), down 1.7% from the Dh10.1bn (€896.9m) posted in 2011. The decrease was due in part to lower margins on customer transactions (down 2 basis points to 4.21% due to the strength of competition in the market). With the rate of NPLs having increased to 5% of total loans in 2012 (from 4.8% in 2011), net income was also negatively impacted by higher provisions to reflect the higher risk. While official figures were not available for 2013 at time of print, Zahoui indicated that despite NPLs rising to 5.8% as of the third quarter of 2013, net income over the first half of 2013 remained stable versus 2012, due to higher income from market operations and banks’ foreign branches, mostly in the rest of Africa.

DEPOSITS: As GDP per capita has gradually improved at around 3% per annum between 2009 and 2012 in constant local currency terms, according to data from the World Bank, and with it the rate of banking penetration, aggregate customer deposits have similarly grown consistently every year, increasing from Dh627bn (€55.7bn) in 2009 to Dh697bn (€61.9bn) in 2012, i.e. around 3.6% per year. At Dh141bn (€12.5bn) by end-2012, remittances from abroad are a key source of funds for Morocco’s banks, representing more than 20% of total customer deposits. Despite fears that the economic slowdown in Europe would negatively impact foreign remittances, they have in fact continued to grow, increasing by some 5.2% in 2012 (compared with 5.7% in 2011). With Europe slowly emerging from its crisis, the risks to this significant source of cash flow for Moroccan banks appear to be limited.

As for the constitution of customer deposits, demand deposits (current accounts) continue to dominate, growing from 54.4% of total deposits in 2009 to 57.9% in 2012. This in part due to an increase in current accounts, but also due to a reduced appetite for time deposits; total funds in time deposits have fallen steadily from Dh179bn (€15.9bn), or 28.5% of total deposits, in 2009 to Dh161bn (€14.3bn) in 2012, or 23.1%.

LOANS: Access to credit in emerging markets can often prove problematic as a result of lack of transparency or high interest rates. However, as part of its aim to strengthen its regional competitiveness as a financial services centre in North Africa, Morocco has strived to foster a stronger credit environment for the past several years. In 2007 Irish-headquartered Experian was issued the first private credit bureau licence and eventually opened its doors in 2010. Private credit bureaux now cover just under 20% of the population, according to the World Bank – double the average for the MENA region and notably higher than the 4.2% the previous public registry held. Other actions taken include directives to improve access to credit for small and medium-sized enterprises (SMEs, see Economy chapter), with specific funds set up for this purpose.

The results thus far have been encouraging and bank lending has grown consistently. Since 2005, bank lending (in volume of loans) has increased by an annual average of 14%, although growth rates have diminished in recent years due to the supply and demand issues around liquidity as discussed above. At the end of 2012 outstanding loans totalled some Dh722bn (€64.1bn), with short-term loans representing some 39.9%, while medium- and long-term loans accounted for 27.6% and 27.5%, respectively. Households continued to be the biggest beneficiaries of bank credit in 2012, accounting for some 28.9%. This is followed by manufacturing at 16.7% and construction at 12.9%. These distributions have seen little change over the past three years, though loans to the construction sector have started to fall, likely a reflection of lower activity in this sector.

Given the economic challenges over the past few years, non-performing loans have unsurprisingly risen as a percentage of total loans, increasing from 4.8% in both 2010 and 2011 to 5% in 2012 and to an estimated 5.8% in 2013. However, these rates remain well below the level of 19% seen in 2004 and are among the lowest in the region. Despite these indicators, the World Bank’s “Doing Business Report 2013” ranks Morocco at 109th out of 189 nations in the access to credit section. According to the Permanent Secretariat of the National Committee for Business Environment (Comité National de l’Environment des Affaires, CNEA), this ranking is misleading. Morocco ranks highly on depth of credit information, scoring 5/6 in line with OECD countries. Its overall ranking, however, is weighed down by its 3/10 score for strength of legal rights. In an effort to address the issues raised in the “Doing Business” report, the CNEA is working on establishing a comprehensive legal framework on security rights in such agreements and is working on developing a collateral registry in Morocco – still a rarity in Africa. Moreover, its 2014 action plan envisages greater access to existing credit bureaux for more operators.

EXPANSION: Morocco’s banking penetration rate of 58% is one of the highest in Africa. This is perhaps all the more impressive given that the penetration rate was only 24% in 2001, indicative of the high annual growth in the years since, and suggesting the country is well placed to meet its 65% target rate by end-2016.

Banking penetration has been improved through several initiatives undertaken over the past few years, including expansion of the bank network (the number of branches in the country jumped from 1703 in 2000 to 5447 in 2012, while the number of ATMs likewise increased from 1168 in 2002 to 5476 in 2012); introduction of banking products aimed at lower-income groups, such as Attijariwafa Bank’s hissab bikhir or Banque Centrale Populaire’s (BCP) hissab chaabi, and products targeting specific sectors such as housing and SMEs; and the diffusion of educational information on finance and banks. While 86% of banks are located in urban areas, efforts continue to improve penetration rates in rural areas, with Poste Maroc playing a particularly important role (see analysis). Since it received banking accreditation in 2010, Poste Maroc’s subsidiary Al Barid Bank has opened close to 500,000 new accounts per year across its entire network.

Banks have used access to credit as a means to incentivise clients to open bank accounts, whether it be via loans, credit cards or even microfinance loans. As of end-September 2013 there were 9.5m bank cards in circulation, according to the Interbank Monetary Centre (Centre Monétique Interbancaire, CMI), a 3% rise in comparison to end-2012 and a sharp 19% jump on the 8m cards in circulation year-end 2011. Growth could also come from other services provided by financial institutions . “Allowing leaseback transactions for full service lease companies would be a real lever for promoting this mobility solution,” Philippe Chabert, managing director of Arval (BNP Paribas Group), told OBG.

EXPANSION ACROSS AFRICA: Expansion of Morocco’s banking system has not, however, stopped at its borders. The past decade has seen Moroccan financial institutions expand their sub-Saharan Africa footprint through numerous acquisitions across the continent, with Moroccan banks present in more than 20 African countries. Several acquisitions by the country’s largest banks, including Attijariwafa and BMCE Bank, came during the immediate aftermath of the global financial crisis, as European lenders pulled out of emerging markets to concentrate on core regions. However, the momentum has continued. The most recent example of this expansion is BCP’s acquisition of a 50% interest in Côte d’Ivoire’s Groupe Banque Atlantique, which has a footprint in eight African countries.

As Hassan El Basri, the director-general in charge of risks at BCP, noted that given the low banking penetration rates in these countries of around 10%, the growth potential is extraordinary. While Groupe Banque Atlantique was primarily focused on corporate banking, 2014 will see BCP launch a pilot project in retail banking in Côte d’Ivoire and Senegal, with the plan to eventually roll retail banking out to all eight countries.

Importantly, the significance of this African expansion is not simply limited to increasing the potential pool of banking clients. Many foreign investors are investing in, signing strategic alliances with or opening lines of credit with Moroccan banks as a means to indirectly access or invest in what are often perceived as higher-risk African countries. Elsewhere, in March 2013 the European Bank for Reconstruction and Development signed an agreement with BMCE to establish a $75m trade finance facility to help Moroccan companies engage more widely in international trade. Other investors have sought to tap into Moroccan networks on the continent. In 2013 BMCE agreed upon a $100m credit line with Japan Bank for International Cooperation to encourage bilateral trade and investment flows between Japan and Morocco, and more broadly, through countries where BMCE is currently present. Similarly, in August 2013 through a risk-sharing agreement with Citibank, the US’s Overseas Private Investment Corporation extended a $40m loan facility to Attijariwafa Bank to support loans to SMEs. Citibank’s Siouffi indicated to OBG that they are looking to expand the agreement, with a memorandum of understanding signed in November 2013 to increase the line to $100m and also to extend the target market to include sub-Saharan countries where Attijariwafa Bank has affiliates.

FINANCE CITY: A combination of special zone and financial district, the CFC has also helped elevate the profile of the country’s banks and financial institutions. The zone was officially opened in 2013, and 30 companies have already been granted CFC status. These are a mix of foreign financial firms, such as Abu Dhabi’s AD Capital and France’s BNP Paribas Regional Investment Company, and professional service firms, including Clifford Chance and McKinsey.

Law 68-12, which was approved by the Chamber of Counsellors’ financial commission in March 2014, expands the list of financial service organisations eligible to obtain CFC status from corporate and investment banking institutions; law, audit and consulting firms; and major companies outside of the financial services sector, including reinsurers and firms that perform a wider array of investment services, like capital market intermediation, investment banking services and specialised services, such as financial research and ratings agencies. The CFC has also signed several partnerships with international organisations such as the Chartered Institute for Securities and Investment, The CityUK, Paris Europlace, Luxembourg for Finance and Singapore Cooperation Enterprise, which aim to develop relations between Morocco and each respective country through think-tanks and collaboration in financial training.

FINANCIAL SECURITY: Despite a regional average ranking of 91/177 in Transparency International’s Corruption Index 2013, with particular mention of the need for new legislation to guarantee access to information to combat corruption, financial crime nonetheless is relatively rare in Morocco. Complementing regular law-enforcement institutions are the Central Authority for the Prevention of Corruption (Instance Centrale de Prévention de la Corruption, ICPC) and the Financial Intelligence Unit (Unité de Traitement du Renseignement Financier, UTRF). The ICPC was created in 2007 and its primary objectives are to increase public awareness of what constitutes corruption and prevent corruption by helping organisations put in place anti-corruption procedures. Its remit could be further widened under a new law currently under discussion in the government and expected to be voted on by June 2014.

According to Mohammed Khalid Laraichi, the secretary-general of the ICPC, if approved, the law would bestow investigative powers onto the ICPC, entitling it to lead independent enquiries where corruption is suspected and issue sanctions where necessary.

The UTRF works to prevent money laundering and terrorism financing through its role in domestic oversight and by facilitating global partnerships. A key step forward came in October 2013, when Morocco was removed from the Financial Action Task Force’s blacklist, thereby reducing the cost for investors of doing business in the country. At the time, the inter-governmental organisation hailed Morocco’s “significant progress” in complying with global standards in its fight against both money laundering and terrorism funding.

In addition, Morocco has a low rate of credit card fraud, according to the CMI, despite the fact that the use of credit cards continues to increase (CMI data indicates year-on-year growth of 9.1% for a total of 163.1bn transactions through end-September 2013). This is partly due to the low penetration rate of just 30%.

OUTLOOK: The outlook for Morocco’s banking sector remains robust. With Europe’s economy slowly seeing a much-needed improvement (the European Central Bank forecasts economic growth of 1.1% in 2014 and 1.5% in 2015 for the area) and Morocco establishing a number of partnerships with Middle Eastern, US and Asian partners, the country as a whole should benefit.

Furthermore, BMCE’s successful tapping of international capital markets for funds to drive its expansion could provide the necessary impetus for other Moroccan banks to follow in its footsteps, thereby accelerating the sector’s expansion in sub-Saharan Africa.