(Bloomberg) -- Africa’s biggest banks booked windfall profits as regional currencies tumbled this year, but some of those gains are being eaten by higher provisions and the outlook for 2024 appears mixed.
Sharp slides in the naira and Kenyan shilling have significantly boosted foreign-exchange income at Standard Bank Group, Zenith Bank Plc and Equity Group Holdings Plc, their earnings reports show.
Those currency woes reflect wider economic weakness, spelling bad news for the banks’ corporate customers and potential loan losses going forward. At the same time, the region’s biggest lenders look well capitalized and should be an important source of strength for the region as it continues to cope with high interest rates and a cost-of-living crisis.
“Elevated inflation continues to dent households’ purchasing power and significant sovereign exposure poses risks to loan quality,” said Mik Kabeya, senior analyst at Moody’s Investors Services. “More positively, African banks’ robust capitalisation ratios will act as a buffer against asset deterioration.”
The South African Reserve Bank last week warned the quality of bank loan books has suffered amid high interest rates, as it announced plans to have lenders add protectively to capital buffers in 2025.
Likewise, Nigerian Central Bank Governor Olayemi Cardoso told lenders on Nov. 24 the regulator would require them to raise capital levels to offset currency weakness and tepid economic growth.
“Asset quality risks will remain prominent, with households and businesses continuing to be hit by high inflation and high interest rates, and currency depreciation,” Fitch Ratings analyst Eric Dupont and his colleagues wrote in a research report on the outlook for African banks in 2024.
“Nevertheless, we assume only a moderate increase in impaired loan ratios, with most banks able to address rising asset quality risks through strong pre-impairment profits stemming from high interest rates, still-satisfactory loan growth and, in some markets, revaluation gains on long net open-currency positions,” they said.
Equity Group Holdings Plc, East Africa’s biggest bank by market value, earned 56% more from foreign-exchange trading of 13.9 billion shillings ($91 million) in the nine months through September. Nigeria’s Zenith Bank Plc saw foreign-exchange trading income jump to 356 billion naira ($409 million) in the same period, more than it made from lending.
“If inflation stays high, banks will keep booking strong interest income in the first half of 2024,” said Joshua Odebisi, banking analyst at Rand Merchant Bank in Lagos, Nigeria’s commercial capital. That picture darkens if the economy worsens, though Nigerian bank stocks do not look to be overly expensive.
“Valuations have been beaten down recently because of reactions to policy decisions, but the fundamentals remain very strong,” he said.
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