Moody Rating Agency has said its study that recent events in the United States of America have cast a spotlight on risks for banks arising from customer deposit withdrawals, especially for those sitting on significant unrealised losses in their fixed-income bond portfolios. It said “we believe this risk to be low for African banks. Deposits have historically been stable for the large banks we rate on the continent, capital and liquidity is higher than in other regions, and central banks play a key role in providing liquidity for their domestic banks. Moreover, African banks’ credit ratings are generally low and already capture many of the challenges these institutions face in 2023, indicated by our negative outlook for the sector

“Most rated African banks have solid liquidity that can buffer large deposit withdrawals. Liquid assets to total assets for rated banks was 43% and we estimate that 20% of assets are in the form of cash, balances with the central bank and other interbank exposures, all of which are highly liquid. Most of the remainder are in the form of local sovereign government bonds, which can be repoed at the central bank. Rated banks have large, stable deposit bases with limited reliance on more volatile market funding.Most of the banks we rate on the continent are market leaders with diversified and well-established franchises. Furthermore lower financial sophistication, a lack of material competition from non-bank financial players and greater reliance on bricks-and-mortar banking make deposits particularly stable in most countries in Africa. Impact of any unrealised investment losses is modest for most rated African banks. In the unlikely event that some of the paper losses on securities need to be realised, most rated African banks can absorb them given their high capital ratios. We also understand that part of the government securities held by African banks have a short maturity, often less than one year, and they hedge interest rate risk for longer duration.

“Investments held at amortised cost are not substantial. Investments held at amortised cost, where changes in market prices are not visible in banks’ financials, stand at just over 110% of tangible common equity1 . Given the stability of deposits, the high cash and interbank balances, and the availability of central bank liquidity support, we expect most banks will be able to wait for their investments to mature without incurring any significant losses. African banks face many challenges, captured in their low credit ratings. The greatest risk facing banks across the region is rising sovereign credit risk. In addition, high inflation, tight global funding conditions, foreign-currency shortages, and increasing social risks make 2023 a challenging year. This drives our negative out look for banks in Africa. Most rated African banks have ample liquidity, with overall liquid assets to total assets of around 43%. We estimate that around 20% of assets are highly liquid, such as in cash, balances with the central bank and other interbank exposures. This compares with similarly high balances totalling 16% of assets for European banks. In the event of any moderate deposit withdrawals, banks can rely on these balances without incurring any losses. The high cash and interbank balances in the East Africa Community (Other EAC above) reflects large cash balances held by banks in the democratic Republic of the Congo (DRC, B3 Stable). This is because DRC banks are highly dollarised and there are no government bonds issued for banks to invest in.

While most African banks are not yet subject to the Basel III liquidity coverage ratio2 requirements, with the exception of more developed regulatory regimes like South Africa and Mauritius. But most regulators have their own regulatory liquidity and cash reserve requirements. We estimate that local government securities account for around 20% of African banks’ assets. This compares with fixed-income securities accounting for about 12% for euro-area banks and over 24% for US commercial banks (of which 80% are government and agency securities for US banks). African banks’ large government bond holdings mean that the credit ratings of many banks are closely linked with that of their government. African banks can generally repo large stocks of their government securities to get access to cash, representing an additional funding source. In addition central banks are likely to step in to provide liquidity in the event of financial stress. Moody’s rated African banks are well-established and have large and diversified deposit bases. Their customer deposits have been historically stable. Reliance on more volatile market borrowings is modest at less than 13% of assets on aggregate (Exhibit 3). What is more, these market funding sources are primarily in the form of interbank balances and funding from development finance institutions.

Larger rated African banks typically have large, granular depositor franchises, especially in the East African community, Egypt and Morocco. Some African banks, such as those in oil-exporting countries, however, may have concentrations of deposits from single depositors, typically government and quasi-government institutions. Nevertheless, these are unlikely to be affected by the distress experienced in the US.

Smaller unrated banks on the continent may have less stable and more concentrated depositor bases, but historically there have been few cases of mass deposit withdrawals. This often reflects the more laborious process of moving deposits, lower financial sophistication and greater reliance on bricks-and-mortar banking in most countries in Africa. Depositors also have limited alternatives. There are few non-banks, such as money market funds and asset management companies, while currency restrictions make it difficult to send money abroad. The gradual increase in mobile banking and financial inclusion in the region has supported a general increase in deposits over the past years but has not yet resulted in higher depositor mobility. Impact of any unrealised investment book losses is modest for most rated African banks

The rise in interest rates since early last year and tighter global funding conditions has driven down the market value of government bond portfolios held by African banks. Exhibit 4 shows the movement in yields since the end of 2021 for those sovereigns that have Eurobonds outstanding. The chart shows that, for most African sovereigns, yields have been volatile in the past although they have come down recently. Higher prevailing market interest rates, but more importantly investor risk-aversion, translated into higher yields (and thus lower bond prices).

“The strongest movements have been in Ghana(Ca stable). The Ghanaian sovereign is going through a debt restructuring exercise and yields have skyrocketed. For Kenya(B2 negative) and Nigeria, Eurobond yields have increased by around 150-200 basis points over the period. However, many local government securities held by African banks will have lower maturities than in developed countries – with some less than one year – which have had a more modest market value impact. Given the stability of deposits, high volumes of readily available liquidity, and potential liquidity assistance from central banks, we expect most banks will be able to wait for these investments to mature without incurring losses from having to sell them at depressed market values. Investments held at amortised cost are generally not substantial. Investments held at amortised cost are generally not substantial, standing at 105% of tangible common equity3 . Investments held at amortised cost (i.e. held-to-maturity) are not easily visible in banks’ accounts. The banks are not required to book an impairment from drops in market value (mark-to-market losses) either in their capital or profit and loss accounts, unless the bank recognises that the instrument’s loss of value is attributable to more permanent underlying credit issues faced by the bond issuer. As market interest rates rise, the value of the these bonds drops accordingly. This results in unrealised losses for banks, which will only be realised if and when banks are forced to sell these bonds. We understand that many African banks also use hedges to limit the fair value volatility of “held-to-maturity” investments.