OVERVIEW
— We are maintaining our BICRA on Morocco at group ‘7’.
— The expected slowdown in the economy will dampen credit demand and consequently limit economic imbalances. Our concerns over real estate sector risks have also reduced. Consequently, we raised our economic risk score to ‘7’ from ‘8’.
— At the same time, we believe liquidity in the Moroccan banking system has deteriorated in recent years as a result of a rapid increase in lending without a proportionate increase in the deposit base. We therefore lowered our industry risk score to ‘6’ from ‘5’.
BICRA ACTION
PARIS (Standard & Poor’s) Oct. 18, 2012–Standard & Poor’s Ratings Services said today that it is maintaining its Banking Industry Country Risk Assessment (BICRA) on the Kingdom of Morocco (foreign currency BBB-/Negative /A-3, local currency BBB /Negative /A-2) at group ‘7’. For the two main BICRA components, we are revising the economic risk score to ‘7’ from ‘8’, and the industry risk score to ‘6’ from ‘5’.
RATIONALE
We believe the economic imbalances built up in Morocco over the past decade have reduced. Real estate prices have remained broadly flat over the last four years and credit demand is slowing down after years of sharp increase.
Private sector credit growth has been strong at an average of 15% over the past five years. It is currently slowing as a result of banks’ more conservative underwriting standards and lower economic growth. Morocco is highly dependent on the EU’s economic trend, and this factor, coupled with our forecast of a slowdown in Moroccan real GDP growth to 3% in 2012, will dampen credit demand.
Our economic risk score of ‘7’ factors in our revised assessment of “economic imbalances” to “intermediate risk” from “high risk,” as our criteria define the terms. Our scores for “economic resilience” and “credit risk in the economy” remain unchanged at “very high risk.”
Our industry risk score of ‘6’ reflects our belief that liquidity in the Moroccan banking system has deteriorated in recent years. The funding profile of domestic banks remains sound, reflecting a minor share of net external debt funding to total loans–close to zero at the end of 2011–and the banks’ still adequate ratio of loans to deposits at 89% on Dec. 31, 2011. Moroccan banks have satisfactory funding metrics compared with other systems, which helped them finance their rapid expansion over the past five years. Nevertheless, the banks’ loan-to-deposit ratio is steadily increasing because the pool of available deposits can no longer accommodate the growing size and pace of lending activities. We expect this funding ratio to deteriorate further over time, as we expect a noticeable increase in lending without a proportionate increase in the deposit base. We also expect the total flow of deposits from Moroccan expatriates, which made up about 20% of the system’s deposits in March 2012, to contract in 2012 because of the recession in Europe.
We expect banks to tackle their liquidity needs by increasingly tapping capital markets, with further recourse to subordinated debt, short-term commercial paper, or repurchase agreements. Financial institutions, however, face narrow domestic debt markets and limited access to external markets. This situation may present liquidity challenges over time.
To ease this chronic domestic liquidity squeeze the Moroccan central bank, Bank Al-Maghrib, has recently been providing extensive liquidity support to the banking system by providing repo facilities of up to three months–Bank Al-Maghrib refinancing represented 6% of banks’ funding in March 2012. The central bank has also recently extended eligible collateral for this facility to small corporate credits, in addition to government debt. It finally cut its reserve requirements for banks by a third on Sept. 26, 2012. Our revision of the industry risk score for Morocco therefore reflects the change in our assessment of the country’s “systemwide funding” to “high risk” from “intermediate risk.” It also continues to factor in our opinion that Morocco has “intermediate risk” in “competitive dynamics” and “high risk” in “institutional framework.”
Our criteria define the BICRA framework as one “designed to evaluate and compare global banking systems.” A BICRA analysis for a country covers rated and unrated financial institutions that take deposits, extend credit, or engage in both activities. The analysis covers the entire financial system of a country while considering the relationship of the banking industry to the financial system as a whole. A BICRA is scored on a scale from 1 to 10, ranging from the lowest-risk banking systems (group ‘1’) to the highest-risk (group ’10’). Other countries in BICRA group ‘7’ include Indonesia, Jordan, Portugal, El Salvador, and Russia.
RELATED CRITERIA AND RESEARCH
— Analytical Linkages Between Sovereign And Bank Ratings, Dec. 6, 2011
— Banks: Rating Methodology And Assumptions, Nov. 9, 2011
— Banking Industry Country Risk Assessment Methodology And Assumptions, Nov. 9, 2011
— Sovereign Government Rating Methodology And Assumptions, June 30, 2011
— Bank Resolution Regimes: Potential Rating Implications As Sovereign Support Frameworks Evolve, March 16, 2011
— Bank Capital Methodology And Assumptions, Dec. 6, 2010
— Understanding Standard & Poor’s Rating Definitions, June 3, 2009
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