The regulatory environment of the National Bank of Ethiopia will not open for foreign banks or subsidiaries and will still require private banks to place 27 percent of their loan portfolios in NBE bonds, in order to finance the Development Bank of Ethiopia, a new study revealed.
42, a Fitch Group company, under the title ‘Industry Forecast – Banking Sector Will Maintain Double Digit Growth’ stated that the banking sector will register robust growth, while public banks will continue their business leadership.
Results from the study indicated that loans and deposits in the Ethiopian commercial banking sector will expand at a robust rate over the year ahead, continuing a long trend of double-digit growth. It said that high economic growth, even as political risk remains elevated, and a sizable population will be the key driver of growth in the sector.
Ethiopia’s commercial banking sector will post a steady expansion over 2017, with both loan and deposit growth continuing on a strong upward trend.
Robust economic growth will continue to raise disposable incomes, boosting demand for credit and transaction accounts.
“We forecast loan and deposits to grow by 27.0 percent and 28 percent respectively in 2017, keeping growth in line with the annual average of 28.1 percent and 25.8 percent over the past 10 years,” the BMI research report estimated.
According to the report, loans will continue to post double digit growth over a multi quarter time horizon as the economy diversifies away from agriculture and disposable incomes rise.
The country will still post strong economic growth and will see higher value added industries become increasingly important economic drivers over the years ahead.
As a result, demand for credit from the private sector will rise as firms invest into new operations and expand existing ones. Already the proportion of new loans issued during the first quarter of 2016/17 were directed primarily towards trade and industry, this is expected to continue over 2017 which will boost loan growth.
“While Ethiopia will see growth remain below historic levels, the country will still post high growth levels compared to the wider Sub Saharan Africa (SSA) region, and this will support steady deposit growth over 2017 and onwards,” it explained.
The research document stated that economic growth will tick up from 5.4 percent in 2016 to 6.0 percent in 2017 which is considerably higher than the SSA average of 1.8 percent and 3.1 percent over the same period. The stated economic growth is lower than the projected by the government and other international organizations like IMF.
The report added that the number of transaction accounts in Ethiopia have risen steadily in recent years and this will also receive a boost from high urbanization rates.
It said that while Ethiopia’s banking sector will continue to be heavily regulated by the government, we expect private banks to rise in prominence over the next several years.
The public sector holds a disproportionate share of total capital with two public banks holding around 48.9 percent, compared to 16 private banks.
BMI research indicated that while Ethiopia’s non-performing loan (NPL) ratio has risen over recent years, “we believe that asset quality (quality of loans) will improve as the agricultural sector recovers from El Niño-induced droughts.”
It added that the NPLs to total loans have risen from 2.0% in June 2014 to 3.5 percent in March 2016 but will remain below the statutory benchmark of 5.0 percent of National Bank of Ethiopia standard. Credit disbursed to the agricultural sector constituted 15.9 percent of total client loans issued by Ethiopia’s banks in the first quarter of 2016/17, and increasing output from the sector as rainfall normalizes and will see farmers’ ability to service loans improve.
Domestic trade, industry and international trade have taken the major share on loan disbursement by 23.5, 22.3 and 16.1 percent respectively.
In terms of the hard currency business it said that the banking system’s low outstanding foreign borrowing and the birr’s gradual pace of depreciation will keep foreign exchange exposure limited.
The birr will depreciate modestly from ETB 21.9 /USD in 2016 to ETB 23.3/USD in 2017, as the National Bank of Ethiopia (NBE) continues to maintain tightly managed floats.
“That said, according to the IMF the birr is overvalued by 20 – 40 percent and we believe that low foreign reserves will present some foreign exchange liquidity shortages, especially for private banks,” it added.
BMI Research is a research firm that provides macroeconomic, industry and financial market analysis. It is part of Fitch Group. Fitch is one of the first three rating agencies that evaluated Ethiopian economy three years back.