The National Bank of Ethiopia (NBE), which oversees the financial sector, reports a significant decline in the proportion of state firms with outstanding credit during the financial year 2023/24. To tackle the issue of nonperforming loans (NPLs), the NBE claims to be collaborating with certain banks.

In its recently published 2024 Financial Stability Report, the NBE revealed that the percentage of state-owned enterprises (SOEs) with outstanding loans and advances from the banking sector decreased during the specified financial year.

As SOEs and regional governments are the largest debtors in the nation, the government has recently decided to prevent them from acquiring new loans, as this has proven challenging for the state-owned financial giant, Commercial Bank of Ethiopia.

The latest report, the second of its kind, notes that the banking industry’s loans and advances remain concentrated due to the historical trend of extending large loans to significant state enterprises and regional governments.

“The top 10 borrowers in the banking sector accounted for 14.7 percent of total loans and advances at the end of June 2024, a notable decrease from 23.5 percent a year earlier when considering large state-owned enterprises,” the report stated.

However, the concentration ratios are significantly lower when SOEs are excluded. The top 10 private borrowers accounted for only 3.5 percent of bank loans and advances.

Despite constituting just 0.5 percent of the total, large borrowers with credit exposure exceeding 10 million birr held over three-quarters (74.8 percent) of all loans from the banking industry, marking an increase from the previous year.

During the reporting period ending June 30, 2024, the overall amount of outstanding loans and advances rose by 14.5 percent to 1.5 trillion birr.

The report indicates that most banks, as well as the banking system overall, are considered adequate, as their NPL percentage remains below the NBE’s threshold of 5%.

However, the report also highlights systemic risks and the subpar performance of certain banks. “Nevertheless, in some banks, NPLs exceeded this minimum. As a result, the NBE is collaborating with them to address the underlying challenges,” it noted.

The ratio of NPLs to gross loans slightly increased to 3.9 percent for the year ending June 30, 2024, up from 3.6 percent in the same period in 2023, but still well below the regulatory maximum of 5 percent.

At the end of June 2024, the total assets of the financial sector reached over 3.4 trillion birr, reflecting a 15.1 percent increase from the previous year. These assets represented 29.5 percent of nominal GDP, down from 37.6 percent at the end of June 2023.

Total bank deposits grew by 15.4 percent, primarily driven by an increase in demand for time deposits, compared to a growth rate of 24.6 percent in the year leading up to June 2023.

The report indicated that loans and bonds expanded by 16.1 percent as of June 2024, a decline from the annual growth rate of 24.3 percent recorded up to June 2023.

It also noted that GDP increased at a faster pace than both deposits and loans during the reporting period.

“As a result, the share of deposits in GDP decreased to 21.6 percent from 24.8 percent at the end of June 2023, while the share of loans and bonds fell from 21.7 percent to 19 percent,” the report elaborated.

The share of loans in GDP remains low in an international context, and there is an objective to significantly increase it in the medium term to reduce credit concentration risk.

Total assets of commercial banks reached 3.3 trillion birr at the end of June 2024, reflecting a growth of 15.2 percent from the previous year, although this increase is lower than the 19.9 percent recorded in June 2023.

The main contributors to the growth of total assets were loans, advances, and bonds, which collectively represented the largest share, accounting for 66.9 percent of total assets.

According to the NBE paper, the ratio of loans to deposits remained stable throughout the reporting period, declining by just 0.4 percentage points to 60.2 percent, while the ratio of loans and bonds to deposits increased slightly from 87.4 percent to 87.9 percent compared to the previous year.

However, these percentages remain alarmingly high, indicating that nearly all deposits are tied up with borrowers, leaving minimal room for significant and unexpected withdrawals.

In adverse conditions, the high ratios could lead to a liquidity crisis, as they result in relatively low levels of liquid assets, the report cautioned.

It highlighted that the increase in lending, particularly to the construction, import, and household sectors, may have contributed to the decline in the liquidity ratio.

“While the increased lending aligns with the general policy to promote lending to key sectors of the economy, the NBE continues to advise against exceeding a loan-to-deposit ratio of 85 percent to ensure the sector remains resilient to adverse liquidity shocks,” it added.

By the end of June 2024, only 0.4 percent of the banking sector’s depositors held 58.5 percent of total deposits.

State-owned enterprises are among the largest depositors, contributing to credit concentration.

A limited portion of banks’ liquid assets consisted of high-quality liquid assets, such as cash. As a result, some institutions were facing real-time liquidity constraints.

By the end of June 2024, the financial sector was more sensitive than it had been the previous year. If the same shock had affected 18 banks, they would have been unable to meet the minimum liquidity requirements for June 2023; currently, 20 institutions face this issue.

The total income of the banking sector reached 361.4 billion birr for the year ending in June 2024, up from 297.5 billion birr the previous year.

Despite net income before tax rising by 18.4 percent to 57.9 billion birr at the end of June 2024, compared to 48.9 billion birr a year earlier, the overall profitability of the banking industry decreased slightly, although it is still considered adequate.