Thursday 16, February 2017 by Matthew Amlôt

S&P: Banks in the Levant and North Africa continue to face hurdles in 2017

Banks in the Levant and North Africa have broadly exhibited a stable credit profile in an unstable environment in 2016, says S&P in a report. However the agency expects banking systems in Egypt, Jordan, Lebanon, Morocco, and Tunisia to continue to face obstacles. For further details, see Continued Hurdles Expected In 2017 For Banks In The Levant And North Africa, published today.

"Despite economic problems and political uncertainties in the region, no rated bank operating in the region has seen its stand-alone credit profile worsen over 2016," said S&P Global Ratings credit analyst Stéphanie Méry.

Central to S&P’s analysis is the evolution of factors that feed into our banking industry country risk assessments. Macroeconomic vulnerabilities and political risks will remain key drivers of our ratings, as the situation in the region has further deteriorated in 2016, with the Syrian crisis and sluggish regional economic growth.

High sovereign exposures remain the most significant risk looming over banks in 2017, especially in Lebanon, Jordan, and Egypt.

"Domestic banks bridge the significant financing needs of the government, and are consequently highly exposed to the sovereign compared with their equity base," said S&P Global Ratings credit analyst Pierre Hollegien. "Governments' creditworthiness therefore weighs negatively on banks' ratings."

Beyond typical constraints faced by banks in the Levant and North Africa--such as internal and external political risks--we see four key credit factors for bank ratings in 2017: sovereign exposures, foreign currency risk, asset quality, and asset concentration.

Foreign currency risk in the region will remain generally limited, except in the specific case of the Central Bank of Egypt's decision to float the pound, which has raised issues for some banks in the region. In addition, concentration in banks' exposures by sector or issuer remains a key concern.

Finally, asset quality recognition and trends in nonperforming loan ratios are also central to our rating analysis. Impaired loan recognition, coupled with sectorial concentration, blur asset quality assessment in some countries.

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