African Banks Hold Government Debt That Exceeds Their Equity

Proshare

Friday, September 25, 2020 12:05 PM / By Proshare Research / Header Image Credit: African Markets

 

Proshare Nigeria Pvt. Ltd.


Rising pressure on African governments occasioned by the COVID-19 pandemic is weighing heavily on the domestic banks in Africa. According to a report published by Moody's Investors Service on the banking sector in Africa, the rising pressure is so because the creditworthiness of the banks is inextricably linked to the financial strength of the government in the country where they are based. As a result, when sovereign creditworthiness deteriorates, in the majority of cases bank creditworthiness comes under pressure.

 

The report states further that African banks are heavily invested in government bonds. African banks hold government debt that typically exceeds 1.5x to 2x their equity and as such a government default would therefore take a significant toll on the banks.

 

African banks, as reported, hold significant amounts of sovereign debt primarily to meet their liquidity requirements, but also because of their limited appetite for riskier private-sector loans. Since 1999, exposure to sovereign debt in advanced economies ranged between 6% and 9% of total assets, while for emerging and developing economies it ranged between 15% and 21%, according to the IMF, Moody's stated

 

More specifically for the big African banking systems under Moody's coverage, exposure to government securities are in line or exceed the above mentioned ranges, with South African banks' sovereign debt exposure at over 15% of total assets (with the percentage doubling over the past 12 years), over 21% for Nigerian banks and over 35% for Egyptian banks. Such exposures typically exceed 1.5x the banks' capital (see Exhibit 2), but if we also include other related exposures, such as loans to government departments and to state-owned enterprises, the potential exposure is much higher.

 

Proshare Nigeria Pvt. Ltd.

 

Furthermore, Moody's stated that Roughly 90% of bank rating actions in Africa over the past six months have followed a sovereign rating action. Most. The creditworthiness of African banks is inextricably linked to the financial strength of the government in the country in which they are based, to the extent that when sovereign credit ratings are downgraded, bank ratings will tend to follow.

 

Proshare Nigeria Pvt. Ltd.


Proshare Nigeria Pvt. Ltd.


Related News - Rating Agencies on Banks

  1. S and P Global Ratings Affirmed First Bank of Nigeria Ltd Ratings, Outlook Stable
  2. Fitch Affirms Coronation Merchant Bank's Rating at B-
  3. Fitch Rates Coronation Merchant Bank Limited at ''B-''; Outlook Negative
  4. Moody's Announces Completion of a Periodic Review of Ratings of Union Bank of Nigeria Plc
  5. Moody's Announces Completion of a Periodic Review of Ratings of Sterling Bank Plc
  6. Moody's Announces Completion of a Periodic Review of Ratings of Access Bank Plc
  7. Moody's Announces Completion of a Periodic Review of Ratings of Fidelity Bank Plc
  8. Moody's Announces Completion of a Periodic Review of Ratings of FCMB Limited
  9. Moody's Announces Completion of a Periodic Review of Ratings of First Bank of Nigeria
  10. Moody's Announces Completion of a Periodic Review of Ratings of Zenith Bank Plc
  11. Moody's Announces Completion of a Periodic Review of Ratings of Guaranty Trust Bank Plc
  12. Moody's Announces Completion of a Periodic Review of Ratings of UBA Plc
  13. Moody's Announces Completion of a Periodic Review of Ratings of Bank of Industry
  14. Moody's Announces Completion of a Periodic Review of Ratings of Bank of Industry
  15. Coronavirus Shock Likely to Reduce Some Banks' Capital, Increase Credit Vulnerabilities
  16. Fitch Maintains Access Bank's 'Aplus (nga)' National Long-Term Rating on RWN
  17. Fitch Revises 2 Nigerian Banks' National Ratings
  18. Banking System Outlook Update - Nigeria Outlook Changes to Negative Due to Oil Price Collapse
  19. Various Rating Actions On Nigerian Banks By S and P Following Sovereign Downgrade; Outlooks Stable
  20. Nigerian Banks at Severe Risk from Oil Price Slump, Coronavirus
  21. Fitch Downgrades 3 Nigerian Banks to 'B', Places All 10 Banks on Negative Watch
  22. Outlooks On Six Nigerian Banks Revised To Negative After Same Action On Sovereign
  23. Fitch Revises Outlook on UBA Subsidiaries to Negative on Parent Action
  24. Fitch Revises Outlook on 4 Nigerian Banks to Negative on Sovereign Action
  25. Moody's Affirms Bank of Industry Ratings, Changes Outlook to Negative from Stable
  26. Moody's Affirms Ratings of Nigerian Banks Following Action On The Nigerian Government
  27. Fitch Affirms Union Bank of Nigeria Plc at 'B-'; Outlook Stable
  28. Fitch Affirms Stanbic IBTC Bank at 'AAA(nga)'
  29. Fitch Affirms Zenith Bank Plc at 'B' plus; Outlook Stable
  30. Fitch Affirms Bank of Industry at 'B' plus; Outlook Stable
  31. Fitch Affirms United Bank for Africa PLC at 'B' plus; Outlook Stable
  32. Fitch Affirms Access Bank at 'B'; Stable Outlook
  33. Fitch Affirms Guaranty Trust Bank at 'B' plus; Stable Outlook
  34. Fitch Revises Outlook on FBNH to Stable; Affirms at 'B-'
  35. S and P Global Ratings Affirmed ETI And Ecobank Nigeria Ltd Ratings; Outlook Stable
  36. Fitch Rates Access Bank's Tier 2 Subordinated Debt Final 'A(nga)'
  37. Fitch Affirms Ecobank Transnational Inc at 'B'; Outlook Stable
  38. Access Bank 'B and B' Ratings Affirmed; Outlook Stable

Proshare Nigeria Pvt. Ltd.
READ MORE:
Related News
SCROLL TO TOP