(MENAFN- Capital Intelligence Ltd) Capital Intelligence Ratings (CI Ratings or CI) today announced that it has raised the Long-Term Foreign Currency Rating (LT FCR) and Short-Term Foreign Currency Rating (ST FCR) of Banque Centrale Populaire (BCP) to ‘BBB-’ and ‘A3’ from ‘BB+’ and ‘B’, respectively. At the same time, CI Ratings has affirmed the Bank’s BSR at ‘bb’, and the CFS rating at ‘bb+’. The Outlook for the LT FCR and BSR remains Stable. The upgrade of the LT FCR corrects an error in the application of CI’s notching guidelines for incorporating extraordinary support into issuer credit ratings. As ST issuer ratings are mapped from LT issuer ratings under CI’s approach, the ST FCR is also raised.
The two-notch uplift of the Bank’s LT FCR above the BSR (corrected from one notch) reflects the high likelihood of the Bank receiving extraordinary support from the authorities in the event of need given its shareholder base and, inter-alia, its classification in domestic law as a strategically important company in Morocco, as well as its leading 25% market share of customer deposits. The government maintains a ‘Golden’ share in BCP, which gives it the power to veto and/or outvote all other shares, and hence the power to dictate ownership and direction. BCP is also classified as a domestically systemically important bank (D-SIB) in Morocco.
The BSR is derived from a CFS rating of ‘bb+’ and an adjusted Operating Environment Risk Anchor (OPERA) of ‘bb’, which is lower than the OPERA of Morocco (‘bb+’) due to the Bank’s exposure to assets in higher risk African countries. Similar to its major competitor banks in Morocco – Attijariwafa and Bank of Africa – BCP has been expanding its banking operations in the Sub-Saharan African region, and is now present in 18 African countries. Approximately 80% of assets and loans are Morocco-based. The African activities generate heightened credit risks, where 18% of consolidated loans are located, although they provide more opportunities for growth and higher margins.
The CFS is underpinned by the Bank’s satisfactory profitability at the operating and net levels, its stable revenue base, adequate loan loss coverage, good liquidity profile, and a very strong franchise in Morocco. BCP has a diversified earnings base within its Moroccan operations as well as through its African subsidiaries. Of gross operating income and net profit, 74% and 82% was generated by Moroccan based activities in 2023, respectively. The Bank has a good funding and liquidity profile, supported by its dominant market position in customer deposits in Morocco.
BCP’s principal credit challenges are its modest capital buffer, a high level of NPLs, and an important asset base outside of Morocco in higher risk sovereigns in Sub-Saharan Africa. The level of NPLs remains slightly above the Moroccan banking sector. However, loan loss reserve (LLR) coverage is satisfactory at close to full coverage. Moreover, the percentage of Stage 2 loans against gross loans declined again in 2023 and is at a moderate level. The operating environments in both Morocco and, to a greater degree, in a number of African markets where the Bank is active in, remain challenging. This reflects global pressure on growth and higher interest rates. However, Moroccan economic growth improved in 2023 due to improving net exports and recovering domestic demand. The short- to- medium term outlook appears favourable on the back of continued recovery in domestic demand supported by declining inflation, improving private investment, and the completion of significant infrastructural projects
Group BCP is a cooperative type banking organisation, with cross shareholdings within the principal body of BCP and regional banks. The major part of the Group consists of BCP and eight member banks, or Banques Populaires Regionales (BPRs). BCP (which is the legal entity of the Group) plays a central role in the Group and is entrusted with two main tasks: as a credit institution authorised to carry out all banking transactions, and as a ‘central bank’ to the BPRs.
Operating profitability has been satisfactory for some time and improved further in 2023 due to increased gains from securities as market conditions improved, in addition to higher net interest income (NII) and fee income. The net interest margin is good, supported by low-cost funding through the Bank’s large customer deposit base and significant volume of CASA deposits. Net profit and the ROAA both increased in 2023 despite the loan impairment charge rising; the cost of risk remains elevated. BCP’s profitability is in line with the peer group.
Q1 24 net profit was 47% higher against Q1 23. NII and fee income were slightly higher but gains from financial instruments at fair value through the P&L increased significantly (linked to trading and debt securities). The cost of risk was higher. For the full year, we expect a further improvement in returns.
BCP’s capital ratios are modest although slightly above its two major competitors, Attijariwafa Bank and Bank of Africa. NPLs are currently adequately covered by LLRs, but the Bank’s overall absorption buffer is not significant. BCP’s buffer above the regulatory minima is somewhat narrow, while internal capital generation has been moderate due to a somewhat high dividend payout ratio. However, in regard to the latter, it should be noted that there is cross shareholding between BCP and the BPRs. Moroccan Law requires at least 34% of BCP be owned by the regional banks. The regional banks’ stake is currently at 35.4% and they are BCP’s main shareholder.
The funding base is stable and well diversified, with the bulk of assets funded by its steady and core customer deposit franchise. Due to its strong deposit franchise and its mutual status, the Bank has a very granular deposit base with little customer deposit concentration. Funding is further supported by medium- and long-term facilities from the local market, subordinated debt and bank deposits. The level of liquid assets is relatively good. Other main liquidity ratios are at comfortable levels and better than peer banks. Liquidity is expected to remain stable over the next year.
Rating Outlook
The Stable Outlook indicates that BCP’s ratings are likely to remain unchanged over the next 12 months, and balances challenges relating to the operating environment against the expectation that the Bank will maintain its financials at a satisfactory level this year relative to its current ratings.
Rating Dynamics: Upside Scenario
The likelihood for an upward revision in the ratings or the Outlook is currently unlikely. A favourable rating action in the future would require improvement in the Bank’s capital adequacy and loan asset quality metrics.
Rating Dynamics: Downside Scenario
A significant weakening of capital ratios and loan asset quality that the Bank may not be able to correct in a reasonable period of time could lead to a lowering of the ratings.
Contact
Primary Analyst: Darren Stubing, Senior Credit Analyst; E-mail: ...
Secondary Analyst: Farah Khan, Senior Credit Analyst
Committee Chairperson: Morris Helal, Senior Credit Analyst
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This rating action follows the identification of an error in the application of rating criteria. For further details see ‘Error Identification Notification: Moroccan Banks’ in the Errors and Corrections section of CI’s website ( Ratings on the entity were first released in April 1997. The ratings were last updated in August 2023. The ratings and rating outlook were disclosed to the rated entity prior to publication and were not amended following that disclosure.
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