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Fitch Ratings has affirmed Bank of Africa's (BVC:BOA) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) at 'BB' with Stable Outlooks. Fitch has also affirmed BOA's Viability Rating (VR) at 'bb-' and National Long-Term Rating at 'AA-(mar)' with a Stable Outlook.


Fitch Ratings has withdrawn BOA's Support Rating of '3' and Support Rating Floor of 'BB' as they are no longer relevant to the agency's coverage following the publication of its updated Bank Rating Criteria on 12 November 2021. In line with the updated criteria, we have assigned BOA a Government Support Rating (GSR) of 'bb'.



Key Rating Drivers

BOA's 'BB' IDRs are driven by a moderate probability of support from the Moroccan sovereign (BB+/Stable), considering BOA's systemic importance as the third-largest Moroccan bank but also the limitations of the sovereign's financial flexibility. The Stable Outlook mirrors that on the sovereign rating.


BOA's VR considers its solid franchise in Morocco and pan-African presence, which brings diversification benefits to the business model but also exposes it to less-developed markets and more volatile operating conditions. BOA's stable performance record and fairly strong funding and liquidity are counterbalanced by a weak capital position and asset quality pressures heightened by the fallout from the Covid-19 pandemic.


BOA's National Rating is in line with its direct local peers but below the subsidiaries of large French banking groups as these benefit from potential support from their foreign shareholders.


Sovereign Support: Fitch considers BOA a domestic systemically important bank (D-SIB) in Morocco, based on the bank's 13% share of loans and deposits at end-1H21. BOA's GSR is therefore in line with the D-SIB GSR of 'bb'.


Adequate Franchise in Morocco: BOA has a strong franchise and D-SIB status in its home market (which accounted for 67% of total assets at end-1H21) but its 13% market share is below that of the other two D-SIBs. BOA operates across 32 countries (including 20 across Africa), which contributed 47% to total net income in 1H21, well above D-SIB domestic peers.


Improvements in Risk Profile: Evidence of improving risk profile include greater harmonisation in risk controls across the group, a cautious approach to growth in recent years in a drive to preserve capital, as well as several rounds of capital instrument issuances including core capital through right issues.


Asset Quality Pressures: BOA's Stage 3 loans ratio (end-1H21: 9.8%) is higher than at other major Moroccan banks due to higher impairments at its African subsidiaries. Stage 2 loans are high at 7.8% of gross loans but remain broadly in line with the peer average. Total reserve coverage of Stage 3 loans (87%) is reasonable. Our assessment also considers non-loan assets primarily government securities, both Moroccan and those held in the African subsidiaries.


Profitability Strongly Recovering: BOA's operating profit/risk-weighted assets ratio recovered to 1.7% in 1H21 from 0.7% in 2020, primarily owing to lower loan impairment charges, which consumed 37% of pre-impairment operating profit vs. 66% in 2020. BOA's cost to income ratio of 53% in 1H21 was above the sector average of 49%.


Low Core Capitalisation: BOA's common equity Tier 1 (CET1) ratio of 8.7% at end-1H21 was lower than the sector average (9.2%) and managed tightly against the minimum regulatory requirement (7.5% until June 2022). BOA carried out capital-strengthening measures in 2019 and 2020 and issued MAD1 billion of additional Tier 1 securities in 3Q21. The latter contributed about 40bp uplift to the Tier 1 ratio of 9.1% at end-1H21.


Good Funding and Liquidity: BOA is primarily funded by granular deposits. Liquidity is adequate with a sound 92% loans/deposits ratio and a 171% liquidity coverage ratio at end-1H21. In 1H21 deposits grew by 3.3% and supportive liquidity conditions helped BOA reduce its reliance on Central Bank funding (end-1H21: 5% of total funding; end-1H20: 9%).


Real GDP Growth of 3.2%: Pressures on the operating environment from the pandemic have decreased and Fitch expects real GDP growth of 3.2% in both 2022 and 2023. An easing of the disruptions from the health crisis and improved rainfall following a two-year drought will support the rebound. We expect fiscal policy to remain expansionary until at least 2023.



Rating Sensitivities

Factors that could, individually or collectively, lead to negative rating action/downgrade:
BOA's IDRs and GSR would be downgraded if the Moroccan state's ability or propensity to support the bank weakened.


BOA's VR is sensitive to further deterioration in the operating environment and adverse developments surrounding the future of the health crisis. The VR could be downgraded if BOA's asset quality deteriorates markedly, particularly if the stage 3 loans ratio sustainably exceeds 14%, resulting in a significant weakening of the bank's profitability and capital position. A decrease in the CET1 buffers over the minimum regulatory requirements would also be rating-negative.


The National Rating could be downgraded if the bank's Local Currency IDR was downgraded and Fitch believes BOA's creditworthiness has weakened relative to other Moroccan issuers.


Factors that could, individually or collectively, lead to positive rating action/upgrade:
An upgrade of BOA's IDRs could be primarily driven by an upgrade of the GSR. However, the latter would require an upgrade of the sovereign's IDRs. This is not our base case given the Stable Outlook on Morocco's sovereign rating.


An upgrade of the VR is unlikely in the near term, although it could result from a sustained improvement in the operating environment in the medium term or a sustained material strengthening of the bank's earnings capacity and capital position.


The National Rating could be upgraded if Fitch believes BOA's creditworthiness has improved relative to other Moroccan issuers.



The operating environment score of 'bb-' has been assigned above the 'b' category implied score, due the following adjustment reasons: 'macroeconomic stability' (positive) and 'sovereign rating' (positive).


Best/Worst Case Rating Scenario

International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579



The principal sources of information used in the analysis are described in the Applicable Criteria.


Public Ratings with Credit Linkage to other ratings

BOA's IDRs are driven by a moderate probability of support from the Moroccan sovereign.


ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit neutral or have only a minimal credit impact on BOA, either due to their nature or the way in which they are being managed by BOA. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.


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