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Morocco's banks appear well placed to cope with economic slowdown and the outlook for the sector is stable, says Fitch Ratings. We forecast GDP growth of 2.9% in 2016, which is lower than the robust 4.6% estimate for 2015, which was held up by exceptionally strong agricultural output. The banks should benefit from overall resilient macro and business stability. Morocco's banks are largely domestic and rely on the local economy for 80% of their business.


The stable sector outlook for the largest Moroccan banks balances resilient profitability against modest capital ratios given substantial risk appetite in volatile African operating markets and modest asset quality.


Credit growth is modest, with the leading banks reporting lending up an annual 1.2% to end-June 2015. The majority of the banks have avoided the high risk, aggressive expansion strategies common to many emerging market banks.


We expect non-agricultural output to pick up in 2016 and domestic loan demand in some segments to show solid growth. This should translate into higher revenues and help stabilise loan impairment charges for the banking sector. Car exports are growing, manufacturing output is up and the energy, commerce, trade and retail housing sectors are all experiencing positive loan demand, which we believe will balance difficulties faced by the tourism and real estate sectors.


Identifying good quality borrowers can prove difficult and Fitch has long highlighted concentration risks in the Moroccan banking sector. Corporate exposures in excess of the 10% regulatory capital threshold are not uncommon at the major Moroccan banks and their 20 largest exposures often account for 100% to 200% of banks' core capital, as defined by Fitch. Exposures to the Moroccan state are also high. Credits for households and SMEs are still higher risk.


Asset quality ratios are weak, with impaired loans representing around 10% of total lending. This is considerably higher than the 5% average reported by emerging banking systems captured in our EM Datawatch coverage. Major banks report tier 1 capital adequacy ratios in excess of 9%, but we consider loss absorption capacity to be modest, given the level of concentration and impaired loan risks they face, notably in their sub-Saharan African subsidiaries. Banks are profitable but boosting capital through retained earnings is unsteady because performance metrics can be affected by large, single name, loan loss impairment charges.