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FINANCIAL INSTITUTIONS

OUTLOOK Banking System Outlook Update – Morocco


27 April 2020
Downside risks from coronavirus pandemic
tips outlook to negative
We changed our outlook for the Moroccan banking system to negative from stable to reflect
our view that the banks will face weakening loan quality and profitability as the coronavirus
pandemic weighs on parts of the economy. The outbreak adds to low rainfalls that are
Analyst Contacts
hurting the agriculture sector. Although capitalisation is relatively modest for Moroccan
Mik Kabeya +971.4.237.9590 banks, they benefit from good access to funding and liquidity, which will help buffer the
AVP-Analyst
mik.kabeya@moodys.com impact of the deteriorating economy.
Lea Hanna +971.4.237.9692 The coronavirus impact and weak agriculture performance will slow economic
Associate Analyst
growth. The coronavirus pandemic will hurt economic growth in Morocco, particularly in
lea.hanna@moodys.com
the confidence-sensitive tourism sector, and will reduce exports to Europe, where the cyclical
Elisa Parisi-Capone +1.212.553.4133
automotive industry has been particularly hard hit. The impact will be partially offset by
VP-Senior Analyst
elisa.parisi-capone@moodys.com lower energy import prices, given that Morocco (Ba1 stable) is an oil importer.
Antonello Aquino +44.20.7772.1582 The government's early and comprehensive response will support the economic recovery in
Associate Managing Director
the aftermath of the crisis. However, depending on the duration of the crisis, the downside
antonello.aquino@moodys.com
risks to our current 2.0% real GDP growth forecast for 2020 (from 2.4% in 2019) are
Sean Marion +44.20.7772.1056
MD-Financial Institutions
increasing, reflecting both the coronavirus shock and continued dry weather conditions
sean.marion@moodys.com partially mitigated by the benefits of the reduction in oil price.

Credit growth will be around 5.0% in 2020, down from 5.7% in 2019, reflecting a balance
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between moderate growth in Morocco and relatively faster cross-border growth in Sub-
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Saharan Africa to which banks are exposed.
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We expect loan performance to weaken in light of the coronavirus pandemic.We
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expect problem loans to rise as the economic challenges reduce borrowers' repayment
EMEA 44-20-7772-5454 capacity. Coronavirus-related deterioration will add to existing high problem loans due to
borrower concentrations, exposure to small and midsize enterprises (SMEs) and Sub-Saharan
Africa. We expect systemwide problem loans to increase to between 9.0% and 11.0% of total
loans in 2020, from 8.1% at the end of 2019. Loan-loss reserves are healthy, representing
93% of problem loans at the end of 2019.

Borrowers in tourism (hotel and restaurant sectors represent 1.5% of systemwide lending at
end-2019), trade (6.4%) and transportation sectors will be worst affected by the coronavirus
outbreak, and SMEs are particularly vulnerable. At the end of 2018, lending to SMEs was
a sizeable 37% of lending to corporates, which, in itself, represents around 65% of total
lending. The manufacturing sector (9.7% of systemwide lending at end-2019) may also face
challenges as exports to Europe decline.
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The banks' fast growing exposure to Sub-Saharan African countries, which have a higher risk profile than Morocco, also poses risks. Sub-
Saharan African credit accounted for 17.5% of the lending of the three rated Moroccan banks with pan-African activities at end-2019.

Government’s comprehensive response to the pandemic will help limit the extent of asset quality deterioration. Measures
include the set up of an economic emergency fund, the postponement of tax payment deadlines and a monthly stipend for employees,
in addition to family allowances and health coverage.

Funding will remain strong and stable, and liquidity will stay high. Moroccan banks have stable funding profiles and high liquidity
buffers, supported by a strong, low-cost and diversified domestic deposit base. As of December 2019, banks' market funds reliance was
manageable at 14.2% of tangible banking assets, and liquid banking assets were high at 32.3%. Stable deposits represent the bulk of
the funding, with low-cost current accounts representing 61% of total deposits, saving accounts 17%, time deposits 18% and other
deposits 4% at the end of 2018.

Measures announced by the Moroccan central bank on 30 March will also provide banks with easier and wider access to funding so
to meet cash calls from affected borrowers. We expect these measures, if implemented in full, to triple the refinancing capacity of
banks at the central bank and support their liquidity. The central bank also strengthened its refinancing programme targeting SMEs. See
Moroccan central bank's measures will soften coronavirus' negative effects on banks.

Capital will remain modest. We expect sectorwide tangible common equity (TCE) to remain modest at between 7.5% and 8.5%
of risk-weighted assets (RWA) over the next 12 to 18 months. Systemwide, the TCE/RWA ratio, which includes Moody's adjustments
for minority interest and government debt holdings, was 8.0% at December 2019. The banks' reported Tier 1 ratio (without Moody's
adjustments) was 10.4%.

Profitability will decline as a result of reduced net interest income. Net interest income, which depends on net interest margins
and lending volumes, represents the large majority of the revenues for Moroccan banks at 66% in 2019. We expect net interest
margins to narrow because gross yields earned on loans will decline more than the cost paid on deposits. In addition we expect the
coronavirus-related disruptions to constrain credit demand, partially mitigated by cash calls from clients affected by the disruptions.

Loan-loss provisions will increase appreciably, as challenging business conditions hurt borrowers' repayment capacity. Systemwide cost
of risk, computed as loan-loss provisions divided by gross loans, was 71 bps in 2019 and 75 bps in 2018.

More positively, the banks' higher-yielding African activities will continue to support the profits of the three pan-African banks.

The government willingness to support will remain strong. The willingness of the Moroccan government to support local banks if
needed will remain high. The government's high willingness to provide support reflects the dominance of local banks in the domestic
financial system and the concentrated nature of the banking system (the four rated banks hold 79% of deposits).

The government's fiscal capacity to provide support to the large banks is somewhat constrained, as indicated by its Ba1 credit rating.
Morocco has relatively high but affordable central government debt, which we estimate at 66% of GDP at end 2019 (with a low
foreign-currency component). The size of the banking system is relatively high, with total assets accounting for around 135% of
nominal GDP at end-2019.

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on
www.moodys.com for the most updated credit rating action information and rating history.

2 27 April 2020 Banking System Outlook Update – Morocco: Downside risks from coronavirus pandemic tips outlook to negative
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Exhibit 1
Key drivers for Morocco's negative banking system outlook
Operating Deteriorating - The coronavirus impact and weak agricultural performance will slow economic growth
Environment
- The global coronavirus pandemic will hurt economic growth in Morocco through lower activity in the confidence-
sensitive tourism sector, and through reduced exports to Europe
+ The impact will be partially offset by lower energy import prices, given that Morocco is an oil importer
Asset Risk Deteriorating - We expect loan performance to weaken noticeably
- Borrowers in tourism, trade and transportation sectors will be most badly affected by the coronavirus outbreak, and
SMEs will be particularly vulnerable
= Coronavirus-related deterioration will add up to high problem loans due to borrower concentrations, exposure to SME
and Sub-Saharan Africa
Capital Stable = Capitalisation will remain modest
Funding and Stable = Funding will remain stable, supported by a strong, low-cost and diversified domestic deposit base
Liquidity
= Liquidity buffers will remain high
+ Central bank's measures will provide easier and wider funding access
Profitability and Deteriorating - Net interest margins will narrow as a result of the low interest-rate environment
Efficiency
= Efficiency ratios will remain stable
- Provisioning requirements will increase amid challenging economic conditions
Government Stable = Authorities' willingness to support the largest banks will remain high
Support
= A banking resolution regime is in place, but the accompanying legal framework has yet to be finalised

Source: Moody's Investors Service

Exhibit 2
Key indicators for the Moroccan banking system
Rated banks
2012 2013 2014 2015 2016 2017 2018 2019
Scorecard Ratios
Problem Loans / Gross Loans 5.6% 6.6% 7.0% 7.7% 7.8% 7.7% 7.7% 8.1%
TCE / RWAs 8.3% 8.8% 8.3% 8.7% 8.8% 8.2% 7.8% 8.0%
Net Income / Tangible Assets 1.2% 1.1% 1.1% 1.0% 1.1% 1.1% 1.1% 1.0%
Market Funds / Tangible Banking Assets 17.0% 17.1% 15.4% 13.9% 13.4% 14.0% 14.7% 14.2%
Liquid Banking Assets / Tangible Banking Assets 30.0% 29.5% 29.7% 31.6% 32.2% 33.3% 31.7% 32.3%
Other Ratios
Loan Loss Reserves / Problem Loans 71.3% 66.2% 69.9% 68.9% 71.2% 74.8% 94.2% 93.2%
Loan loss Provisions /Gross Loans 0.7% 0.9% 1.2% 1.0% 0.9% 0.9% 0.7% 0.7%
Tier 1 ratio 9.6% 10.2% 10.5% 10.6% 10.5% 10.0% 10.2% 10.4%
Capital Adequacy Ratio 12.4% 12.8% 12.7% 12.7% 12.8% 12.7% 13.0% 13.3%
Shareholders' Equity / Total Assets 8.1% 8.5% 8.2% 8.2% 8.3% 8.2% 7.9% 8.5%
Gross yield 1.1% 1.1% 1.1% 1.0% 1.0% 1.1% 1.1% 1.0%
Cost of Funds 2.0% 2.1% 2.0% 1.8% 1.7% 1.7% 1.7% 1.6%
Net Interest Margin 3.0% 3.1% 3.2% 3.2% 3.1% 3.0% 3.0% 3.0%
Cost to income ratio 49.7% 50.0% 48.0% 50.5% 50.7% 51.1% 52.3% 52.0%
Loan Loss Provisions / Pre Provision Income 20.6% 26.0% 31.2% 29.4% 27.8% 26.6% 23.2% 22.2%
Net Loans / Customer Deposits 97.9% 97.4% 94.7% 88.7% 89.6% 88.6% 88.9% 89.2%
Credit Growth - 4.3% 4.8% 2.3% 5.7% 5.5% 5.3% 5.7%
Deposit Growth - 4.6% 7.2% 8.7% 4.4% 6.5% 3.2% 5.1%

Notes: RWAs = Risk weighted assets, TCE = Tangible common equity. Tier 1 and Capital adequacy ratios are the weighted averages of reported ratios by rated banks.
Source: Moody’s rated banks’ financial statements

3 27 April 2020 Banking System Outlook Update – Morocco: Downside risks from coronavirus pandemic tips outlook to negative
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Rating Universe

We rate four banks in Morocco, which together represent approximately 88% of banking system assets as of December 2019 (Exhibit
3). Moroccan banks’ Baseline Credit Assessments (BCAs), our view of their standalone financial strength are distributed over a two-
notch range from b1 to ba3. The weighted average long-term foreign currency deposit rating is Ba2.

Exhibit 3
Moroccan banks

Total assets Uplift Government LC *FC Market Market


Dec 2019 Parental from Adjusted Government support deposit deposit share net share
Name of the Bank (USD million) BCA support BCA BCA support notches rating rating Outlook LT CRR loans deposits
Attijariwafa bank 55,711 ba3 ba3 Very High 2 Ba1 Ba2 STA Ba1 26% 24%

Groupe Banque Centrale 45,128 b1 b1 Very High 3 Ba1 Ba2 STA Ba1 24% 26%
Populaire
Banque Marocaine du 33,028 b1 b1 Very High 3 Ba1 Ba2 STA Ba1 13% 14%
Commerce Exterieur
Credit du Maroc 6,188 ba3 High 2 ba1 High 0 Ba1 Ba2 STA Baa3 5% 5%

Notes: BCA = Baseline Credit Assessments, on a scale from aaa (highest) to c (lowest), reflect banks' standalone credit strength. Adjusted BCAs incorporate any affiliate or parental support
assumptions. Long-term ratings incorporate our affiliate, parental and government support assumptions. RUR = Ratings under Review. NR = Not rated. LT CRR = Long-term Counterparty
Risk Ratings.* The long-term foreign currency deposit ratings are capped by the relebant sovereign ceiling at Ba1
Source: Moody's Investors Service; Moody’s rated banks’ financial statements

Exhibit 4
BCA distribution of Moroccan banks as of 6 April 2020
4

3
Number of Banks

0
aaa aa1 aa2 aa3 a1 a2 a3 baa1 baa2 baa3 ba1 ba2 ba3 b1 b2 b3 caa1 caa2 caa3 ca c
Baseline Credit Assessment

Source: Moody's Investors Service

4 27 April 2020 Banking System Outlook Update – Morocco: Downside risks from coronavirus pandemic tips outlook to negative
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Moody’s related publications


Credit Opinions:

» Attijariwafa bank

» Groupe Banque Centrale Populaire

» BANQUE MAROCAINE DU COMMERCE EXTERIEUR

» Credit du Maroc

Sector In-depth:

» Banks – Morocco Macro profile – Moderate -

Sector Comment:

» Banks – Morocco: Moroccan central bank's measures will soften coronavirus' negative effects on banks

Rating Methodology:

» Banks

» Banks: Proposed Methodology Update

To access any of these reports, click on the entry above. Note that these references are current as of the date of publication of this
report and that more recent reports may be available. All research may not be available to all clients.

5 27 April 2020 Banking System Outlook Update – Morocco: Downside risks from coronavirus pandemic tips outlook to negative
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Banking System Outlook Definition


Banking system outlooks represent our forward-looking assessment of fundamental credit conditions that will affect the creditworthiness of
banks in a given system over the next 12-18 months. As such, banking system outlooks provide our view of how the operating environment
for banks, including macroeconomic, competitive and regulatory trends, will affect asset quality, capital, funding, liquidity and profitability.
Banking system outlooks also consider our forward-looking view of the systemic support environment for bank creditors.

Since banking system outlooks represent our forward-looking view on credit conditions that factor into our bank ratings, a negative (positive)
outlook suggests that negative (positive) rating actions are more likely on average.

Overview of Banking System Outlooks

Exhibit 5
Banking System Outlook Table
As of 27 April 2020
Banking System Positive Stable Negative Banking System Positive Stable Negative
Argentina Negative Malaysia Negative
Armenia Negative Mexico Negative
Australia Negative Mongolia Stable
Austria Stable Morocco Negative
Azerbaijan Negative Netherlands Negative
Bahrain Negative New Zealand Negative
Bangladesh Negative Nigeria Negative
Belarus Negative Norway Negative
Belgium Negative Oman Negative
Bermuda Stable Pakistan Stable
Brazil Negative Paraguay Negative
Canada Stable Peru Stable
Chile Negative Philippines Negative
China Negative Poland Stable
Colombia Negative Portugal Negative
Cyprus Stable Qatar Negative
Czech Republic Stable Russia Negative
Denmark Negative Saudi Arabia Negative
Egypt Stable Singapore Negative
Finland Negative Slovakia Negative
France Negative South Africa Negative
Germany Negative Spain Negative
Greece Stable Sri Lanka Negative
Hong Kong Negative Sweden Stable
Hungary Negative Switzerland Stable
India Negative Taiwan Negative
Indonesia Negative Thailand Negative
Ireland Stable Turkey Negative
Israel Stable Ukraine Stable
Italy Negative United Arab Emirates Negative
Japan Negative United Kingdom Negative
Kazakhstan Negative United States Negative
Korea Negative Uruguay Negative
Kuwait Negative Uzbekistan Stable
Lebanon Negative Vietnam Negative
Source: Moody’s Investors Service

6 27 April 2020 Banking System Outlook Update – Morocco: Downside risks from coronavirus pandemic tips outlook to negative
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Appendices
Morocco Macro profile: Moderate -
The Macro Profile is a rating input used to determine each bank’s Baseline Credit Assessment. It is designed to capture the system-wide
factors that are predictive of the propensity of banks to fail.

Morocco's (Ba1 stable) macro profile reflects sustained economic growth over the past several years; an industrial policy agenda that
supports the development of higher-value-added export sectors; coherent and sound economic policies; and high political stability
relative to Middle Eastern and North African peers. Susceptibility to external risks is also limited. The authorities are seeking to tackle
significant structural rigidities with major reforms including fiscal decentralisation as part of the country's Advanced Regionalisation
programme, tax reforms and the introduction of a more flexible exchange rate regime.

Read the full report, Morocco Macro profile: Moderate -. For more information about Moody’s Macro Profiles, please see Moody's
Macro Profiles: A Compendium and consult Moody’s Bank Rating Methodology.

Exhibit 6
Arriving at Morocco Macro profile: Moderate -

Note: The Macro Profile is a rating input used to determine each bank’s Baseline Credit Assessment. It is designed to capture the system-wide factors that are predictive of the propensity of
banks to fail. For more information, please consult Moody’s Bank Rating Methodology.
Source: Moody’s Investors Service

7 27 April 2020 Banking System Outlook Update – Morocco: Downside risks from coronavirus pandemic tips outlook to negative
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Average Long-Term* Ratings (Asset-Weighted) – Moody’s Rated Banks**

Exhibit 7
Ratings data as of As of 28 February 2020
1.0 2.0 Caa3
3.0 4.0 5.0 B3
6.0 7.0 8.0 Ba3
9.0 10.0 11.0 Baa3
12.0 13.0 14.0 A3
15.0 16.0 17.0 Aa3
18.0 19.0 20.0 Aaa
21.0

*Because not all rated banks necessarily have the same rating class outstanding, rating included in 'Long-Term Rating' column is determined by an internal algorithm, which is described
here.
**Includes all banks assigned a BCA, plus one or more Long-Term Ratings.
Source: Moody’s Investors Service

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