By Allan Olingo

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Tanzania’s banking sector will remain resilient, says rating firm Moody’s, supported by solid capital and liquidity metrics, and a gradually improving operating environment.

Moody’s, in a report released on Thursday, said the operating conditions for Tanzania’s banks will gradually improve after a challenging period of high tax payments and delayed tax refunds weighing on the private sector.

“We expect operating conditions to gradually improve as private sector businesses adapt to higher taxes and liquidity in the system improves with the payment of government arrears and more focus on infrastructure and development plans by the authorities,” Christos Theofilou, Moody’s assistant vice president said.
Tanzanian banks’ capital buffers will remain among the strongest in sub-Saharan Africa and globally, due to the banks’ strong earnings generation.

Although their profitability has declined due to lower interest incomes, reduced business activity and rising loan-loss provisions, it remains strong by global standards, with a return on assets of 2 per cent during the first nine months of 2017.

NPLs

Moody’s also expects stable liquidity metrics given muted loan growth of around 5 per cent, broadly stable government deposits and private sector deposit formation supported by growing financial inclusion and the increasing use of mobile and agency banking.

“While improving operating conditions mean that non-performing loans (NPLs) are close to their peak, NPLs may rise further in the first half of 2018 due to the continued and delayed impact from last year’s public sector job cuts, a corporate liquidity crunch and lower corporate margins following a crackdown on tax evasion,” the agency said.

The report comes after President John Magufuli, when opening a CRDB branch on March 9, said that while his government was concerned by the rising NPLs, it will not bail out struggling banks.

In the past three years, NPLs have risen to a high of 12.5 per cent of total loans in September 2017, from 6.8 per cent at the end of 2014, the latest central bank data showed.

This is more than twice the maximum target of 5 per cent and has resulted in reduced lending to the private sector, thereby undermining economic growth.

Revoked licences

This came barely a month after the Bank of Tanzania revoked licences of five critically undercapitalised community banks to protect financial stability.
Moody’s changed the outlook on the banks’ long-term deposit rating from stable to negative.

“For NMB Bank, the negative outlook captures the strong interlink between its own creditworthiness and Tanzania’s credit profile, given its holdings of sovereign debt securities. For CRDB Bank, its local currency deposit rating benefits from a one-notch of systemic uplift and the negative outlook reflects Tanzania’s government potentially weakening capacity to support CRDB Bank, in case of need,” the agency said.

Early this year, the International Monetary Fund raised the alarm over the country’s deteriorating growth of credit to the private sector due to the bad loans.

Last year’s poor banking sector health saw the Bank of Tanzania lower its minimum reserve requirements and the discount rate, and stepped up liquidity injection operations as it sought to stabilise the sector.

In March last year, BoT began a series of policy easing moves aimed at boosting liquidity in the banking system. The bank cut its discount rate by 4 per cent to 12 per cent affecting its Lombard facilities as well as rediscounting of Treasury securities.

That same month, it cut commercial cash banks’ harmonised statutory minimum reserves by 2 per cent applicable to both local and foreign currency deposit liabilities. Upon implementation, this freed up about $220 million in liquidity to the banking system.