Bank Bailout Reports Highlight Systemic Problems

BMI View:  The Angolan government's reported move to guarantee billions of dollars' worth of bad loans held by distressed Portuguese bank Banco Espirito Santo Angola (BESA) has sent jitters through the financial sector.  While a full blown banking crisis is unlikely, the bank's problems highlight systemic weaknesses in governance - one of a number of issues holding back progress within the sector.

We remain broadly positive on the prospects for the Angolan banking industry over the medium-to-long term, believing that a strong economic trajectory, a large unbanked population, an improving regulatory environment and rising foreign interest will spur growth and competition within the sector. That said, recent developments lend support to our view that, following a decade or so of rapid growth, Angolan banks will face increasingly testing times over the next couple of years as they grapple with rising bad debts, adjust to tougher government regulations and re-orientate loan portfolios.

Widely publicised but unconfirmed reports that the Angolan government has provided a guarantee to Banco Espirito Santo Angola (BESA), Angola's second largest bank, in order to back-up billions of dollars' worth of non-performing loans is the starkest illustration yet of the difficulties facing the sector. The bank is a subsidiary of distressed Portuguese lender Banco Espirito Santo (which holds a 55% stake in BESA) which has been a major source of funding for its Angolan unit in recent years. However, BESA has since run into severe financial difficulty with a reported USD5.7bn worth of loans - over three quarters of its credit portfolio - now considered bad. 

Falling Asset Quality
Angola - Outstanding Commercial Bank Loans

BMI View:  The Angolan government's reported move to guarantee billions of dollars' worth of bad loans held by distressed Portuguese bank Banco Espirito Santo Angola (BESA) has sent jitters through the financial sector.  While a full blown banking crisis is unlikely, the bank's problems highlight systemic weaknesses in governance - one of a number of issues holding back progress within the sector.

We remain broadly positive on the prospects for the Angolan banking industry over the medium-to-long term, believing that a strong economic trajectory, a large unbanked population, an improving regulatory environment and rising foreign interest will spur growth and competition within the sector. That said, recent developments lend support to our view that, following a decade or so of rapid growth, Angolan banks will face increasingly testing times over the next couple of years as they grapple with rising bad debts, adjust to tougher government regulations and re-orientate loan portfolios.

Falling Asset Quality
Angola - Outstanding Commercial Bank Loans

Widely publicised but unconfirmed reports that the Angolan government has provided a guarantee to Banco Espirito Santo Angola (BESA), Angola's second largest bank, in order to back-up billions of dollars' worth of non-performing loans is the starkest illustration yet of the difficulties facing the sector. The bank is a subsidiary of distressed Portuguese lender Banco Espirito Santo (which holds a 55% stake in BESA) which has been a major source of funding for its Angolan unit in recent years. However, BESA has since run into severe financial difficulty with a reported USD5.7bn worth of loans - over three quarters of its credit portfolio - now considered bad. 

Former BESA CEO Álvaro Sobrinho, who left the company in 2012, is at the centre of the scandal and is alleged by Portuguese newspaper Express, to have used some USD750mn of the loans in question for his own purposes. The bank also stands accused of having made loans without guarantees to unnamed recipients, with many observers pointing the finger of blame at government officials given their widely perceived involvement in the running of the sector.

While there are likely to be issues specific to the BESA case that have contributed to its current predicament, we believe its problems are also indicative of challenges facing the banking sector as a whole. The concerns over governance standards within the industry are long-standing, not least given the inextricable ties between business and politics in Angola. The government has been making notable strides towards strengthening financial sector governance in recent years through increased supervision and regulatory oversight, recent developments confirm that there is still progress to be made. The introduction of credit bureaux is a vital step if banks are to accurately assess credit risks and lending opportunities, but coverage is still minimal ( see 'Growing Pains, But Better Times Ahead For Banking Sector', April 17).

Given the absence of credit controls and regulation within the sector, banks have remained relatively risk averse, preferring to focus on perceived 'safe' sectors and high-end clients. However, this has resulted in the concentration of credit within a relatively narrow section of the economy - particularly real estate and construction - and these issues are increasingly coming to the fore. 

Meanwhile, the latest central bank figures show that non-performing loans in October 2013, accounted for 10.2% of total loans, a jump from September 2013, when they accounted for 6.1%. Angola's largest bank in terms of assets,  Banco Angolano de Investimentos (BAI), reported earlier in the year that it wrote off USD122mn worth of loans in 2013. With real estate and construction accounting for over one third of BAI's loan portfolio and with state budget execution challenges likely to persist over the near term, we believe BAI and the banking sector at large will see conditions remain challenging over the near term as this loan over-exposure is reduced.

Read the full article

This article is tagged to:
Sector: Country Risk
Geography: Angola
×

Enter your details to read the full article

By submitting this form you are acknowledging that you have read and understood our Privacy Policy.