African banks may lose $48b to virus rebound risks in 3 years

Bloomberg

African banks need to improve operating efficiencies and mitigate other risks quickly to avoid a revenue slump of as much as $48 billion over the next three years.
If risks go unchecked, multiple years of low profitability will likely follow, according to a report by McKinsey. “Lessons from the 2008 economic crisis suggest that, in times of crisis, speed is everything.”
Banks must now begin focusing on post-pandemic growth and driving down costs through technology. McKinsey estimates lenders will need to increase efficiencies in their operations by at least 20% to 25% to restore returns due to shareholders to pre-crisis levels, it said.
The impact of the Covid-19 crisis was less severe on banks across the continent than initially expected as governments took steps to ease strain on businesses and interest rates fell. Lenders that aggressively built reserves to guard against souring loans in nations like South Africa and Kenya may see an improvement in results this year as provisioning levels relax.
“It is likely that banks in Morocco and Nigeria may need to further increase provisioning levels in 2021, as the current loan-loss provisions in those countries may not adequately cover the expected increase in bad debts,” McKinsey said.
African banks face $218 billion of climate change risk
African banks are vulnerable to the increasing frequency and severity of climate change shocks unless lenders take action to manage these risks, Moody’s Investors Service said.
Moody’s estimates that the 49 banks it rates across 14 African countries have extended almost $218 billion in credit to environmentally sensitive sectors, an amount equivalent to nearly 29% of their total loans, Moody’s analysts including Malika Takhtayeva and Peter Mushangwe wrote.
The transport, oil and gas, and mining industries are particularly exposed to changes in the physical environment, and to the shift to low-carbon technologies. They also face pressure from investors to show how they’ll be affected by climate change.
“For African banks, disclosure of the risks they face and management of those risks are not yet well advanced,” the analysts wrote. “We expect environmental factors will lead to a deterioration of the banks’ credit quality and profitability in the long term if banks do not take measures to prudently manage climate-related and environmental risks.”
Banks in Nigeria, Democratic Republic of the Congo and South Africa are the most exposed to these risks. In addition, “outsized holdings” of sovereign bonds are a particular concern for some lenders, as most countries on the continent face substantial risk from rising temperatures, water scarcity and carbon transition.