Economic self-reliance and the absence of Gulf-style real estate and stock market booms and crashes have worked well for the financial sector in Morocco.

Attijariwafa Bank, the country’s largest, with more than a quarter of the total market, notched up a 21 per cent rise in its net banking results last year, with a profit of MD13.3bn ($1.57bn), while Groupe Banque Populaire managed a 10 per cent rise to reach MD9bn.

The macro-economic context is fairly good. Morocco weathered the world financial crisis quite well

Mohamed Damak, Standard & Poor’s

The fact that average incomes in the country are relatively low and agriculture, mining and basic services contribute so much to the economy, has forced banks to adopt a strategy of steady organic growth, building up their loans books and range of products over time.

For international expansion, Moroccan banks have looked not east to the bubble and burst markets of Arabia, but south to the slowly developing economies of Francophone sub-Saharan Africa, where competition is less intense, and investors must be prepared to take a long-term view.

Strategic thinking

At a time of instability in the global banking industry, Moroccan institutions have appeared almost immune. Their challenges do not begin to compare with the troubles faced by counterparts in countries such as the UAE or Kuwait. Nonetheless, the home market has not totally escaped the effects of recession abroad.

“The macro-economic context is fairly good. Morocco weathered the world financial and economic crisis quite well; the country does not have serious problems of structural indebtedness,” says Mohamed Damak, senior banking analyst for the Middle East at Standard & Poor’s in Paris. “However, it is beginning to suffer from the weakness of economic activity in its main European export markets.”

Despite a broadly reassuring picture, there are still reasons for hard strategic thinking at Morocco’s biggest banks.

“We have identified two sources of potential risk for the Moroccan banking system – real estate and capitalisation,” says Damak.

The financial sector does face serious questions about the route forward, about how to develop and diversify without abandoning the careful approach to risk that has served it well so far.

The importance of these questions is illustrated by the 2009 financial results from BMCE Bank. The operating results from the core business were solid, if unspectacular, last year. But the bank felt it necessary to make more than MD1bn in exceptional provisions. The impact of this was to cut overall net profits by more than half to MD385m.

Morocco remains less integrated into international markets than many other emerging economies, which has worked in the country’s favour during the crisis of the past three years. Its banks have not been reliant on credit or inflows of capital from abroad; nor have they adventured into high risk international lending.

But while this has offered protection from global problems, it constrains the banks’ options for mobilising the new funds needed to sustain their future development.

Meanwhile, on the lending side, the banks’ exposure to the property market is a concern, but only to a limited degree.

“The segment of the Moroccan real estate sector that has suffered a squeeze is the luxury property market, catering mainly for foreign clients,” says Damak. “They usually purchase in cash or with funding arranged abroad, so local banks do not have much loan exposure to such property buyers.”

Real estate exposure in Morocco

Moroccan banks mainly lend to the mid-market segment, which has not been significantly depressed. Buyers are mostly locals in salaried employment, and this business has continued because of the resilience of domestic economic activity. Banks are further protected because property developers had diversified their activities, moving outside the luxury segment before the start of the downturn.

“Banks also finance social housing. But this business is underpinned to a large extent by government guarantees,” he adds.

Overall, exposure to real estate is not the biggest challenge facing Moroccan bankers.

“A more serious concern for us is capitalisation, particularly taking into account the cost of the banks’ network expansion in Africa,” says Damak. “BMCE and Attijariwafa Bank funded their expansion mainly through subordinated debt issuance, which is not taken into account by Standard & Poor’s in our capital assessment measures.”

This means that their capitalisation is now relatively weak compared with their local and foreign risk assets.

“These investments may well make long-term business sense – Attijariwafa has been successful in improving the balance sheet and business performance of the former Banque du Sud, which it acquired in Tunisia, and sub-Saharan Africa also has growth prospects,” he says. “Even so, these acquisitions have weakened the banks from a capital point of view. This is one of the reasons behind our downgrade of Attijariwafa last year. Banque Populaire Group, however, remains adequately capitalised.”

One of the major questions is how to reinforce capital strength, given the domestic savings and investment market’s limited capacity to produce extra funds. The Casablanca bourse remains relatively quiet, ineffective at mobilising substantial domestic savings or foreign investment.

“Shareholder investment is scarce in Morocco,” says ratings agency Moody’s Investors Service in an assessment of the sector. “Foreign banks are reluctant to inject more equity for fear of jeopardising their returns in their country of domicile, while Moroccan shareholders (either the state or individuals) tend to be restricted in their own capacity to provide the necessary cash. We believe that this lack of cash investment at the equity level is the main challenge.”

It is precisely because the resources available to local companies through the bourse, or from foreign loans, are so limited, that domestic banks dominate the business financing sector in Morocco.

They also attract a major chunk of the available savings and investment cash, in the form of deposits. The market leader in this respect is Attijariwafaa, which last year took in MD154.2bn in deposits, and holds a 26.1 per cent share of the overall deposits market. Groupe Banque Populaire actually managed to grow deposits by 6.2 per cent last year to MD161.4bn.

The underlying strength of the domestic deposit base left Attijariwafa and its rivals well-positioned to survive the squeeze in global liquidity markets relatively unscathed.

“On the funding side, the Moroccan banks remain strong; the loan-to-deposits ratio remains relatively low,” says Damak. “The banks have borrowed almost no money abroad and their strong liquidity has been achieved through the collection of deposits – either in dirhams from local customers or in funds remitted by expatriate Moroccans and then converted into dirhams.”

When it comes to the quality of service provided by Morocco’s banks, progress has been solid, but competition remains tough. Banks continue to see steady growth in their potential customer base, as the rise in living standards expands the number of citizens who are in a position to use a wide range of financial services.

The central bank has also pursued an interventionist approach, actively limiting the number of banks that operate in Morocco, rather than simply awarding licences to all those that satisfy the key criteria.

But the strength of those that are operating leaves no room for complacent stragglers. Indigenous institutions face strong competition from major French banks, which are well established in the country.

“The banking system remains highly competitive, despite the central bank’s decision to limit the number of banks in the country to around 18,” says Damak.

Islamic finance in Morocco

One area that could see substantial growth in the future is Sharia-compliant business. Until now, Morocco has trailed behind many other countries in the Middle East in developing an Islamic banking sector.

“Islamic finance products have been permitted since 2007, but the necessary fiscal adjustments have not yet been made, according to our understanding,” says Damak. “Therefore, conventional products have remained more attractive for customers.”

“But there are reports that the authorities may soon make the adjustments to ensure that Sharia-compliant products are treated on an equal basis, so that customers feel they really do have a competitive choice.”

Meanwhile, the banks’ developing African networks are beginning to contribute to profits despite the high upfront investment costs.

BMCE, for example, now has a 42.5 per cent stake in Bank of Africa, one of the largest banks in the Francophone sub-Saharan market.

The group’s operations throughout sub-Saharan Africa accounted for almost a fifth of its net profits in the first half of 2009. Attijariwafa remains similarly convinced of the potential south of the Sahara. Last year it acquired subsidiaries of the French giant Credit Agricole in Senegal, Cote d’Ivoire, Gabon and Congo (Brazzaville), further extending an already substantial network in the region, which is beginning to produce valuable results.

As European banks have found retail banking in sub-Saharan Africa can be highly profitable. In the long term, such assets will be a key driver of the growth of Morocco’s banking sector and investing in assets now, while the global markets are depressed, is a shrewd move.