With Q2 results season coming up, we compare banks’ disclosure levels, headline ratios and risks costs across the markets we cover.
Why do disclosure levels matter?
Headline NPL and provisions numbers cannot provide a full picture of underlying asset quality. In some markets, we think the volume of problem loans is understated. It is also difficult for investors to ascertain a prudent level of required provisions given limited visibility regarding collateral quality and value.
Therefore, additional information – like loan mix, the ageing of past-due loans, disclosures on collateral, etc. – can help investors better assess true asset quality and potential risk cost headwinds.
Among the banks we cover, asset quality disclosures vary considerably. Banks in Oman, Zimbabwe, Pakistan and Mauritius typically publish detailed loan quality disclosures; those in Tanzania, Sri Lanka, Morocco and Uganda disseminate more limited information.
The good, bad and the risky
GCC countries appear to have stronger asset quality than peers among the markets we cover. Saudi Arabia and Kuwait have non-performing loan (NPL) ratios of less than 2%, cost of risk below 100bps and provision coverage exceeding 100%. Sub-Saharan Africa banks scan less well, notably Zimbabwe (cost of risk: 3.4%; provision coverage: 11%), Ghana (NPL ratio: 7.6%; cost of risk: 3.4%) and Tanzania (NPL ratio: 7.2%; provision coverage: 51%).
Meanwhile, the cost of risk is likely to rise in Pakistan, where banks are currently benefiting from recoveries against legacy NPLs. In contrast, the cost of risk is likely to fall in Ghana (falling NPLs) and Kuwait (excess provisioning).
Some of the markets we cover have not yet implemented IFRS9, including Pakistan, Bangladesh and Vietnam. In our view, the experience elsewhere suggests that implementation could lead to a sizeable one-off increase in provisions and might also have a recurring impact on the cost of risk.
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