MEA bank testimonials to follow in 2021: Green financing, Lebanon, Kenya



Historical issuance of green instruments suggests a growing trend in the Middle East and North Africa; Lebanon’s besieged banks are gearing up for another difficult year; and Kenyan lenders should benefit from a risk-based loan pricing model.

Green financing should develop

Green sukuk and bond issuance in the Middle East and North Africa region is likely to increase in 2021 as governments and state-linked companies seek to diversify their sources of funding and take advantage of price drop.

Investor appetite for regional green debt appears strong, with three landmark issues in September. The five-year $ 750 million Egyptian bond was the first issued by a sovereign state in the MENA region and received $ 3.7 billion in orders, while the $ 1.3 billion green sukuk of State-controlled Saudi Electricity Co. has been oversubscribed 4 times. European and American investors bought 88% of Egyptian bonds, which bear a 5.25% coupon. Qatar National Bank (QPSC)The $ 600 million in unsecured notes, which the MENA region’s main lender in terms of assets will use to finance green projects, attracted orders totaling $ 1.8 billion.

“Borrowers want to align what they do from a funding perspective with overall corporate social responsibility commitments on an organizational level,” said Stuart Ure, partner at Clifford Chance law firm in Dubai. “In addition, among borrowers, there is a willingness to continue to diversify sources of funding and seek liquidity.”

The National Bank of Abu Dhabi – now First Abu Dhabi Bank PJSC – issued the MENA region’s first green bond in 2017. At that time, it was debated whether the sale of green debt required issuers to pay a premium. higher than their established yield curve. Today, the number of investors seeking exposure to quality environmental, social and governance products has increased, while issuance of these instruments in the Gulf remains lower than in other regions.

“As a result, green bonds are priced flat against existing credit curves, and in many cases lower,” Ure said.

“In 2021, particularly in the Middle East, we will continue to receive from clients – sovereigns, corporations and financial institutions – more and more inquiries about the framework and processes required for issuing green bonds / sukuk. “

In the United Arab Emirates, ambitious plans are in place to expand the country’s capacity to produce clean, renewable energy. The Gulf’s continued development of large-scale solar power plants and investments in other environmentally beneficial infrastructure are expected to lead to increased activity in green financial instruments, although bank financing is generally the primary means of financing projects. large-scale regional.

“The Gulf is still at a relatively early stage of capital market development, so banks are taking a larger share of credit generation,” said Timucin Engin, senior director and inter-practice coordinator for the region of the GCC at S&P Global Ratings.

“There is an increase in regional activity in the area of ​​green finance. The long-term outlook for green infrastructure projects is rather positive, so green finance will continue to grow. “

Lebanese lenders still in a “deep hole”

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The future of Lebanon’s besieged banks, which have used their clients’ deposits to buy billions of dollars in government-linked instruments, will depend on the country’s restructuring of its ever-growing debts.

Lebanon defaulted on Eurobonds in March and had a record 127.9 trillion pounds, or $ 84.9 billion, in local currency debt and $ 35.2 billion in foreign currency debt in August . Bank customers could lose a large chunk of their deposits as part of a government debt restructuring project that is expected to result in aggregate losses of £ 154 trillion in the financial sector.

With such massive losses and an economy set to contract by 25% in 2020, Lebanon’s only hope has been to agree on a bailout with the International Monetary Fund.

IMF Middle East and Central Asia Director Jihad Azour said in October that Lebanon must “present a comprehensive and credible reform program” that will restore macroeconomic stability and address financial sector losses. The country’s annual inflation rate hit an all-time high of 136.8% in October.

“There has been no progress in debt restructuring,” said Sami Nader, economist and director of Beirut’s Levant Institute for Strategic Affairs.

The stasis is due to the tense politics of Lebanon. Saudi Arabia-backed Saad al-Hariri was reappointed as prime minister in October but struggled to form a government.

“Nothing is moving on the economic side, because we need a government to make political decisions,” Nader said.

Lebanon is facing a total economic collapse, Nader warns, noting that central bank reserves are dwindling and that it will be unable to subsidize commodities within weeks.

Likewise, he describes the banks as being in a “deep hole”, with shareholders on the verge of being wiped out, according to the restructuring plan.

“On the asset side of their balance sheet, they have government treasury bills that have lost 80% to 90% of their value, in addition they have nonperforming loans that are increasing day by day and also have real estate assets that have lost much of their value, ”Nader said.

Outlook for Kenyan banks

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Kenya’s retail borrowers are struggling to repay debts despite banks restructuring more than a third of their loan portfolios. Still, the outlook for lenders in 2021 looks positive – provided they get regulatory approval for a long-awaited risk-based loan pricing model that is expected to increase margins.

The Combined Annual Profits of Kenya’s Big Four Banks Co-operative Bank of Kenya Ltd., Equity Group Holdings PLC, KCB Group PLC and Stanbic Holdings PLC is expected to fall by 45% in 2020, estimates Egyptian investment bank EFG Hermes. The crisis comes as Kenya’s economy stumbles due to the coronavirus pandemic.

Banks had hoped for a better year after the central bank in November 2019 removed interest rate caps that limited loan pricing premiums to 400 basis points against Kenya’s benchmark interest rate. But removing the cap has not allowed lenders to price loans, and net interest margins have contracted by 50 basis points this year, EFG estimates, as the central bank cut rates to their lowest level since 2011.

“The central bank wants to allow banks to reassess loans based on risk, but will not allow arbitrary pricing of loans. Instead, it wants banks to deploy risk pricing models that take into account various factors such as financing costs, probability of default and collateral, ”said Ronak Gadhia, director of sub-Saharan African banking research at EFG Hermes.

Meanwhile, the banking sector’s NPL ratio rose steadily to around 13 percent in August, according to the Kenya Bankers Association.

NPLs are on the rise despite banks restructuring 38% of their loan portfolios, according to the central bank. This restructuring did not force banks to take “haircuts” and therefore will not necessarily reduce their interest income.

“We should now be on top of [NPLs] and with the improvement of the economy, it should improve the quality of assets, ”Gadhia said.

Still, Gadhia is nonetheless optimistic.

“Next year, profits could more than double for most of the big banks – they have developed significant NPL buffers so their cost of risk should normalize. Banks should realize higher interest margins. if the central bank approves the loan risk pricing model, ”Gadhia said. .

As of December 18, US $ 1 was equivalent to 1,519 Lebanese pounds.



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