Announcement: Moody's: Morocco's diversifying economy and stable policy environment support positive banking system outlook

Moody's Investors Service (Moody's) says its outlook for the Moroccan banking system is positive, supported in part by the country's ongoing economic diversification and stable and predictable political and economic policy environment.

Moody's report, "Banking system outlook: Morocco, improving operating environment and rising credit growth support positive outlook", is available on www.moodys.com. Moody's subscribers can access this report via the link provided at the end of this press release. This report does not constitute a rating action.

"One of the key drivers behind our positive outlook for Morocco's banking system is the solid operating environment, with real GDP growth expected to remain elevated at 3.5% next year before rising to 4.5% in 2019," said Olivier Panis, a Moody's Vice President- Senior Credit Officer and the report's author. "The country's sound macroeconomic policies, trade diversification and industrial transformation will support exports and investment and boost banks' credit growth."

Lending will accelerate next year as public and private investment increases financing needs, while Moody's expects the ongoing gradual transition to currency flexibility will be orderly and support Moroccan exports and domestic economy more broadly in the long-term.

Although credit risk formation will ease slightly, stock of problem loans will remain elevated in the next 12 to 18 months mainly due to loan concentrations and high exposure to riskier portfolios linked to small-and-medium enterprises (SMEs) and sub-Saharan Africa. Nonperforming loans accounted for 7.4% of gross loans in June 2017.

Capital buffers will continue to exceed regulatory requirements, but will reduce slightly as loan growth accelerates. Banks' capital -- with a sector-wide reported Tier 1 ratio of 11.5% - has only limited capacity to absorb additional credit losses.

Banks' profits will be supported by higher domestic lending growth, rising fees and commissions, and higher-yielding sub-Saharan Africa portfolios. This will be partly offset by pressure on net interest margins and loan-loss provisioning amounting to around 30% of pre-provision income. As a result, returns on assets will remain broadly stable.

Banks' liquidity buffers have been gradually rising, with a Liquidity Coverage Ratio of 143% as of December 2016, and will remain strong despite accelerated lending activity. A covered bond framework, in legislative progress, will allow banks to reduce maturity mismatch and interest rate risks.

Banking system outlooks represent Moody's forward-looking assessment of fundamental credit conditions that will affect the creditworthiness of banks in a given system over the next 12 to 18 months.