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The outlook for the Moroccan banking industry appears relatively stable in the foreseeable future, Standard & Poor’s Ratings Services notes in an updated report on the Moroccan banking system.

“As banks are relatively immune to external competition and shocks, the domestic economic, competitive, and regulatory environment will be the determining factors in their future creditworthiness,” says Standard & Poor’s credit analyst Emmanuel Volland. “Structural weaknesses in the financial system infrastructure, the legal and judicial environment, and industry regulation and supervision need to be addressed, however.”

The country also suffers from a low level of savings and labour rigidities, which create additional risks for banks. Furthermore, low inflation and interest rates are putting pressure on banks’ interest margins and profitability.

“To cope with growing competition, financial institutions are expanding new business lines, such as consumer finance and leasing,” says Standard & Poor’s credit analyst Anouar Hassoune. As in other countries, rapid growth in business with untested risk control systems can create unexpected problems that are only revealed during an economic downturn. “A major drop or sudden reversal in remittances, although not expected, would also affect the sector.”

More generally, the asset quality of Moroccan banks is weak and has deteriorated in the past four years. This is reflected in a ratio of gross NPLs of 17.7% for the system at December 31, 2002 – 11.6% if state specialised banks are excluded. Increasing exposure to small and midsize companies and potential problems in the tourism sector could put additional pressure on the banks’ asset quality in the medium term.

In general, the largest private banks are up to the challenge. These institutions have good franchises and adequate financial strength. Moreover, a significant presence of foreign shareholders provides them with the transfer of technology and know-how. Relatively wide interest margins, adequate liquidity, and an expanding range of products and services characterize these institutions. Although underbanked, the banking sector is becoming more competitive as banks compete for the same limited groups of good customers. This could lead to some necessary consolidation. Banks that will be able to diversify their businesses and earnings, while controlling risks and costs, will be successful.