Moody's says African banks will likely make even more profits this year.

In South Africa, some banks' profits had already recovered to pre-pandemic levels in 2021. And those who didn't get there were not too far behind. South Africa's big 4 banks grew their combined earnings by 177% in the first half of 2021.

Constantinos Kypreos, the senior vice president for financial institutions at Moody's, said African banks' should report higher profits this year because the need to make additional Covid-19 provisions is diminishing now. As interest rates rise, banks will also collect more interest income.

Even though the quality of banks' loan books will remain under pressure as some customers still can't service their debts due to reduced incomes and job losses, Kypreos said this will be better than in the past two years.

"Having said that, the operating and the macro conditions remain difficult. This is especially so for sub-Saharan Africa," he said.

Kypreos said South African banks, in particular, are victims of low economic growth, the constantly rising government debt and the country's slow pace at implementing the promised economic reforms. He said this creates an environment for muted new business growth and customers who struggle to repay what they owe.

The credit profile of local banks is also negatively affected by their exposure to government bonds, which is now around 17% of their total assets, he said.

Early in February, Moody's published an outlook on the five biggest banking systems in Africa, i.e. South Africa, Nigeria, Kenya, Morocco and Egypt. The rating agency maintained a negative outlook for South African and Moroccan banks but upgraded the outlook for banking sectors in the other three countries to stable.

Kypreos said Moody's decision to keep South African banks' outlook negative was precisely because of macro-economic problems in the country.

But it seems that South African banks' resilience during the pandemic, the level of buffers they built when they did not pay dividends in 2020, and tightening their credit risk when the situation called for it might outweigh the challenges of operating in a stagnant economy.

"We also acknowledge that banks' financial metrics are improving....We expect loan provisions to remain above historical levels but lower than those reported in 2020 and 2021," he said.

Kypreos added that banks set aside additional precautionary provisions in the past two years. Many have not released those back to their balance sheets. So, even if bad debts rise for some reason, banks can easily absorb those without the massive negative impact seen on their earnings in 2020.