Written by MOODY’S
On 4 March, the National Bank of Rwanda (NBR), the central bank, published its 2020 monetary policy and financial stability statement, which showed that Rwandan banks’ loan-loss provisions for nonperforming loans (NPLs) rose to 106% in December 2020 from 82% at year-end 2019. The increase is credit positive because it boosts banks’ capacity to absorb losses amid expectations of increased loan losses from still-high pandemic-related asset risks.
Rwandan banks’ NPLs rose 26% to RWF133 billion in 2020 from RWF106 billion in 2019, but because of higher loan origination, reported NPLs fell to 4.5% of total loans in 2020 from 4.9% in 2019. Gross loans increased as cash-strapped businesses drew down credit lines and banks capitalised the interest of restructured loans, increasing the denominator for reported NPLs.
We expect exposure to service sectors such as trade, hotels and transport and communication to remain a key source of asset risk this year because of their vulnerability to the economic consequences of a renewed pandemic-related lockdown should it occur.
Loans to these sectors increased by 21% on average in 2020 and accounted for 33% of total loans. Combined, these sectors accounted for 40% of the banking system’s NPLs last year.
Loans to the hotel sector, which is particularly vulnerable, rose by 47% last year. Hotel industry loan performance has been volatile in the past, with NPL ratios of 12.1% in 2017, 2.8% in 2019 and 4.5% in 2020. Consumer loans, which are generally unsecured, comprised 12% of total loans and rose by 17% in 2020, generating unseasoned risks for banks. However, such loans tend to be short term, limiting the risks from unexpected events.
Banks are also vulnerable to property market tail risks because of their high exposure to the sector. Mortgage loans accounted for about 33% of total loans last year (see exhibit). Although the NPL ratio for mortgages was only 4.6% in 2020, they comprised around 40% of total NPLs.
Rwandan banks are highly exposed to mortgages, as well as vulnerable sectors such as trade, consumer, transport and communication, and hotels.