SREP: Moroccan Banks' Capital Strengthens Due to Increased Regulation

Bank Al-Maghrib (BAM) is gradually implementing the Supervisory Review and Evaluation Process (SREP), with full implementation expected by 2027. This initiative marks a significant step towards strengthening the capitalization and risk governance of the banking sector. The introduction of capital surcharges for the three domestic systemically important banks (D-SIBs) — Attijariwafa Bank, Bank of Africa, and the Group Banque Centrale Populaire — raises their minimum Tier 1 capital ratio from 9% to 11%. This adjustment brings Moroccan regulations closer to international standards and enhances the resilience of banks against shocks. However, the increase in capital and resilience alone may not justify an improvement in viability ratings. Some banks still maintain limited capital margins despite recent progress. In many cases, improved operating conditions and asset quality would be necessary for Fitch to consider a rating upgrade. Key capitalization indicators have consistently improved since 2021, supported by stricter regulations and increased profitability. The consolidated net profit of the seven largest banks rose by 20% year-on-year in the first half of 2025, driven by better trading performance and a decrease in provisions for bad debts. The average Common Equity Tier 1 (CET1) capital ratio slightly increased to 10.9% at the end of June 2025, up from 10.8% at the end of 2024, providing a cushion of 290 basis points above the regulatory minimum. The Tier 1 ratio stood at 11.9%, also 290 basis points above the required threshold, with all three D-SIBs reporting ratios above the new 11% benchmark. Moroccan banks have demonstrated a strong ability to bolster their capital through capital increases or dividend reductions. Their overall capital adequacy ratios also benefit from regular issuances of Tier 1 and Tier 2 debt in the domestic market. Under the SREP, banks will need to conduct comprehensive self-assessments and address any identified weaknesses in their business models, internal controls, capital, and liquidity. Fitch expects these measures to enhance internal governance and risk management frameworks, thereby supporting capital strength. The implementation of Basel III in Morocco is among the most advanced in Africa, with banks already publishing their liquidity, net stable funding, and leverage ratios. BAM's supervisory framework, which includes on-site inspections, introduces a more dynamic and risk-sensitive approach. The central bank has also taken steps to strengthen capital cushions by imposing higher risk weights on seized assets: 100% in the first year, 150% after two years, 200% after three years, and 250% after four years. This framework encourages quicker resolution of assets and limits the prolonged retention of non-performing exposures, thereby improving asset quality and capital risk sensitivity. Combined with a more favorable economic environment, these enhanced capital cushions position Moroccan banks strongly to seize upcoming growth opportunities. Fitch forecasts economic growth of 4.4% in 2025 and 3.9% in 2026, supported by robust domestic demand, a recovery in agricultural production, and strong performance in the tourism and industrial sectors. Inflation has significantly slowed, averaging 1.7% at the beginning of 2025, allowing BAM to continue its accommodative monetary policy. The fiscal policy remains favorable, with public investment supporting infrastructure expansion. Lower interest rates and sustained credit demand for investment projects are expected to drive bank loan growth of around 4% to 6% in 2025 and 2026. Historically, capitalization has been a weakness for Moroccan banks due to their high concentration of risks and exposure to fragile external markets. The implementation of SREP and ongoing profitability improvements should lead to sustainably higher capital ratios, while the establishment of a secondary market for bad debts could further strengthen capital.