For a few banking bucks
Put it in another way: how is the Moroccan financial capitalism performing? not too bad as the data shows, though it comes to the expense -no pun intended- of the consumers. It is their plight to submit to the high fees and expenses their banks charge them, while service quality and innovation are clearly not worth it. And it is not like one can benefit from competition: banking market behaves more like a cooperative oligopoly, and each bank treasures a much lucrative rent, each one prefers to keep living on it, rather than go on the market for the kill to get some market shares. So there you are: an oligopolistic market and little benefits for the consumer. Or does it? One might think that these high fees are just a sort of a levy, a way to channel the money to fund and some productive investments. Not necessarily public-oriented, but investments that could create jobs and drive the economy forward. Again, nothing is further from the facts. Let there be no misunderstanding: the Moroccan banking system has accomplished wonders, whether in updating its laws and regulations system, as well as its extension, even beyond domestic market, in less than a decade. This progress however, did not benefit to the many, only to the few, contrary to what was expected.
Consumers do pay high fees, but that does not get to the bottom of our issue: are our banks really fat cats? do they enjoy high margins, do they deliver high earnings? Do they deliver them to a small and inward-looking group of shareholders? I tried to gather some figures, and the results are quite puzzling. Some were expected, others less so. Let us go through the whole thing step by step.
The Banking market in Morocco is, in terms of number of players, clearly an oligopolistic market: according to the Casablanca Stock Exchange website, there are 6 banks on the secondary market, with about 30% direct market capitalization of the overall listed shares:
Crédit du Maroc (CDM),
Crédit Hôtellier et Industriel (CIH),
Banque Marocaine du Commerce Extérieur (BMCE)
Banque Marocaine du Commerce et d’Industrie (BMCI)
Banque Centrale Populaire (BCP),
To these 6 banks, there must be added the state-owned Crédit Agricole (CAM) and the Moroccan subsidy of the French bank Société Générale (SGMB). according to their financial statements for 2009, these banks (save perhaps the CIH, due to its past financial difficulties) have delivered quite satisfactory results, as indeed the table on the right-hand side clearly show. Being a bank shareholder surely is quite lucrative. In 2009, the main CSE index, the MASI (Moroccan All Shares Index), delivered on average a rate of return of about 5%. Following the data I got from their respective financial statements, only two banks (CAM and CIH) delivered a lower rate of return compared to the average index return. One of them, CIH, has the handicap of past shady business deals, the other is a Public Bank, and is not constrained by the same required rate of return in a financial market.This is only a first sketch of results. Indeed, the idea is to compare the pattern of behaviour of the banks’ stocks to the rest of the market. This is just to have an idea of how correlated their value is to the other non-banking stocks. This is achieved by plotting the day-to-day bank stock performances vs the MASI index, through a customized composite bank index (a very basic indicator that is computed with respect to each bank’s share weight and their performance) January 2009 is considered base day. In other words, the Composite Banks Index (CBI) is computed as follows:
The result on the graph is a bit messy, so we shall keep only the CBI vs MASI, and the graphic result is quite odd. Odd because the overall Bank share of the CSE amounts, as computed before, to less than 30% (according to the MASI weightings, the banking sector accounts for 29.51% of the overall index capitalization, while IAM alone accounts for 20%). The interpretation of it is that the day-to-day valuation of bank shares does not differ significantly from the other stocks, while on average, these deliver higher dividends, ceteris paribus.
The index has however a setback, for it fails to compute the daily fluctuations of both SGMB and CAM, though it would be safe to presume that the first one will most probably behave in a comparable manner, and the second does not fit to any financial comparison. On the whole, the index comparison results hold. The routine tests one could run on the data set do confirm a very close correlation between both series (to name only one, the correlation coefficient is .95, regression R-square .91). The level of dividends is however quite different. Although there is no immediate available data, the preliminary results show that the banks deliver dividends at a higher rate and more often than comparable companies in size and profits. While it is perfectly understandable that Moroccan banks have to create value for their shareholders, they seem to achieve this objective not through investing and lending money to businesses, but quite often by levying high fees on their customers, which induces less risk and immediate profit for them. On the long run, such strategy destroys actual value.
It is therefore agreed that the banks deliver high dividends. But do they? By computing both time series, on can get an overall β of 1.0818 for the banking sector. The βeta measures the sensitivity to market returns, and the computed Beta confirms the close relation admitted earlier on. Let us now take a look at the following formula: where r(b) is the required rate of return for banks, β the banking sector beta, r(f) the risk-free return(which amounts to the the real interest the Treasury bonds service, around 1.4% on domestic markets, much less abroad) and E(Rm) is the expected market return, which, in our case, amounts to the MASI return (5% in 2009).
The average required return for the banking sector in Morocco was, in 2009, of 5.49%, a required return easily beaten by all but two banks (Not Applicable to the Crédit Agricole and s for CIH the share value took a beating and lost 20% over 2009 YoY). Even when computed with each bank’s own required rate (the SGMB‘s was computed with the sector Beta), the main result remained unchanged, the banks are very profitable enterprise in Morocco indeed.
Next question is, where does the money come from? the graph shows high margin commission rates; intuitively, that could be interpreted as a very profitable fee structure, that makes up for about a tenth of the net banking income. It is definitely lucrative for the banks to levy high fees and charge their customers for their miscellaneous operations, arguably something the banks should not be very keen on, since it is quite difficult to justify the present level of banking fees with respect to the quality of service. On the other hand, the banks spend relatively little money on investment instruments. The consolidated financial statements provide good evidence on the matter: While the total banking gross revenue was around MAD 40 Bn, the aggregate margin on commissions reached MAD 5.1 Bn, a ratio rate of 12%.
On the upper side of the balance sheets, the total customers’ deposits amounted to MAD 655 Bn opposite to a total lending of MAD 400 Bn (the total national lendings amount to MAD 597 billion). The lending makes up for 82% of the total M3 aggregate (MAD 792.87 Bn, Q4 2009). These lendings are weight-biased towards specific types: Housing mortgage (MAD 103 Bn) Equipment lendings (MAD 119 Bn) Overdraft facilities (MAD 139 Bn). Arguably, it is understandable to charge high fees for overdraft (no need to fuel monetary inflation) but it seems contradictory that housing mortgage (which makes up for a third of the overall economic debt) should be positively discriminate in the high fees policy, especially when the central banks lowers the monetary rate to keep the money flowing in: although it is quite difficult to get to fine details (or rather, I am getting a bit tired going through columns and columns of balance sheets), it is reasonable to suggest that the levy on mortgage is quite important, a policy which contradicts, as mentioned before, the official public policy. So there you go: the banks are unambiguously benefiting from high profits, which do not come from financial operations. The permanently available financial instruments (for sale) account for MAD 50 Bn, 20% more than the annual gross revenue, which gives a fair idea of how comparatively important the day-to-day -thus fee lucrative- operations are for the banks. Last but not least, most of the banks are under-capitalized (total market cap of MAD 30 Bn) that might be good for business, but it just gives them an unfair leveraged advantage which might turn against the customers in the event of a stronger negative shock.
One last thing: the shareholders of these banks, those who benefit from flowing cash (the net after dividend total available cash for 2009 was around MAD 20 Bn) are not individuals with small stakes on the markets, nor pension or mutual funds: large companies, with powerful political and economic connections control these banks, and certainly not to the benefit of the consumer, and therefore, the common citizen. Are the bankers Fat Cats? yes they are. domestic entities such as SNI-ONA or Finance.com, and foreign (mostly French) companies such as Groupe Crédit Agricole, or Société Générale are the one that are making good use of deposited money – and making people paying dearly for it.