African banks have enjoyed mixed fortunes over the past year but there is no doubt that the sector as a whole is in better shape than at this time in 2010. North African financial institutions face an uncertain future, while the recent upheavals in the Nigerian banking sector have not quite settled, but the continent as a whole continues to recover from the fallout of the global financial crisis. Higher GDP means more revenue for African banks and greater foreign investment in expanding African companies. Report compiled by Neil Ford
The Top 100 African banks were ranked according to ‘Tier 1′ capital that comprises [a] common shareholders’ equity and retained profits or net earnings; [b] qualifying non-cumulative preferred stock (up to a maximum 25% of core capital); [c] minority interests in equity accounts of consolidated subsidiaries.
The BASEL Capital Convergence Accord as operated by most domestic regulators in the region requires banks to hold Tier 1 capital equivalent to at least 8% of their risk-adjusted assets, with half of this cushion in the form of core capital and other half comprising ‘Tier 2’ capital. The latter comprises [a] undisclosed and revaluation reserves; [b] general provisions or general loan loss reserves; [c] perpetual preferred stock not qualified to include into Tier 1; [d] hybrid debt instruments and subordinated debt items; [e] preferred stock with medium-term remaining current maturity.
Glossary Of Key Financial Concepts
Balance sheet mismatch: A balance sheet is a fiscal statement showing a company’s assets, liabilities and capital on a specified date. A ‘mismatch’ in a balance sheet indicates that the maturities of the liabilities differ (are typically shorter) from those of the assets and/or that some liabilities are denominated in a foreign currency whilst the assets are not.
Banking soundness: The financial health of a single bank – measured by annual returns on total assets and equity – or of a country’s banking system.
ROE: The return on equity, which equals total amount less preferred dividends divided by total common equity multiplied by 100.
ROA: The return on assets, which equals net income before preferred dividends plus interest expense on debt minus interest capitalised multiplied by 1; minus the tax rate and divided by previous year’s total assets multiplied by 100.
Asset liability management: Refers to the prudent management of assets to ensure that liabilities are sufficiently covered by productive assets at all times.
Assets under management: Funds managed by an investment company on behalf of investors.
Intermediation: The process of transferring funds from the ultimate source (savers) to the ultimate user (borrowers). A bank ‘intermediates’ credit when it obtains money from depositors and on-lends it to borrowers.
Collateral: Security pledged for the repayment of a loan.
Liquidity: The ability to convert an asset into cash quickly.
Basel II Accord: A comprehensive revision of the Basel capital adequacy standards issued by the Basel Committee on Banking Supervision.
Total capital: Common equity, preferred stock, minority interests, long-term debt, non-equity reserves and deferred tax liability in untaxed reserves.
Common equity: Shareholders’ total funds minus preferred equity.
Risk capital: Money allocated for speculative investment activities.
Tangible assets: Total assets minus intangible assets such as deferred tax assets and goodwill.
Total debt: All interest-bearing and capitalised lease obligations.
Short-term debt: That portion of debt payable within one year.
Time draft: A demand for payment on a specified future date – comprising banker’s acceptance, bill and sight draft.
Time bill: A banker’s acceptance or bill of exchange that is not payable until some specific future time. This contrasts with a banker’s draft or sight bill, which is good for immediate payment at sight.
Profit margin: the difference between the price received by a company for its products/services and total production cost (including labour).
Yield curve: The relationship between the interest rates (or yields) and time to maturity for debt securities of equivalent credit risk.
LIBOR: The London Interbank Offered Rate at which banks offer to lend unsecured funds to other banks in the London whole money market.
Leverage: The proportion of debt to capital often measured as the ratio of on- and off-balance sheet exposures to capital.
Leveraged loans: ‘Sub-prime’ loans rated below investment grade (BB+ and lower by Standard & Poor’s and Ba1 and lower by Moody’s Investors Services).
Leveraged buyout: Acquisition of a company heavily funded by loans or bond issues to meet the cost of take-over. Usually, the assets of acquired company are used as collateral for bank loans.
Syndicated loans: Consortiums of banks make large loans jointly to one borrower, sovereign or corporate. Usually, one lead bank takes a small percent of the loan and partitions (i.e. syndicates) the rest to other banks.
Non-performing loans: Bad debts that are in default or close to being in default.
Securitisation: Creating securities from a pool of pre-existing assets and receivables, which are placed under the legal control of investors through a ‘special purpose vehicle’ (SPV) or ‘special purpose entity’ (SPE).
SWIFT: stands for Society For Worldwide Inter-bank Financial Telecommunications – a messaging system that facilitates global funds transfers.
MICR: refers to Magnetic Ink Charter Recognition – a secure, high-speed method of scanning and processing information used by banks.