The total consolidated assets in the African Business Top 100 bank listing reached $1.1 trillion, up by whopping 105% on 2005, while aggregate Tier-1 capital surged 156% to $90.7bn. South African banks, led by the ‘Big Five’ – Standard Bank (Stanbank), Absa, FirstRand, Nedbank and Investec – continue to dominate our survey comprising 46% and 40% respectively of total assets and capital.
Stanbank and Absa focus mainly on retail banking, whilst Nedbank and FirstRand are more focused on the corporate sector. Investec ranks among the world’s best investment houses. Africa’s banking assets compare favourably relative to other emerging markets, such as India with $1.2 trillion and Russia’s $1 trillion, but fall below Central and Eastern Europe’s $2.1 trillion.
The industry, however, is heavily concentrated; 25 premier banks hold about three quarters of the region’s financial assets and core capital, equivalent to $881bn and $65.6bn respectively.
That leaves only $275bn and $25bn to be shared among 75 banks, of which the five largest (by total assets) are Nationale Société Générale Bank, Arab African International Bank, Banco Africano de Investimentos, Société Générale Marocaine de Banques and Banque Marocaine pour le Commerce et l’Industrie.
The pan-African Ecobank Transnational (listed in Abidjan, Accra and Lagos) is a symbol of Africa’s economic renaissance. Its strategy is based on closer integration between independent subsidiaries in over 30 countries, which tailor services to the local market, whilst drawing on regional connections, such as shared financial and personnel resources from its head office in Togo. Attijariwafa of Morocco is also expanding retail operations across the continent, mainly in Francophone areas. Attijariwafa is the largest bank in Senegal. The business model adopted by African Bank (micro-credit lender) provides a fine example to sub-Saharan banks. This niche bank has filled the gap between mainstream banks and micro-lenders by focusing on four criteria: affordability, accessibility, simplicity and personal services.
It provides credit, mortgages, and savings products to low- and middle-income clients and small businesses. Loan applications are assessed quickly by using a sophisticated credit-scoring system – backed by a simplified application process using the latest technology, such as biometric scanners. Nigeria (especially) has huge potential for mass retail banking and micro-finance since only 10% of the population hold bank accounts.
Regional banks including foreign-owned subsidiaries are healthy, liquid and strongly capitalised – with low leverage and moderate loan-to-deposit ratios. Some banks report capital positions (both Tier 1 & 2) well above the Basel Committee’s (8%) norm. They include African Bank (34%), Guaranty Trust Bank (26%), First Bank of Nigeria (24.3%), Banque de Tunisie (22.1%), Ecobank Transnational (21.4%), Banque du Caire (21.4%), Banco de Fomento Angola (21.2%), Arab African International Bank (18.3%) and United Bank for Africa (16.3%). The average BIS capital ratio for the SA five giants is 15% – they have investment-grade ratings on a par with several OECD-based banks.
The contagion effects
The spillovers from the global financial shocks and recession on the African banking sector were significant but not as destabilising as in Eastern Europe where several banks were declared insolvent. By contrast, the top-tier African financial institutions remained stable, despite some impairment of asset quality, caused by weaknesses in regional economies.
The region avoided recession despite waning commodity prices and a slowdown in foreign direct investment, which fell to $58.56bn (down from $72.18bn in 2008).
Output growth, however, declined steeply in 2009 to 2.5%, compared with average growth of 5.6% per annum during 2001–08, according to the African Development Bank (AfDB) – the continent’s major multilateral investor and donor.
The bank in recent years has approved financing (including 15% in equity) worth $4.7bn for 80 projects, mainly in infrastructure and financial services. AfDB’s co-financing has helped mobilise an additional $23.5bn from other multilaterals and private investors – including public-private partnerships.
There was only modest contagion to local subsidiaries of major foreign banks – notably Barclays, Banco Comercial Portugues, BNP Paribas, Citigroup, Crédit Agricole, HSBC, Société Générale (SocGen) and Standard Chartered. Thus, no heavy capital transfers from subsidiaries to parents were reported. Foreign subsidiaries are not reliant on funding from home countries, but rely instead on solid local deposit sources. Nevertheless, tighter credit conditions were observed during 2009. Most banks imposed stringent lending criteria (higher deposit requirements and collateral) and focused on the high-end market.
Lending margins rose significantly on forex denominated loans and on local currency lending. Concurrently, credit lines to African banks from foreign lenders came under severe pressure, reflected in reduced limits, repricing with increased spreads and some cancellations to small and medium-sized banks. Financing continued only for major banks.
Trade financing was also very expensive and scarce across the continent – with soaring interest rates and confirmation fees for letters of credit (LC) and bank guarantees. There were some cases for LC to be cash collateralised.
Tapping foreign expertise
The African subsidiaries of major overseas banks continue to introduce new product lines and innovative services, which, in turn, improve the growth potential of smaller but rapidly expanding countries like Ghana, Uganda and Zambia, among others.
Multinationals boast credentials in high-margin businesses such as offshore syndications, project (asset-backed) financing and structured trade and corporate finance, specialised advisory services (on mergers and acquisitions, cash management and custodian), the placement of private debt and equity, as well as treasury products for commodity hedgers and global asset management for high-net-worth individuals and institutional clients.
Standard Chartered has greatly advanced treasury services in host countries; for example, it introduced the first ever local-currency interest rate swaps in Kenya and Tanzania, the first cross-currency swap in Zambia, the first euro-pula trading in Botswana and the first flexible-forwards in Kenya and Zambia, as well as being first to offer forex forwards in Côte d’Ivoire, Gambia and Sierra Leone. The bank also helped Zambia’s mining industry by providing a copper hedge. Such innovative products have enhanced risk-management opportunities.
In Uganda, Standard Chartered offered new savings and remote banking products as well as better services for smaller and medium-sized enterprises (SMEs). Its project finance team is involved in power, telecoms, mining, hydrocarbons and ports. In Ghana, the bank was a global coordinator – structuring the $900m syndication for US-based Kosmos Energy and arranging a $2bn deal for Tullow Oil, the Irish-UK explorer.
Citigroup still dominates cash management from North to Southern Africa, while JPMorgan and Morgan Stanley capture the bulk of transactions for equity raisings and investment banking.
Updates on banking reforms
The Central Bank of Nigeria (CBN) under the governorship of Lamido Sanusi has published guidelines stipulating that each bank’s market share cannot exceed 20% and bank chief executives should have a maximum tenure of 10 years.
Significantly, the CBN has abolished the concept of ‘universal banking’. Hence, banks will have to dispose of non-banking activities like portfolio management, pension custodianship and insurance brokerage.
Moreover, the Asset Management Company of Nigeria (AMCO N) is expected to commence taking over the N1.5 trillion toxic debts of the rescued banks from January 2011.
Ghana is set to become the world’s fastest-growing economy in 2011 as ‘multiplier effects’ from oil production, higher investment and private consumption, thus benefiting the financial sector, led by Ghana Commercial Bank (GCB).
To further increase the banks’ capacity to participate in big-ticket projects and support an expanding economy, the Bank of Ghana (BoG) raised the minimum capital requirements to 60m cedi (about $42m).
Explaining the rationale for higher Tier-1 capital, Daniel Mensah, head of the Ghana Association of Bankers (GAB), said: “With the discovery of oil and its auxiliary businesses, there is a need for us, as members of one association, to increase our capital base. This is all in anticipation of the kind of activities that might come up as we become an oil-producing country.”
In Uganda, a five-year Financial Markets Development Strategy aims to strengthen financial intermediation. The plan includes updating the payments system and revising the commercial laws to improve contract enforcement. Last year, a Central Depository System was implemented to facilitate automated trading.
Future opportunities and challenges
Looking ahead, investment banking represents a lucrative business with the growth of private equity funds targeting natural resources, financials, telecoms, consumer and infrastructure sectors.According to the Emerging Markets Private Equity Association (EMPEA), more than one third of institutional private equity investors are now making allocations to sub-Saharan Africa, compared to only 4% in 2006.
Sarah Alexander, president of EMPEA, said: “African funds raised through June already exceeded the full year 2009 total, and some sizeable funds being raised point to a return to pre-crisis levels.”
In fact, banking stocks are among the best investments during fledgling stages of a frontier market’s growth. Equity Bank, Ghana Commercial Bank, Guaranty Trust Bank, CRDB Bank and CAL Bank (Ghana), among others, boast decent balance sheets and relatively low price/earnings ratios of 12 to five, (especially compared with their growth potential).
Net-interest margins are significantly higher across Africa than in other regions, thus providing scope for higher earnings.