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West African banks are feeling the squeeze

West African banks are feeling the squeeze

Banks in West Africa have been in the news for the wrong reasons lately.

In Nigeria, four banks, of which three have foreign affiliations, namely Standard Chartered, Citibank,  Stanbic IBTC Bank and Diamond Bank, were fined N5.65bn in total by the Central Bank of Nigeria (CBN) for illegally facilitating the transfer abroad of $8.134bn for MTN, a South African telecoms firm. The Nigerian central bank has also increased its scrutiny of some of the practices of banks that are clearly exploitative. In September, for instance, it instituted a fine for erring banks that fail to reverse failed electronic transfer transactions within 24 hours.

In neighbouring Ghana, five banks, namely Unibank, Sovereign Bank, Construction Bank, Beige Bank, and Royal Bank, failed and had their licences revoked by the Bank of Ghana (BoG), the central bank, in early August. The failures were largely due to weak corporate governance systems, with widespread fraud and insider dealings alleged. In Unibank, for instance, hitherto Ghana’s sixth largest bank, directors and their associates availed themselves of depositors’ funds to the tune of $1.1bn, according to the BoG.

Consolidated Bank Ghana, a resolution vehicle set up by the Bank of Ghana, to assume the assets and liabilities of the failed banks, is believed to be adequate to prevent a crisis, however. Stringent punitive measures against the directors of the failed banks are also expected. Nonetheless, poor banking supervision by the BoG is also a reason why the banks failed. That said, remedial measures by the central bank have proved to be effective. S&P Global Ratings seems to think so, at least. In September, it raised Ghana’s sovereign rating to B from B-, in part because it assessed the country’s banking sector to be largely stable.

Regardless, there is a general lack of confidence by Ghanaians in the banking sector at the moment. It is also important to note the continued divide in the banking sectors of Anglophone and Francophone countries. “There continues to remain a deep divide between the banking systems in English and French West Africa,” says Andrew Nevin, chief economist at PwC Nigeria in Lagos. “Apart from Ecobank – a truly pan-Sub-Saharan African bank, the players are different in the two regions, and certainly, English-speaking banks have not had great success when they entered Francophone markets,” he adds.

De-risking, increased mobile banking

So what are the notable banking industry trends in the region over the past year, especially in Nigeria, Ghana, and Côte d’Ivoire? “We have noted three trends,” says George Bodo, head of banking research at Ecobank, a pan-African bank, in London. “First, we have generally seen a balance sheet de-risking trend in West Africa, where banks, in Ghana, Nigeria and UEMOA, increased the pace at which they purchased central government debt compared to lending to the real economy.

“In 2017, the share of central government debt to total banking sector assets rose sharply by 400bps y-o-y to 21%,” he continues. “In the same period, the share of customer loans rose by 200bps y-o-y. This is largely a risk-off trend informed by the elevation in credit risks as gross NPL ratio rose to 16% in 2017, from 11% in 2015. “Second, there is an increasing adoption of mobile phone as a distribution channel-especially in Ghana and UEMOA,” says George Bodo. In Ghana, the value of mobile money transactions (primarily deposits and withdrawals) hit $35bn in 2017, from $18bn in 2016. In UEMOA, the value of mobile money transactions hit $21bn in 2016, a sharp growth from the $2.9bn transacted in 2013.

“Finally,” concludes Bado, “regulations seem to be tightening. In Ghana, commercial banks have until end of 2018 to increase their minimum fully paid-up share capital to a new regime of GH¢400m [approximately $84m] (from GH¢120m).” In UEMOA, the regional central bank, BCEAO, has, effective 1 January 2018, rolled out a mix of Basel II and III inspired regulatory reforms.

Some of the key reforms include: (i) introduction of operational and market risks in the calculation of risk-weighted assets; (ii) a capital conservation buffer surcharge – mainly a 2.5% surcharge of core capital; (iii) a reduction in the single large exposure limit to 25% of core capital; and (iv) regulation and supervision of financial holding companies on a consolidated basis by the BCEAO and the Banking Commission.

PwC’s Nevin provides additional views on the Ghanaian banking sector: “With respect to Ghana, the number of banks was very high in a small market and it is not surprising there is a consolidation. The costs of banking technology – particularly with the fintech challenge – and the increasing demands of regulatory compliance mean that small banks are going to be more and more uncompetitive.

“In the Ghana market, you have Ghana Commercial Bank as a huge player, and a number of very successful African Banks (GT, Ecobank, UBA and Absa for example). So it is not a surprise that small, poorly capitalised players cannot survive. The Bank of Ghana is doing an excellent job of resolving these banks and making sure the banking system in Ghana is robust.”

QE to the rescue?

And how does Ecobank’s Bodo see the banking industry in the region evolving over the next year or so; especially in the key countries of Nigeria, Ghana, and Côte d’Ivoire? “In Ghana and UEMOA, we are anticipating increased partnerships between traditional banks and mobile network operators (MNOs) especially in regards to liability mobilisation. In Nigeria, we still anticipate increased risk-off liquidity deployment strategies.”

He explains: “In 2017, banks bought Federal Government-issued debt securities worth N245bn, while only lending N183.6bn to the real economy. This kind of asset allocation was bound to concern the CBN. However, we broadly believe that for balance sheets to grow, banks have to move up the risk curve. But this risk spectrum, which holds the right price incentives, still lacks the right ingredients that banks are looking for.”

To push them along, the CBN announced a number of stimulus measures in August. It offered to release some of the funds kept by banks with it as reserves for lending to agricultural and manufacturing firms at the single-digit rate of 9%. Additionally, it offered to buy long-tenored bonds of corporates that demonstrate their activities would create jobs. But would these be enough to nudge the banks towards more lending to the real sector? Ecobank’s Bodo is sceptical: “CBN’s direct intervention in deposit intermediation will still not avail the ingredients.” 

Innovate, innovate, innovate

“In the Nigerian banking sector, the environment remains very challenging. The uplift in oil prices has taken some pressure off non-performing loans in the oil & gas sector – but not the power sector. There continues to be a widening gap between the major banks and the middle-tier banks in terms of return on equity and cost-to-income ratios,” says PwC’s chief economist, Andrew Nevin,

“Therefore, middle-tier banks will need to find distinctive strategies to create value because if they do what other banks do, they will not earn adequate returns,” he argues. Besides, banks all over the world and indeed Africa, are facing disruptions from new technologies at the behest of industry outsiders. At their current pace, financial technology companies could easily displace banks in the very near future.

Nevin provides some perspective: “All Nigerian banks, even the top tier banks, are challenged by fintechs and they need to create new, innovative products if they want to appeal to a very young, connected population in Nigeria. “Fintechs are very strong in the payment space – Interswitch, Paga, and Flutterwave, for example – and are increasingly strong in the consumer credit market.

“There are also new players trying to create savings vehicles for retail clients. The banks carry significant legacy costs and the finechs will find ways to take revenue at a much lower cost.” Clearly, short of innovation, banks in Nigeria and the broader West African region, might find the times even more challenging yet.

Rafiq Raji

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