NewsNorth AfricaA record year for African banks

Tue,19Sep2017

Posted on Monday, 05 October 2015 13:30

A record year for African banks

Photos© Siphiwe Sibeko/ReutersFinancial institutions in our rankings reported assets of more than $1.5trn for the first time. But economic headwinds from China and the US signal troubles ahead

 

Africa's biggest banks enjoyed a year of buoyant asset growth. They will need it. If local currencies continue to slump against the US dollar and if commodity prices – particularly oil – remain depressed, buffers will ease the shock.

The International Monetary Fund predicts sub-Saharan Africa to record economic growth of 4.5% in 2015

In our 2015 ranking of Africa's Top 200 banks, based on banks' 2014 results, total assets topped $1.5trn for the first time since our rankings began in 2006. This rise in Africa's bank assets marks an 8.4% increase on our 2014 ranking and a rebound after a 3.9% drop the previous year.

Across the continent, banks are continuing to profit from their lending. The total net interest income – the difference between interest earned on loans and paid on deposits – for our Top 200 banks was $76.5bn in 2015, up 25.7% on 2014.

Of this, just less than half came from South Africa-based banks, which were also the continent's most profitable: six of the 10 most profitable banks in our ranking are South African, topped by the continent's largest, Standard Bank Group (#1).

But some banks punch above their weight when it comes to profit making: Nigeria's Guaranty Trust Bank (#22) was the continent's ninth most profitable.

Breaking down our Top 200 by region, all banks apart from those in Central Africa experienced growth in assets between our 2014 and 2015 rankings.

Central Africa's weak showing is likely to be due to fewer of its banks making it onto the Top 200 list this year – 13 compared to 17 last year. They have been squeezed out as more banks make the Top 200 from North, East and Southern Africa.

Asset growth in those banks outside South Africa has been strong due to "low penetration levels and high asset yields", according to Kato Mukuru, head of equity research at Exotix, an investment bank.

Most governments have continued with short-term borrowing at high interest rates, leaving banks little incentive to change business models and focus on extending services to unbanked customers.

Mukuru says banks have also protected their margins by managing to keep their funding costs – the price at which they finance their activities – low.

There has also been a healthy recovery in African banks' total deposits, now standing at $1trn for our Top 200 banks – a figure not seen since 2011.

This deposit growth was matched by an increase in lending, with both total deposits and total loans growing at just over 5% between our 2014 and 2015 rankings.

To give an order of magnitude, however, China's stock exchanges recorded $3trn in losses in two months this year – so Africa's financial system has some way to grow.

 

North Africa rebounds

North Africa in particular has seen a strong recovery in its deposit base this year, which stood at $361bn in the 2015 ranking, up 8.5% from $332.5bn in 2014.

Two of the top five banks that grew fastest in terms of total assets were Egypt-based: the Housing and Development Bank (#84) and the National Bank of Kuwait – Egypt (#64).

But in the years since 2010, it has been West African banks in our Top 200 list that have seen the fastest growth in deposits, with a rise of 112% from $78.6bn in our 2010 ranking to $167.2bn this year.

Nigerian banks have consolidated their performance in the years since the bad-debt scandal of 2009.

The International Monetary Fund predicts sub-Saharan Africa to record economic growth of 4.5% in 2015, but this is subject to global risks and a tightening in the flow of financing around the world.

As the US economy continues to recover, the Federal Reserve is expected to raise interest rates before the end of the year, causing concerns among some analysts that emerging markets could be negatively affected as the value of the dollar increases.

Jared Coetzer, who works on institutional sales for pan-African equities at South African-based investment banking group African Alliance, tells The Africa Report that a more expensive dollar might mean banks turn to fund themselves through euros or borrowing from South Africa. "For banks with large US dollar liabilities already, a continued strengthening of the dollar could lower bank equity values as bank assets and earnings growth might not keep pace with a rising debt burden," he says.

Some African currencies are already facing turbulence against the US dollar. Central banks, including those in Kenya, Uganda and Nigeria, have moved to shore up their currencies by raising benchmark interest rates.

Each troubled currency is subject to different economic headwinds: Ghana's cedi because of a weak economy, Nigeria's naira and the Angolan kwanza because of the fall in the oil price, which dipped to below $40 per barrel in late August; Kenya's shilling because of security threats denting tourism revenue; and the South African rand because of a lack of electricity.

In South Africa, Coetzer expects banks to prepare for an increase in non-performing loans (NPLs). "We are facing an unprecedented electricity crisis and the interest rate cycle has turned higher. The resource super-cycle has come to an end and consumers are going to feel the pinch," he says.

The slow increase in NPLs should be offset by increases in banks' net interest income as interest rates rise. The South African Reserve Bank raised benchmark rates, for the first time in a year, to 6% in late July.

Exotix's Mukuru says that, so far, Ghanaian banks have been some of the "hardest hit" by currency weakness, but that "this has created strong asset growth" because banks have a lot of dollars on their balance sheets. "This has generated exceptionally high return on equity in cedis as we are yet to see a material deterioration in asset quality," he says.

He predicts, however, that this deterioration will come eventually. "To mitigate, the banks in Ghana and across Africa have been converting US dollar exposures to local currency. That is really the only way to protect themselves. The question is, are they too late?"

 

Hedging for the wise

Banks such as Nigeria's United Bank for Africa (#21) have hedged to protect themselves against the low crude price and weak naira.

Coetzer says the naira is expected to drop in value by up to 20% in the second half of 2015. He says that with foreign exchange assets taking up 40-60% of Nigerian banks' risk-weighted assets in December 2014, "we have done stress tests on capital adequacy ratio levels under a devalued naira and find that there are indeed banks which may need to raise Tier 1 and Tier 2 capital."

In East Africa, banks that have been expanding steadily during the past few years are looking further afield. Kenya's Equity Bank Group is now #66 in our rankings, up two places on last year and a stellar climb since our 2010 ranking, when it was #103.

In May, Equity Bank announced it would buy ProCredit Bank Congo in the Democratic Republic of Congo as part of a move to expand to 10 new countries in the next five years.

It has Burundi and Ethiopia in its immediate sights and its eyes on Zambia, Mozambique and Zimbabwe in the medium term.

As more African governments and businesses migrate operations such as paying wages or pensions online, opportunities to leap ahead will emerge.

In Nigeria, MasterCard signed a deal with the Nigerian National Identity Management Commission in 2014, branding the country's new national identity cards with MasterCard and building-in an ability to do financial transactions.

In the pilot, 13 million people received cards, with plans to extend it to another 100 million people. The banks ready to step in and process the payments will bring in new customers – and be the ones to watch.



Gemma Ware

Gemma Ware

Gemma Ware is business editor of The Africa Report magazine, where she has worked since 2008. She coordinates the magazine's business pages and writes on a range of subjects from the continent's telecoms revolution, to private equity and African stock markets.

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