Deutsche Bank sees Ethiopia’s delayed polls as a trigger for entry

“Enhanced political stability subsequent to the election may lead many international institutions, including Deutsche Bank, to play a more active role in the country,” says Hoving.

“The country is currently facing many challenges,” but has “significant growth potential once the privatization strategy has fully kicked off,” he says. Hoving and Loïc Voide were appointed co-CEOs for the Middle East and Africa in September. Both will be based in Dubai.

READ MORE Ethiopia delays elections: Is COVID a valid excuse?

Ethiopia, where the banking sector remains closed to foreign investment, has been the world’s fast-growing economy of the last decade. Average annual growth in real terms has been 9.6%, and over 75% of the country’s population of 112m is under the age of 34. “Years of sustained growth are creating a burgeoning consumer class,” analysts at Tellimer write this month.

Deutsche Bank has been in close contact with Ethiopia for many years, says Hoving. The bank was chosen by Ethiopia to manage a sale of eurobonds in 2014. Hoving adds that the bank has the ability to confirm letters of credit with some banks in Ethiopia to enable corporate customers to trade.

There have been tentative signs of a liberalization, with a law passed in 2019 to allow banking-sector investment from the diaspora. Last year also saw the first financial services license for a foreign company, given to US-owned equipment finance firm Ethio Lease.

Still, high tariffs, the infrastructure deficit and the difficulty of doing business remain constraints, says Tellimer.

Political stability is far from assured: the northern Tigray region in September held elections in defiance of the decision by Prime Minister Abiy Ahmed to postpone all polling because of COVID-19.

READ MORE Ethiopia: Tigray regional polls escalate tensions with Addis Ababa

Verisk Maplecroft’s head of Africa Indigo Ellis sees Ethiopia as one of four African countries where food insecurity prompted by the pandemic will contribute to the destabilisation of local and national governments.

FinCen

If full-scale banking entry becomes possible, investors will need some convincing of the Deutsche Bank’s execution capability. Former chief operating officer Kim Hammonds, who managed the company’s IT systems, said in 2018 that the bank was the “most dysfunctional” place she had ever worked. Endless strategic restructurings have never borne fruit.

• The bank is currently trying to reduce the size of its investment bank and exit equity sales and trading.
• With a price-to-book ratio of 0.27 times, Deutsche Bank’s shares are among the cheapest of any European bank. That compares with 0.38 times for BNP Paribas, 0.48 for Credit Suisse and 0.47 for HSBC.
• While most lenders have seen their prices tumble due to the economic impact of COVID-19, Deutsche Bank’s shares have languished at less than half their book value for years.

The leak in September of suspicious banking transactions filed by banks to the Financial Crimes Enforcement Network (FinCEN) of the US Treasury Department did nothing to increase confidence. Deutsche Bank accounts for 62% of all the leaked suspicious reports.

• That was no great surprise: in 2015, the bank paid a fine of $258m after US regulators found that it had moved money on behalf of clients in Libya, Sudan, Iran, Burma and Syria while under US sanctions from 1999 to 2006.
• The bank has devoted “significant resources to strengthening our controls on a global level and we are very focused on meeting our responsibilities and obligations,” says Hoving.
• “This also includes implementing risk mitigants and, where appropriate, off-boarding customers and correspondent banking relationships that do not meet our high standards.”
• Globally, the bank has invested almost $1bn in improving controls, training and operational processes, adds Hoving.
• The bank has increased its anti-financial crime team to over 1,500 people and will increase this number further, he adds.

In Africa, the bank will “continue to look for opportunities to support our international and local clients in addition to the development of local African economies,” says Hoving.

That might be easier if Africa had its own chief executive on the ground. Dubai’s strategic location prompts Deutsche Bank to manage its African business from the United Arab Emirates, adds Hoving.

Bottom line

Deutsche Bank has no room for further error as it seeks ways to expand in Africa.