Medium Banks Challenge South African Dominance

Amid continuing uncertainty in the global financial markets, this year’s African Business survey of Africa’s Top 100 Banks has yielded one overwhelming conclusion: the continent’s biggest banks have been greatly outperformed by middle ranking banks in smaller economies. South Africa’s big four banks have enjoyed mixed fortunes since our last survey but have collectively lost strength in terms of dollar denominated tier-one capital. In contrast, banks in the rest of the continent have made strong gains, nowhere more so than in Eastern Africa.

However, although most African banks have gained in strength over the past year, stagnation in some regions and falls in the value of tier one capital of three of the four leading South African banks have dragged down the total size of Africa’s Top 100 Banks. The combined value of tier-one capital of the Top 100 stands at $87.6bn in our 2012 table, down from $90.7bn in last year’s survey. The fall in total assets has been much more limited: from $1,156bn last year to $1,150bn this year, which also shows that lending has not increased much in the past year.

The very top of our table has a very familiar ring to it. Indeed, there are no new entries among the top 10. However, there has been a great deal of jockeying for position among the rankings, as global economic insecurity continues to affect different banks in different ways.

The big four South African banks remain the four biggest banks on the African continent, while Investec Bank moves up two places to make it a South African top five.

Standard Bank Group (Stanbank) retains top position but with a much reduced lead, as its relative strength as measured by tier-one capital of $9.8bn is down from last year’s $12bn. An increase in capital has been at the forefront of the debate in the Western world as banks are required to hold more capital to be able to withstand shocks such as the one which took place in 2008 with the fall of Lehman Brothers. Capital Adequacy ratios in Africa (i.e. capital, or a bank’s reserves, with respect to its assets, or loans) are high in Africa in comparison to world averages, reaching 20% in some countries. FirstRand Banking Holdings leapfrogs Absa Group into second place, with an impressive jump in capital from $6bn to $8.4bn.

Standard Bank did record a 15% increase in income for the first half of this year but this was coupled with a 17% increase in costs. Standard Bank Group chief executive Jacko Maree said: “Amidst the uncertainty in the world economy and the continuous upheavals in global banking, our broad financial product base and our financial strength have served us well.”

He continued: “Following a reasonable start to the year, the challenges that hampered the global economy in 2011 intensified in the second quarter, much of this centred on the Eurozone. It has become clear that 2012 has developed into another difficult year for the global economy. Investor confidence remains fragile and financial markets are volatile. This makes for a very challenging operating environment for all banks.”

As with Standard Bank, second placed FirstRand is looking to the rest of the African continent for new sources of income. In August, the company announced that it would pay $91m for a 75% stake in Merchant Bank Ghana, continuing its strategy of acquiring established assets with plenty of scope for organic growth. Rival Absa is now in talks with its majority owner, the UK’s Barclays Bank, regarding the integration of their various assets in Botswana, Ghana, Kenya, Mauritius, Tanzania, Uganda and Zambia. The head of equities at Sanlam Investment Management, Patrice Rassou, commented: “These are well run, profitable operations with little overlap with Absa except for Tanzania.” However, the details of the deal still need to be worked out.

Morocco’s Attijariwafa Bank has lost its position as the biggest non-South African bank on the continent, with a fall in capital from $2.7bn to $2.5bn. It has been overtaken by another Moroccan bank, Groupe Banques Populaire, which moves up from 10th position to sixth. The remainder of the top 10 comprises Libyan Foreign Bank (whose unaudited accounts are actually stronger as at end of 2010) and two Nigerian banks: Zenith Bank and First Bank of Nigeria.

New entries

There is far greater variation in the rest of the table than at the top, with 23 new entries this year, in comparison with just 10 in 2011. This number includes nine Egyptian banks, many of which return to our rankings. There are also three Algerian and two Tunisian banks in the top 100, suggesting that the North African banking sector is still quite strong even after the Arab Spring.

There have been some geographical changes in the balance of banking power over the past year. While the Top 100 as a whole has greatly increased, West and North African banks have grown little in value over the period, which may reflect either losses which were absorbed and/or devaluation with respect to the dollar.

By far the most growth has been experienced in Southern Africa outside South Africa and across Eastern Africa. The latter has generally been underrepresented in our survey but average annual regional economic growth of 6% over the past decade is finally feeding through into bigger banks.

The new entrants also include three companies from Mauritius: Standard Chartered Bank Mauritius, Investec Bank Mauritius and Barclays Bank Mauritius, confirming that the island nation’s offshore banking sector is growing strongly. Financial services now account for 15% of the country’s GDP; a remarkable achievement given that the sector was first deregulated in 1992. An estimated 70% of foreign financial services investment in the country comes from India but the government is keen to attract more investment from banks based in the rest of Africa.

At present, just Investec, Standard Bank and Kenya’s I&M Bank operate in the country. Ravin Dajee, the managing director of Barclays Bank Mauritius commented: “While there is a threat of investment to India from Mauritius drying up, we have an opportunity of investment from Africa.”

Domestic Mauritian banks continue to perform well. In particular, the country’s biggest financial services firm, Mauritius Commercial Bank, moves up from 34th to 25th in our rankings, with a rise in capital from $591m to $765m.

Strength in depth

The overall strength of the African banking sector seems to have improved markedly over the past year. Zambia National Commercial Bank needed a value of $99m to take 100th position in our table last year but First National Bank of Botswana secured the same ranking with $134m this year, a rise of 35% in just 12 months. Even beneath the Top 100, there are clear signs that the African banking sector is booming. Many other banks are developing at such a rapid pace that they are likely contenders for inclusion in our survey in the near future.

Bank of Kigali, for instance, continues to grow very quickly. Rwanda’s biggest bank had a capital base of $54m in our survey last year but this figure has now jumped up to $89m. The company also reported a 32% rise in net interest income to F10.3bn ($16.6m) and a 55% increase in net profits for the first half of this year to F6bn ($9.8m). The government of Rwanda sold its 45% stake in the bank in an initial public offering (IPO) last year that raised $62.5m.

The bank’s chief financial officer, John Bugunya, said: “The banking landscape in Rwanda is maturing over time and by being a top contender in Africa in the world’s top banks goes to show the significant strides our industry is witnessing with Bank of Kigali as the market leader.”

Rwandan GDP grew by 8.6% last year and is forecast to increase by a further 7.7% during 2012. Nevertheless, the bank has been forced out of our regional Top 25 as a result of even more rapid growth elsewhere in the region.

Economic optimism

In the long term, the size of the African banking sector will depend upon the size of the continent’s GDP. The past decade has been the most economically successful decade for the continent since independence in the early 1960s and the pace of growth is likely to continue for the foreseeable future. The IMF predicts continent-wide growth of 5.4% this year, while the UNDP believes that annual growth could reach 7% by 2015.

Tegegnework Gettu, the head of the UNDP’s Africa Bureau, said: “This is a remarkable achievement. Africa is so far the fastest-growing continent globally. We need to keep this spirit. We need to hasten our infrastructural development, because this is the time for Africa.”

However, he added: “At the port in Singapore it takes eight minutes to clear a ship, in Kenya it takes hours, even days sometimes. Those are the issues we should be dealing with and I am glad that most African countries including Kenya are on course.”

There are signs of increased personal financial confidence in some countries, where competition in the mortgage market is increasing. The chief executive of the Kenya Bankers Association, Habil Olaka, said: “It is a competitive strategy to reduce the lending rates, even before your cost of deposits goes down. You want to be the first one to move with the aim of increasing the market share. So you move fast to drop the rate, without fear of sacrificing on the margins, because you know that the costs will eventually go down.”

Credit checks are becoming more common in Kenya and other more developed mortgage markets, encouraging banks to lend to those with the ability to repay.

Standard Chartered Bank of Kenya announced a massive 87% rise in profits for the first half of this year to KSh6.5bn ($77m). This followed a 14.6% fall during the same period last year and was helped by a rise in net interest income from KSh4.52bn ($53m) to KSh7.32bn ($85m) over the past year.

Chief executive Richard Etemesi said that both business and consumer banking were performing well. He added: “Both the businesses enter the second half with good momentum, but we remain vigilant about the global outlook and the uncertainties within the political and economic environment in Kenya. The bank is in great shape, has good momentum, and is superbly positioned for the future.”

Increased competition

Cross-border competition continues to increase, particularly in East Africa. As Kenyan banks increase the scale of their operations in Uganda and Rwanda, some investment is now beginning to flow in the opposite direction.

The chief executive of Bank of Kigali, James Gatera, announced that his company would start operating in Kenya this year and Uganda thereafter. Kenya’s KCB, Equity Bank and Fina Bank all now operate in Rwanda, while Kenya’s I&M Bank took over Rwanda Commercial Bank in August, buying the 80% stake held by UK emerging markets equity investor Actis.

The remaining 20% has been retained by the government of Rwanda. As a result of the deal, I&M Bank has already introduced a new transfer scheme called Brisk Transfer. The new managing director of Rwanda Commercial Bank, Sanjeev Anand, explained: “The service is a unique way where beneficiaries receive funds on the same or next working day, depending on whether they are I&M bank branch network customers or not. And it is cost effective with low charges.” Elsewhere, Diamond Trust Bank Kenya raised KSh1.81bn ($21.5m) in August to help expand its branch network in the region from 78 offices to 90. It already operates in Burundi, Kenya, Tanzania and Uganda.

However, the expansion of banking services in some parts of Africa is being held back by high costs. While the Bankers Association of Zimbabwe insists that bank charges in the country are comparable with those in the rest of the region, a survey by Industrial Psychology Consultants (IPC) concluded that they were too high.

IPC managing consultant Memory Nguwi said: “A random comparison of service fees with South African banks shows that service fees are very much on the high side. The same argument can be used on the cost of getting ATM cards. In South Africa, Standard Bank charges R4 ($0.4), yet some Zimbabwean banks charge US$20 for the same service.” Unless established banks offer more attractive bank accounts, mobile banking services are likely to capture the bulk of the country’s untapped banking market.

Complaints over bank fees are also common in South Africa itself. In a recent survey, Ernst & Young found that 70% of South Africans who switched banks, did so because of high bank charges. It also found that customers want to be able to bank using more channels, whether by mobile or internet. Emilio Pera, financial services sector leader for Ernst & Young in Africa, said: “Banks want to contain their costs and they need to contain their costs, but you could lose market share if you hold back too long.”

Stronger competition and more transparent bank charges should help to reduce the cost of banking and encourage more potential customers to enter the sector.