Can Africa’s banks emerge stronger after Covid-19?

Rising household debt, problems for SMEs and non-performing loans all pose problems for banks, but the pandemic also provides opportunities.

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Image : Minerva Studio/AFP

Where do banks stand in the wake of the Covid-19 pandemic? The full impact may not be felt until next year when some loans will become non-performing. Half-year results to June this year for some banks have been strong although in economies that were struggling prior to Covid-19, such as Tunisia, the banks have announced profit warnings.

The impact on Africa’s major economies of widespread declines in GDP will certainly hit the banking sector. The IMF predicts that South African GDP will shrink by 8%, its biggest contraction since 1985. Nigeria, Angola and other oil-exporters have been hit by plummeting oil prices, which are struggling to climb past $40/barrel. Tunisia, Egypt and Kenya have all seen tourism revenues evaporate but benefit from diversified economies.

Rising household debt and difficulties for small and medium-sized enterprises are the biggest hit to bank earnings. Banks could also suffer a lack of liquidity as investment flows leave emerging markets, but for many, government and central bank inflows have helped to compensate, at least for now. Central banks slashed interest rates and reserve requirements, freeing up more lending. Whether such accommodative policy will continue remains to be seen. 

Still, half year results to June were encouraging for some. In September, Standard Bank Group announced record earnings of $3.2bn for the 6 months to June with a 19% growth in customer deposits. It had increased non-performing loans provision by 30%. Attijariwafa Bank in Morocco announced that net banking income was $1.4bn in Q2, up 5.1% compared to a year earlier.

In Egypt, CIB Bank’s half year results showed that net interest income was up 25% to $773m compared to the first half of 2019, and profit before tax up 2% to $467m, despite a giant $140m non-performing loans charge, nearly three times the previous year.

Despite this relatively good news, earlier this year ratings agency S&P Global cut credit ratings to BB- for some South African banks and B- for banks in Tunisia and Nigeria.

Towards recovery

Looking forward, the longer-term effects of Covid-19 are likely to linger for three or four years, judging by the 2008 global financial crisis. However, the leading African banks remain strong with a large provision of capital.

They have big opportunities to use the crisis to improve, according to consultant McKinsey. They can cut costs (at 4%-5% of assets twice the global average), use more agency banking, and redeploy staff.

The pandemic is also spurring faster decision-making and moves to stronger cyber-security and faster digitisation, including streamlining lending to low-risk customers. Banks can also increase their customer base; for example, in Morocco 4.3m households have had access to social aid through the banking system. 

If the right medicine is doled out, and provided banks work hard on recovery, they could end up stronger than before the virus hit. Undoubtedly, banks across Africa will be impacted but most will not need ventilators or life support.

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