African Banking Expansion Shows no Signs of Abating

Following the ‘tragic’ banking decade of the Eighties the
emergence of African banking players, in the context of surging commodity
prices, led to the redrawing of the Sub-Saharan banking landscape throughout the
Nineties. This reshuffling accelerated in the mid-2000s, with the opening up of
new regional zones, the adaption or, in some case, innovation of products to
local markets and growing initiatives to attract – until then – neglected retail
clienteles. These shifts raised hopes of a real take-off of banking services on
the African continent.
 
Bank-Africanisation Driven by Rampant
Consolidation
 
Today’s landscape was born from this first
transformation. Since 2010, the sector has been in a structuring phase as the
initial models mature.
 
While all players are doing fairly well,
the biggest groups really stand out:

• South African banks:
  Following several years of subdued growth, the ‘Big Four’ banks – FirstRand,
  Standard Bank, Nedbank and Absa – are seeking to recalibrate their presence by
  raising their fairly weak exposure to the continent, which currently is less
  than 15% of their activity.
• Moroccan banking groups: Attijariwafa and
  Banque Marocaine du Commerce Extérieur (BMCE) via Bank of Africa, which benefit
  from their many years of experience expanding on the African continent. Their
  example is increasingly emulated, as seen by the market entry in 2012 of Banque
  Centrale Populaire (BCP), which now operates in nine Sub-Saharan African
  countries. Moroccan banks now have more market share in some countries of the
  West African Economic and Monetary Union (WAEMU) zone than domestic or Western
  banks, with three Moroccan banks sharing market dominance in Ivory Coast.
• Nigerian banks: Their gigantic domestic market, central bank-imposed
  restrictions and Asset Management Corporation of Nigeria (AMCON)-type
  restructurings leave them fenced in their domestic market. AMCON was a joint
  initiative from the Ministry of Finance and the Central Bank of Nigeria (CBN)
  and was established to purchase non-performing loans from Nigerian universal
  banks and recapitalise them.
• Alliance strategies: As evidenced by the 20%
  capital stake taken by South African bank Nedbank in the biggest African banking
  franchise, Ecobank, and Barclay’s expansion strategy in eight countries through
  Absa (held by Barclays Group).

This ‘bank-Africanisation’,
characterised by consolidation and a desire to achieve a continental footprint,
has revolved since the mid-2000s around four categories:

• G1 –
  Groups from the African Continent, i.e. African-owned banking groups operating
  outside their domestic market, such as Standard Bank in South Africa,
  Attijariwafa in Morocco and United Bank for Africa (UBA) in Nigeria.
• G2
  – Pan-African or pan-regional African-owned banking groups, such as Ecobank and
  Bank of Africa.
• G3 – Non-African groups: being all the subsidiaries of
  parent groups with non-African capital ownership, such as Société Générale,
  Barclays and Standard Chartered.
• G4 – Banking groups focused on key
  countries; examples include Kenya Commercial Bank (KCB), which is highly focused
  on Kenya and the East African Community (EAC) zone.

Devlhon
Consulting has noted that groups G1 and G2 posted the strongest retail network
expansion, with respective growth rates of 12 % and 9 % for branch openings
between 2006 and 2010, which compares with 2 % for those in group G3. The main
rationale for African banks is to seek growth prospects beyond their saturated
domestic markets, when loan distribution is running out of steam and positions
are frozen, pushing them to look for bridges-to-growth. This has led to a
relatively strong cross-border activity across the continent vis-à-vis other
emerging zones and the dynamic of inter-regional African trade.
 
Growing but Still Lagging
 
Sub-Saharan banks are catching up those
in other emerging markets as their branch networks grow fast. According to
Devlhon Consulting, sub-Saharan branch networks grew by over 6% in 2011; still
behind Asia (9.7%) but ahead of South America (3.8%). However, sub-Saharan banks
still lack critical mass compared to other emerging banks and it is hard to
compare them to international peers. They are underperforming in terms of return
on equity (ROE) and have a limited presence outside of the African continent.

 
This phenomenon is illustrated by the case of Standard Bank, which
shelved ambitions to become a leader in emerging countries such as Argentina and
Russia, and reverted to a purely African strategy. African banks have a higher
cost-to-income ratio – generally above 50% – than those of other emerging
markets, particularly in Asia. Moreover, the stock market valuation of the major
South African and Nigerian banks (and Moroccan to a certain extent) is still
well below emerging market levels.
 
Prospects for the Years
Ahead
 
An analysis by Devlhon Consulting of retail banking expansion
in the past 10 years backs the scenario of an upcoming consolidation on both
national and regional levels. According to the firm’s forecasts of urban nodes
and banking activity growths, the branch networks of leading banks should have
grown by between 46% and 95% by the year 2020, based on a sampling of 19 African
markets.

This would translate into a further 1,700 to 3,600-plus
branches just for the top three national players. That equates to the creation
of a retail bank network comparable to the combined networks of the Moroccan and
South African leaders, representing two or three times the absolute retail
banking growth than that posted in the mid-2000s.
 
Different
Strategies, Same Challenges
 
The pan-African strategy of the major
banking groups is to capture future growth and even monetise distribution
capacities, but also to capture business and small and medium-sized enterprise
(SME) clientele. The constantly changing banking landscape in Africa makes it
difficult to operate on set growth models. The big players with national
positions and financing are typically the most aggressive in terms of expansion.
Standard Bank, one of the most internationalised banks and a member of the
above-mentioned category, today has a strong exposure to the continent, with 20%
of top line revenue and 15% of tied in capital. Following the new agreement with
its parent group, Barclays, Absa’s revenue exposure to the continent will climb
from 10% to 15%.
 
Moroccan banks are extremely dynamic, both in
terms of organic growth and acquisitions. Although its sub-Saharan exposure in
loans and advances to customers amounts to about 9% of its balance sheet,
Attijariwafa’s sub-Saharan subsidiaries (mainly from Credit Lyonnais’ old
network) already generate nearly 8.6% of its net profit.

Another
specific feature of Moroccan banks is that they initiated their international
expansion in Europe – such as the operations set up in seven European countries
for Casablanca-based Banque Centrale Populaire (BCP) – to capture the money
transfer flow from individuals. Over 25% of Moroccan banking system deposits
stem from residents living abroad. They benefit from a dual advantage: they can
now rely on a Europe/sub-Saharan Africa/Maghreb triangle, both from transfers
carried out by the diaspora and from transactional and trade finance banking. As
for the Nigerian banks the costs of their domestic networks, and their limited
presence in major markets such as Kenya, effectively applies a brake on their
ambitions to expand.   
 
Retail Banking in Africa is not for
Everyone
 
Not all banks have the means to transform themselves into
pan-African banking groups. Among the obstacles to overcome are achieving
critical mass, the complexities of refinancing on growth markets and the
difficulty of building high-performance operational, sales and technology
platforms. In short, the sort of challenges that can hinder profitability: the
ROE of African subsidiaries hovers around 10%, while that generated by the
parent group is typically 15% to 20%. For example, Absa’s subsidiaries in Africa
are loss-making, excluding those held directly by Barclays.
 
In
that respect, product offering and sales strategy are key to the success on the
three major battlefronts:

1. The battle for market share and for
   new sub-markets or segments. Increasingly, banks have to become multi-specialist
   and diversify away from their historical client base. They strive to tap into
   very new and distinct segments such as low income banking, high end clients as
   well as SME markets, which make up 5.4% of total loans granted in sub-Saharan
   Africa versus an average of 13.1% in emerging countries.
2. The
   battle for growth, consisting of players expanding their footprint
   simultaneously in urban, city fringes and rural areas. They roll out development
   models suited to local needs, such as mobile low-cost branches, combining
   physical distribution and alternative channels that include retail agent, mobile
   payments (M-payment) and mobile banking.
3. The battle for product
   penetration, which will mainly be won or lost on the product adaptation front.
   Sub-Saharan product penetration rarely exceeds more than two products per
   client, and for many banks less than half their clients are equipped with
   electronic payment products. Devlhon Consulting’s analysis noted this point for
   the 2006-2011 period concerning the level of non-interest income as a percentage
   of overall net banking income. 

More African banks are able to
carry out such product innovations today, despite them being complicated to
launch, monitor and develop to maturity. Some product adaptation in Africa even
serves as sources of inspiration, such as the mobile revolution in Kenya via
M-Pesa for Equity Bank.
 
Expansion into mass-market retail also
creates exposures to new risks, not to mention that of political crises such as
in the Ivory Coast or Mali. The regulatory framework should tighten, as
countries bring themselves up to international compliance standards, such as the
know-your -customer (KYC) rules, anti-money laundering (AML) and Basel II and
III. In this context, African risk models are maturing. As such, for many
players such as Ecobank over 60% of their local subsidiaries have been in
operation for less than six years. Their risk management also remains somewhat
centralised. For some players, it would thus be beneficial to obtain backing or
become a member of a major banking group.   
 
A Positive
Outlook for Those Able to Go the Distance
 
While the African
banking sector has become much mature, driven by impressive economic growth, the
situation on local markets raise new questions about opportunities and growth
strategies in the coming years. The first challenge is the scarcity of sizeable
value accretive investments; the second is the lack of appealing targets, given
revenue per inhabitant, lower economic growth and the level of bankability’ –
the most dynamic markets in this respect often being found in English-speaking
Africa and in East Africa.
 
The African banking sector’s potential
is much like a long-distance race to gain access to savings and management of
the customer relationships of tomorrow. Therefore, the key to success lies in
the expansion of branch networks and acquisitions. As the current structuring of
African banking landscape might mean fewer opportunities for the time being, it
will probably require forward-looking approach to invent locally-adapted and
robust business models. Such a strategy could work to the advantage of those
players who have expanded into new geographies over the past five years.  There
is clearly a first-mover advantage for those banks and, given that Egyptian
banks have been pretty much out of the picture, South African and, probably,
Moroccan or Kenyan banks will lead the way.
 
As for the non-African
banking groups, Barclays’ ‘One Bank in Africa’ strategy as well the cooperation
agreements between the Industrial and Commercial Bank of China (ICBC) and
Standard Bank have been significant milestones. The question remains how long
will it take for other non-African players to end their hesitation and to join
this process, either through alliances or mergers and acquisitions
(M&A).  

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