Banks cash in on Africa boom

2012-05-12 11:56

One billion people are still largely unbanked or underbanked

The scramble for African markets by local banks is set to intensify as they bid to take advantage of the fast-growing region, buoyed by the resources boom and heightened infrastructure spending.

According to Absa, one of South Africa’s big four lenders, Africa’s gross domestic product is projected to jump to $2.6 trillion (R21 trillion) by 2020 from $1.6 trillion in 2008.

Absa’s local peers, FirstRand Bank, Standard Bank and Nedbank are all aiming to ride out this growth and deliver their products and services to the majority of Africa’s population of one billion which is largely unbanked or under-banked.

“Africa’s economic growth was the second strongest regional performance after Asia last year. Off the back of that resource growth, Africa is also developing a growing middle class. The continent has a young, economically mobile and increasingly entrepreneurial population,” Absa said this week.

South African lenders have in the recent past faced stiff competition from European banks with colonial links to Africa, but the debt crisis in their home markets has forced them to take a cautious approach or to retreat.

This has provided local banks with the breathing space to pump in more credit to the continent’s resources industry and infrastructure development projects, as well as bringing in customers with no access at all to financial services.

Nedbank chief operating officer Graham Dempster conceded that the pullback by some of Europe’s lenders had left room for South African banks to occupy the void.

“It’s given us a window of opportunity to increase our presence,” said Dempster.

Besides South Africa, Nedbank is in five African countries including Namibia, Lesotho, Swaziland, Malawi and Zimbabwe.

It has a pan-African alliance with Togo-based lender Ecobank, which covers 36 countries. Last year, Nedbank lent $285 million (about R2.3 billion) to Ecobank and struck a deal with the west African lender for pre-emptive rights to buy a 20% stake in the bank.

Nedbank has a 12-month deadline to follow through on the deal from November 2013 and November 2014. Ecobank operates in 32 African countries.

Nedbank is not the only local lender using a partnership to attack the continent’s untapped markets. Absa is teaming up with its British parent Barclays Bank to form a formidable pan-African banking footprint.

Collectively, the two lenders are in 12 African countries and have consolidated their assault under Barclays Africa.

Last week, the duo poached seasoned investment banker Kennedy Bungane from Africa’s largest lender, Standard Bank, to head Barclays Africa.

He was at Standard Bank for 20 years and will have an intimate knowledge of how the lender grew its operations to become the largest lender on the continent in terms of assets (R1.4 trillion). Standard Bank has 17 operations across Africa and in 13 countries outside the continent.

Banking group FirstRand, which owns retail lender FNB, investment bank Rand Merchant Bank and vehicle financier Wesbank, is also playing catch-up with Standard Bank and has a R2 billion war chest to internationalise its operations.

The group has been so daring that it became the first African bank to enter the highly regulated Indian market, in which it plans to finance trade and investment between India and Africa.

FirstRand chief executive Sizwe Nxasana said while the group was looking to expand its African presence, it would not “take the eye off the ball in South Africa”, where it generates about 90% of its earnings.

He said FirstRand would not target all African countries, but would go for markets that had the potential to deliver good returns such as Kenya, Angola, Ghana and Nigeria. So far it has operations in seven African countries including Zambia, Tanzania and Mozambique.

Nxasana suggested that political risk in Africa has decreased despite Michael Sata, Zambia’s new ruler, vetoing FirstRand’s planned acquisition of a struggling Zambian lender last year.

“Political risk has come down, especially in countries that we are targeting,” Nxasana said.

Despite political and regulatory hurdles in Africa, analysts are upbeat about the continent’s economic prospects.

Last year, global consultancy Bain and Company’s study indicated that the African banking industry could grow by an impressive 15% a year until 2020, with retail banking accounting for nearly 40% of revenue by 2020.

Faizal Moola, a banking analyst at Avior Research, said the investment in resources and infrastructure would increase formal employment across the continent.

“Africa has a lot of unbanked people. There are many people who will enter formal employment who will require bank accounts. I am positive about Africa,” he said.

Johann Scholtz, a banking analyst at Afrifocus Securities, is bullish too, but maintains local banks will still generate most of their earnings in South Africa for the foreseeable future.

He suggested it was brave of FirstRand to enter the Indian market.

“If it comes off, the rewards will be huge. It’s a difficult market to work in and is highly regulated,” he said.

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