Africa’s Top Banks continue their growth trajectory
Profits have fallen but total tier 1 capital has risen 10.9% to $124.5bn in this year’s survey of Africa’s Top 100 Banks. Tom Minney looks at how leading banks are coping in the second year of the Covid pandemic
How did the banks fare in the past year, a year defined by the Covid-19 pandemic which led to massive disruptions to businesses, volatility in commodity prices and a shift in consumption patterns and the way people paid for goods and services? The short answer is that Africa’s leading banks continued on their positive growth trajectory, and they nearly all remained profitable.
Across the leading banks, profits have fallen hard compared to the 2019 ranking, partly driven by increased provision for non-performing loans as banks and regulators prepared for giant impacts on businesses and other borrowers from the global health pandemic.
By the second half of 2021, many economies are bouncing back or even accelerating, despite a resurgence of the virus in many countries driving renewed lockdowns and restrictions. Consultants at McKinsey say that data from four large economies – Kenya, Morocco, Nigeria, and South Africa – shows that “the pandemic’s impact on African banks in 2020 was less severe than initially expected”. Because of the giant role that banks play in economies and societies, this “could signal a faster recovery for the continent”.
South Africa’s economy was hit the hardest, due to existing weaknesses and strict nationwide lockdowns. Other countries were not as badly affected as initially feared, buoyed by government support programmes including credit, loan-guarantee schemes and delaying repayments. Many of the banks African Business has spoken to have praised rapid interventions by central banks and ministries of finance, providing them with liquidity and facilities to support their clients and the real economy.
The flipside is that lower national interest rates, needed to provide relief and stimulate investment, actually resulted in a fall in net interest income for many banks. But at the same time banks have experienced increases in loans and deposits, some linked to grant programmes of government-backed relief that the banks have rolled out.
All the big South African banks put billions of rand into reserves to cope with non-performing loans and these could be unwound as business risks return to more normal levels. Non-performing loans are likely to increase because of the economic turmoil and contraction, although this may not be as severe as first feared. Banks in Nigeria, for example, exposed to the oil and gas sector, which saw a large fall in its price at the outset of the pandemic, are hedged and the price has since bounced back to acceptable levels from a risk perspective.
Totting up the totals for this year’s top 100 banks shows that total tier 1 capital was up 10.9% to $124.5bn from S112.2bn in 2020, which in turn was a 10.5% climb from 2019. However, total net profit was $14.4bn, a big 31% fall from last year’s $20.8bn. Africa’s top bank, Standard Bank, said the 43% decline in group headline earnings in the year to December 2020 was “driven by a significant increase in impairment charges”.
McKinsey charts a 50% fall in average return on equity (ROE) for Africa’s banks to 7% in 2020 from 14% the year before. It says this is likely to rebound to close to the levels before the crisis within three years.
In South Africa, Standard Bank says its retail and corporate banking clients received a total of R154bn ($10bn) in pandemic crisis relief. All the big South African banks implemented a government-backed credit extension programme for small to mediumsized enterprises.
New opportunities
Banks adapted fast to new means of working and working from home, and now have many opportunities to restrain their operating costs and to invest carefully in IT. Reserves were also boosted after banking regulators in many economies told banks not to pay their usual generous dividends so they would have the cash to support clients through the pandemic.
The large reserves that many banks built up may be an arsenal of investment firepower to spend on new opportunities.
“Our view is post-pandemic there are going to be vast opportunities to grow,” said Standard Bank’s CEO Sim Tshabalala in March 2021 when he announced the December 2020 results. The dividend was slashed to R2.40, from the previous year’s R9.94. Tshabalala said new opportunities included accelerating digitisation, investing in non-banking
The large reserves that many banks built up may be an arsenal of investment firepower to spend on new opportunities
activities and adding new businesses.
In Kenya, Equity Bank had a two-year dividend freeze, which helped it build buffers. Cash and cash equivalents increased 154% to KSh219.5bn ($2bn) in the six months to June 2021 (the ranking is based on the December 2020 full year result) and investments in government debt climbed 46% to KSh315.5bn. CEO James Mwangi said the bank plans to use the funds to deploy loans quickly, including in Democratic Republic of Congo and in Uganda. It has also been able to cut loan-loss provisions by 64% and grow lending income.
Consultants McKinsey highlighted the speed and boldness with which leading African banks managed the crisis. They urge more attention to three key challenges and opportunities.
Productivity is a key challenge, especially as African banks’ cost-to-asset ratios are more than twice the global average, while the impact on ROEs “has been masked to some extent by high banking margins helped by high interest rates”. Falling interest rates will put the focus on change, and Banks could boost efficiencies by up to 25%. The pandemic has brought opportunities. Customers are much more ready to adopt cost-saving digital banking and avoid branches.
The banks had a crash course in new methods of risk management during the crisis and they can turn this to their advantage with new technologies including analytics and real-time reporting. This is already boosting some banks’ performance, particularly when lending to small- and medium-sized businesses.
Technological change offers huge opportunities to Africa’s top 100 banks as they find ways to develop their internal systems and adopt new partnerships. However, the red-hot growth of financial technology (fintech) across the world, including in Africa, brings challenges and competition.
The banks in our survey are very well established, offering huge client bases, brands and infrastructure. They can leverage this to take advantage of the best of
Africa and the world’s fintech revolution. n
Ranking
North Africa’s banks, with their emphasis on strong growth, are starting to challenge the continental dominance of South Africa’s big four. Standard Bank retains its seat at the top, backed by massive growth in its tier 1 capital of 24% to $13.8bn in December
2020. National Bank of Egypt climbs two places to come in #2 with 26% growth in capital pushing it to $6.7bn, but it still has a long way to go to challenge the king of Africa’s banking savannah.
South Africa’s Absa Bank slips back to #3. Its capital was only up 6% to $6.3bn, partly dragged back as the South African rand slipped back 4.6% against the US dollar in the year to December 2020. Rankings can be affected by exchange rate (FX) movements for the local currency against the US dollar. Nedbank is edging higher from #5 to #4, with capital also up 6% to $5.5bn.
Morocco has two banks in the top 10: Attijariwafa Bank climbs one spot to #5 with tier 1 capital of
$6bn, while Banque Centrale Populaire (BCP) stands at #7 and $4.7bn.
The Moroccans sandwich South Africa’s FirstRand, down from #3 to #6 with tier 1 capital down 9% to $5bn (half of this is due to FX). FirstRand is still the most profitable in the top 10 measured by return on equity (ROE) with a very strong 17% (down from a massive 30% in last year’s ranking), tying with Banque Extérieure d’Algérie. Banque Misr is another ROE star at 15%.
Egypt’s Banque Misr (capital unchanged at
$3.4bn in the June 2019 results), climbs from #11 to #8 while Algeria’s Banque Nationale d’Algérie ($3.4bn) and Banque Extérieure d’Algérie ($3.2bn) fall from #8 and #9 to #9 and #10 respectively.
North Africa now has 45 banks in Africa’s top 100, up from 42 last year and Egypt and Tunisia each have two more high-flying banks. Southern Africa’s share falls back from 25 to 22, with South Africa and Namibia each losing banks from the top ranking, although this could partly be due to currency fluctuations.
South Africa has 28% of the total banking tier 1 capital, ahead of Egypt’s 20%, Morocco’s 13.5% and Nigeria’s 10.6%. However, by region North Africa is ahead, with 45% of the total capital (up from 44% last year), compared to 34% in Southern Africa (down from nearly 36%). There are still 12 Nigerian banks in the top 100.
Methodology
The Top 100 Banks survey ranks the banks according to their Tier 1 capital. This consists of: capital + reserves + retained earnings + minority interests. These are published in local currencies and then converted into US dollars at the exchange rates at the year-end date in the results (or on 31 December 2020), so changing FX rates can affect the ranking. We collect the data from Bankers’ Almanac and from the in-house research of African Business. We have excluded some banks where data is old or unreliable.
The banks had a crash course in new methods of risk management during the crisis and they can turn this to their advantage