Bain sees banks coining it in Africa

THERE is scope for growth in African banking in the next five years, but financial services firms should tread carefully when selecting which markets they choose to enter.

Management consulting firm Bain & Company projects banking pretax profits for Africa excluding SA will grow 9% to $13.3bn by 2020, with Nigeria getting the lion’s share at $6bn.

Banks are expected to bring in profits of $2.1bn in Kenya and $1.2bn in Ghana. More than 70% of profits will be made from corporate banking activities.

Fabrice Franzen, a partner at Bain, indicated growth in SA was slowing for local banks, and they would be forced to expand northwards, especially into Nigeria.

West Africa posted a compound annual growth rate of 15% in banking assets during the three years to 2013, compared with a decline of 7% in Southern Africa. West African banking revenue grew 19% during the period, compared with Southern Africa’s 1% decline.

Mr Franzen said more people were coming into the banking market in Nigeria, especially in the 65 and over age group following recent pension reforms.

Mr Franzen warned that banks needed to have a clear strategy before rushing into Nigeria, as opening a bank there was risky.

There is also room for growth for insurers. Although gross written insurance premiums in the rest of sub-Saharan Africa stood at just $6bn compared with $40bn in SA, average annual growth in premiums of 10% in the region surpassed SA’s during the three years to 2013. Average growth in South African premiums was less than 5%.

“This is part of the reason South African insurers are going into the rest of Africa,” said Mr Franzen. “When you have very large insurance providers, you are going to struggle to grow.”

Nigeria was especially attractive to insurers, as most risks were not locally insurable.

Bain has identified a 40% gap between the Nigerian oil and gas industry’s insurance requirements, and the actual portion covered by Nigerian insurers.

“Lots of risk can’t be insured locally; it is too risky. Most risk is passed on to foreign insurers.”

Although the rest of Africa offers better growth prospects, Standard Bank and Nedbank recently reported compressions in their net interest margins — net interest income as a percentage of total assets — partly as a result of high funding costs at their African operations.

Standard Bank’s fell to 3.47% for the half-year to June, while Nedbank’s narrowed to 3.32% in the nine months to September.

Mr Franzen said this was largely a foreign exchange issue that would turn around once the rand recovered.