McKinsey report expects Africa’s Covid-hit banking sector to rebound by next year

THE COVID-19 knock on African banks was less severe than anticipated last year and the banking sector was expected to rebound to pre-pandemic levels by next year, despite a resurgence of the virus, according to the latest report by McKinsey Africa.

The report showed that the return on equity (RoE) for African banks fell 50 percent to 7 percent last year, down from 14 percent in 2019, and was expected to rebound quicker than banks in developed markets.

“We expect this to rebound to near pre-crisis levels within the next three years, if economic recovery on the continent follows the scenario that a majority of global executives believe will most likely unfold,” McKinsey Africa said.

Nedbank recently revised its medium-term targets in its result for the year to the end of December, which were released almost two weeks ago, and said it expected to achieve a RoE greater than the 2019 RoE of 15 percent in 2023 after reporting a RoE of 6.2 percent during the year.

Absa Group reported a RoE of 7.2 percent in its full-year results and expects gross domestic product to recover to 2019 levels only by 2024.

In developed markets, the report estimated that the average RoE for banks could dip below 1.5 percent this year before recovering to pre-crisis levels of about 9 percent by 2024, and this equates to five years of returns lost for the banking sector.

The report was drawn from financial institutions in South Africa, Morocco, Kenya and Nigeria.

The report said despite expecting stronger revenues after risk costs, African banks were facing a challenging path to recovery, which included increasing risk, lower-for-longer interest rates as a result of all-time-high government debt levels and subdued demand.

“The speed of recovery will vary depending on the scenario that unfolds, with the first scenario assuming that a partially effective government policy response and an optimised health-care response that effectively controls the virus’s health impact, revenues after risk costs could rebound to pre-crisis levels by as early as 2022,” the report said.

It said a slower recovery, which assumes partially effective economic interventions and an effective public health response with localised recurrences of the virus similar to what has already been seen across the continent, might not see revenues recovering until 2023.

The report also warned that, given the still uncertain trajectory of the pandemic, African banks could not afford to leave their recovery to chance

“If risks are not mitigated, our estimates suggest that the African banking market could lose more than $48 billion (R718bn) in cumulative post-risk revenue by 2024, leading to multiple years of returns below the cost of capital,” it said.