“JAM yesterday, jam tomorrow, but no jam today.” That was a shareholder’s complaint at the recent results presentation of Investec, a specialist bank that was founded in South Africa and now operates globally. The lament is a familiar one to investors in many of Africa’s fastest-growing banks. The region’s lenders are promising spectacular returns as they expand across the continent. Their ambitions have created a group of home-grown regional powerhouses. Yet the costs of building networks of branches and of investing in growth mean that such returns remain in the distant future.
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The main allure of Africa’s banking market is that it is potentially vast and virtually untapped. Banking penetration among the continent’s 1 billion inhabitants varies significantly from country to country, but swathes of the population in Senegal and Tanzania, for instance, have virtually no access to banks (see chart).
The differences within countries are striking, too. South Africa, for example, offers world-class service and technology from the air-conditioned offices and verdant lawns of Johannesburg’s main banking district. Yet just a short bus ride away is the poverty-ridden township of Alexandria, where many people still stuff cash under their mattresses.
Across sub-Saharan Africa as a whole only about a quarter of adults have accounts at formal financial institutions, and only 3% have credit cards. The challenge is finding a way profitably to reach the rest. Bankers typically think of markets as being ready to take off once GDP per-person reaches about $10,000, a level at which it becomes profitable to start building branches and opening accounts. Yet technology such as prepaid cards and mobile banking may be lowering that hurdle rate.
The commoditisation of banking technology and the expansion of firms such as MasterCard, which can provide partner banks with everything they need to run a credit-card business, is giving a big boost to domestic and regional banks that would previously have been outclassed by international rivals. “Technology has been a big leveller,” says Naveed Riaz, who runs Citigroup’s African business. “It is not very complicated these days to have a credit-card or a mobile-banking platform.”
In some respects, African banks are gaining a leg up on international rivals as they install brand new computer systems from scratch, without having to patch together costly legacy systems that have been around since the 1960s. Al-Noor Ramji of Misys, a banking-technology firm, reckons that African retail banks can achieve costs as low as 30% of their income. Rich-country banks, in contrast, are usually happy if they can get cost-to-income ratios of 50%.
The group of banks that are embracing these technologies most eagerly are the big regional banks. These include South Africa’s Standard Bank, which operates in 18 countries in Africa; Ecobank, a Togo-based pan-African bank with businesses in 32 countries; and Nigeria’s United Bank for Africa (UBA), which is in 19 countries. Their growth has been helped by the retrenchment of some international banks in recent years. A freeze in dollar funding afflicting French banks last year caused many to reduce their activities in Francophone west Africa, for instance. HSBC has shifted its attention to Asia after pulling out of 2010 talks to buy Nedbank, South Africa’s fourth-largest bank.
The financial crisis also prompted some of the region’s banks to focus on expanding in Africa rather than going abroad. Standard Bank, which once billed itself as an international emerging-markets bank, saw its cost of funding shoot up during the crisis. Competing as a mid-sized organisation became difficult, says Sim Tshabalala, Standard’s deputy chief executive. “We
started speaking with urgency about taking capital and bringing it back to the African continent.”
FirstRand, another South African bank, has also been expanding its retail-banking network in Africa since the crisis. It previously had an investment-banking business that generated lots of income through proprietary trading, an activity now regarded as too risky by many executives and regulators. It has since cut back: it trades only on behalf of customers. For growth, it has turned to retail banking in Africa, among other markets.
The regional banks are largely following a bottom-up strategy to build their retail operations. They take deposits locally and woo corporate clients face to face. “To service a company in Nigeria you have to be able to collect their cash, and you can’t do that unless you have a branch network,” says Mr Tshabalala. On paper the returns are enormous. Net interest margins in many countries, including Nigeria, are as high as 8%—about twice as high as in South Africa and four times higher than those routinely achieved in the West.
Yet to lay hands on these riches, foreign banks must either buy local ones or undertake the slow job of building a network branch by branch. The downside of the acquisition-led approach is demonstrated by Standard, which has bought banks in Kenya and Nigeria, among other places. Its return on equity for its African business would have been a respectable 13% in the first half of last year, had write-downs on the goodwill on its acquisitions not pushed it down to a pedestrian 10.6%.
Building from scratch is not easy, either. “Are we making our hurdle rates in terms of cost of capital?” asks Sizwe Nxasana, FirstRand’s chief executive. “In the short term, no.” Mr Nxasana says he still prefers organic growth, although he will consider small acquisitions in some countries.
A third approach is that taken by most big international banks, of which Citi is a good example. It has opted for a top-down approach, helping governments to sell bonds (see article ) and offering banking services to the biggest companies in each country. This has allowed it to build a geographically vast but infrastructurally light network in Africa. Even nimbler are investment banks such as Goldman Sachs, Morgan Stanley and Deutsche Bank, whose staff fly in to arrange deals but which have very little local presence.
The question is whether these models can be sustained as domestic and regional banks gradually gain heft and access to capital markets for themselves and their clients. International banks also have to fend off competition from specialist rivals. One such contender is Renaissance Capital, a Russian investment bank that specialises in emerging markets and has hired lots of staff, including African-born bankers lured from positions at heavyweight firms in New York and London. “We’re on the ground and we’re on the ground properly,” says Clifford Sacks, who heads Renaissance’s African operations.
Some international banks are trying a mixed approach. Standard Chartered offers proper retail- and corporate-banking services in a number of countries and also enjoys access to global capital markets. Shareholders in Absa, a South African bank majority-owned by Barclays, this week approved the purchase of the British bank’s other African operations, cementing its strategy of trying to be both a regional African bank and an international one. That certainly makes more sense than the suitcase-banker model. The promise of high returns is offset by dollops of uncertainty. When Africa delivers on its potential, the winners will be those who have been ready to live with the risks.