Awards for Excellence 2016 Africa: The silver lining in black gold’s fall

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They might not like to admit it, but the decline in commodities prices could be just the impetus that the regions’ investment banks, and their capital markets, need.

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Nothing has shaken the banking sector across the Middle East and Africa more heavily over the past year than the collapsing price of commodities.
 

A slowdown of economic growth in China and the enduring effects of Opec’s decision not to slash oil production, among other events, resulted in a sharp fall in the price of oil, copper, aluminium and iron ore – among the most essential exporting resources of Africa and the Middle East.

Throughout the region, banks accustomed to strong year-on-year growth saw revenues slow, stagnate or drop as a result. Rating agencies have downgraded many of them.

Saudi Arabia’s banks were certainly hit. At the end of March, Standard & Poor’s took negative rating actions on eight Saudi banks, because of "heightened economic and industry risks and weaker credit conditions". Fitch and Moody’s have taken similar views.

Similar rating events are occurring in other oil-producing countries — among them, the UAE, Kuwait, Nigeria and Angola.

The price of copper affected Zambia, the price of aluminium Guinea, the price of iron ore South Africa. Banks suffered across these countries, and in many others, from harsher conditions.

But the fall in commodity prices, especially that of oil, has had a positive impact on some financial institutions: namely, those that have begun working on the debt programmes of the many sovereigns and corporates that require fresh capital to weather the storm; those, too, that are reaping the benefits of investing in technological innovation and of diversifying their lending.

Among those that have benefited from their ability to deliver access to the capital markets, at a time when capital markets access became paramount, are NBK Capital in Kuwait and Samba Capital in Saudi Arabia.

Over the past year, NBK Capital helped alleviate the concerns of its clients amid the economic turmoil, and gained in the process. It worked on the biggest bond issue in the history of Kuwait ($700 million) – for its parent bank, NBK, which needed to shore up its capital.

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Olivier Holmey,
Euromoney
 
There are many more records to be broken. Saudi Arabia is expected to issue a sovereign bond of up to $15 billion. Others – Qatar, Abu Dhabi, Oman – have already taken such steps: a boon for financial institutions needing to keep revenues coming in throughout these difficult times.
 

Also part of that trend is the planned listing of Saudi Aramco, the state-owned oil company, which shocked the world when the idea was first suggested by Muhammad bin Salman, the Kingdom’s deputy crown prince in January. That deal could deliver some of the largest capital market fees banks have ever seen, as it is widely expected to be substantially larger even than the $25 billion IPO of Chinese e-commerce firm Alibaba – the largest listing to date. Banks have already lent Saudi Arabia $10 billion, in the hope that they will be mandated to deliver a bond in the near future.

In Africa, other financial institutions are leaping on the new opportunities. Chapel Hill Denham, for example, saw that Nigeria’s Lagos State faced fiscal challenges and declining oil revenues, so approached the state with a pitch to consider refinancing its outstanding bonds. The N167.5 billion ($593 million) restructuring created big savings and head room for new borrowing.

South Africa’s economy has tanked to the point that finance minister Pravin Gordhan deemed it "in crisis", but Rand Merchant Bank, for instance, was able to weather the storm, capitalising on the equity and debt capital market needs of its clients and achieving return on equity of 22.2%.

In Kenya, Equity Bank is continuing its programme of lending widely, to a varied group of SMEs across the country, through digital banking. Despite the challenging macroeconomic environment in 2015, the bank registered a pre-tax profit of KSh22.4 billion ($222 million), up from KSh20.1 billion in 2014.

Likewise, Guaranty Trust Bank buffeted difficulties – a falling market capitalisation and return on equity – with rising overall revenues and a growing loan portfolio. Digital innovation also bolstered its gains through what were rough months for Nigeria’s economy. GTBank grew its e-business income from N5.2 billion to N16.6 billion in 2015.

These experiences show that, even as some banks falter, there are still plenty of financial institutions in the region that can do well in these conditions. Times will be tough if commodity prices remain this low, as the health of many institutions directly depends on the health of the sovereigns. But the burgeoning capital markets activity could bring a wave of new deals to investment banks in the region, too.