EARLY IN MARCH, Burkina Faso made an unlikely symbolic contribution to the history of Standard & Poor’s when it became the hundredth sovereign to be rated by the US agency. The rating was a by-product of an initiative launched in 2003 by the UN Development Programme to help sub-Saharan African countries secure internationally recognized ratings. And as S&P commented when it assigned the first rating under this programme, for Ghana in September 2003: “Although many of the governments rated under the new initiative will not use their ratings for immediate access to international bond markets, these ratings will help to integrate African countries into international capital markets over the coming years.”
It is not just rating agencies that are looking with new-found interest at increasing integration of sub-Saharan Africa with the global financial services sector. So too are a growing number of banks. At the end of March, for example, HSBC opened its first sub-Saharan African branch servicing corporate and commercial banking customers. Richard Adcock, HSBC’s Johannesburg-based CEO and group country manager, says he sees parallels between the opportunities that now lie ahead for HSBC in Africa and those that were starting to appear in Asia 60 or more years ago. “A lot of people may be expecting too much, too soon, but as a group which has a successful history of investing in emerging markets we see great potential for sub-Saharan Africa,” he says.
Others share Adcock’s enthusiasm. “I’m generally bullish about Africa,” says Peter Sullivan, the London-based CEO of Standard Chartered Africa. Standard Chartered has been in Africa for 140 years, but pulled out of South Africa in 1987. Last year, it won back its full banking licence, opened a Johannesburg branch and bought a local internet bank. “South Africa is having a bigger influence over the rest of the continent, and we are seeing many South African companies expanding north of the Limpopo river, which in turn is forcing standards and transparency to improve all over Africa,” says Sullivan.
The same process is also creating fresh opportunities for banks throughout sub-Saharan Africa. At the Johannesburg office of Citibank, the sixth-largest bank in South Africa, director of strategic planning for sub-Saharan Africa Donna Oosthuyse says that Citi’s strategy is to follow where its clients lead – and its South African clients are moving in increasing numbers into other economies.
But as Oosthuyse points out, the story of Africa’s economic re-emergence is not just one that is associated with South Africa’s momentous changes. Of the industrial sectors that are attracting growing interest from trading partners overseas, oil and gas top the list, especially given the eagerness of the US and other western economies to reduce their dependence on Middle Eastern oil. That is encouraging investors to scrutinize the potential of non-Opec oil producers such as Angola, Equatorial Guinea, Gabon, and others such as Africa’s smallest economy in terms of GDP, São Tomé e Príncipe. That country, said the IMF in an analysis published in April, “stands at the threshold of the oil era”. The international banking community would doubtless welcome the opportunity of carrying São Tomé e Príncipe, and others, across that threshold.
Elsewhere in Africa, more sustainable economic growth patterns are emerging as political environments become more stable, commodity prices more durable and direct investors more attuned to the opportunities Africa can provide. Tanzania, for example, no longer earns less than Goldman Sachs, as it did in 1993, when the UK’s Guardian asked in a front-page headline, “what’s the difference between Tanzania and Goldman Sachs?” The answer was that Goldman’s 160 or so partners earned more that year ($2.6 billion) than the 25 million inhabitants of Tanzania ($2.2 billion).
Another key factor helping to strengthen confidence in Africa is the speed with which several economies have been rebuilt following devastating wars. In the late 1990s, Mozambique was one of the world’s fastest-growing economies, and although that expansion has now slowed, annual growth rates of 8% or so are anything but shabby. The Democratic Republic of Congo has a similar story to tell. There, according to the IMF, “the peace and reunification process has continued to evolve with remarkable speed”, with real GDP growing by an estimated 5% in 2003 and “all sectors posting positive growth for the first time in many years”.
From the perspective of international banks, another important consideration has been the accelerating readiness of regimes throughout the region to deregulate, liberalize and privatize their banking sectors. Ethiopia, where privatization and the official green light for competition from foreign banks remains politically unpalatable, is fast becoming a conspicuous exception. With a prod or two from the IMF, and in the face of fierce political opposition, the Zambian government wants to push ahead with the privatization of Zambia National Commercial Bank, which at the end of 2002 commanded a market share of about 22%.
In Kenya, $170 million of government money has been set aside for the revamping of the National Bank of Kenya, in preparation for privatization prescribed by the IMF. And in neighbouring Tanzania, 70% of National Microfinance Bank is due to be privatized, with 49% going to a core investor and 21% to be floated via the Dar es Salaam Stock Exchange. That sale will give the successful buyer access to Tanzania’s largest deposit base and to 104 branches dispersed throughout the country.
While privatization is bringing added efficiencies to the sub-Saharan banking industry, so too is consolidation in some of the major markets and the negotiation of banking alliances in the more fragmented regions. One recent example of a strategic initiative of this kind has been an alliance between two regional players, Banque Belgolaise (owned by the Fortis Group) and Bank of Africa (controlled by African Financial Holding) aimed at providing each bank’s client base with access to a broader range of markets in the francophone and anglophone regions of Africa.
According to the banks, which between them cover many of the more minor African economies, closer integration of the networks will also “enable the two groups to offer a wider range of joint products, among others in the areas of electronic … and internet banking, and develop organizational synergies particularly with respect to information technology.”
For all the progress that has been made, too much of the financial services sector in Africa is still characterized by glaring inefficiencies. Non-performing loans continue to account for a cripplingly high proportion of loan books, accounting for 25% of the banking system in Kenya, for example, and inevitably make banks cautious about extending new lines of credit to the private sector.
Also, in too many African economies corruption continues to be a serious impediment to banking expansion and rising penetration of financial services. Estimates published recently by the Central Bank of Nigeria, for example, suggest that over N450 billion ($3.3 billion) – about 90% of money in circulation – is still outside the banking system, indicating a dearth of grass-roots confidence in the local financial services sector. Nigeria is an extreme example, but in Uganda a local banker recently calculated that about 60% of business transactions are settled outside the banking system. Further to the south, a Finscope survey in 2003 found that while 82% of households in Botswana used formal banking services, in Lesotho it was 34%, in Namibia 52% and Swaziland 50%.
The flipside of those figures is that the underdevelopment of retail financial services in so much of the region is a source of huge potential for the banks, says Sim Tshabalala, managing director responsible for Africa at Standard Bank’s Johannesburg headquarters. “With such a large proportion of money still residing outside the formal banking system, much of our challenge is to encourage those funds to come into the industry,” he says.
That’s plenty of reason, then, for Africa to be relieved of its unwanted image of being the forgotten continent. Hence this year’s extension of the African section of the awards for excellence, which in recent years has confined itself to recognizing the best banks in South Africa as well as a best overall player in Africa. That is not, however, to say that all 52 regional shareholders in the African Development Bank (AfDB) are represented in this year’s survey. First, it is intended to reflect the quality of banking services in sub-Saharan Africa only, with key north African economies featuring in the Middle Eastern section that will appear in July. Second, countries are excluded that either remain torn apart by domestic conflict or are still recovering from hostilities – ruling out, for example, Côte d’Ivoire and Rwanda.
Size is also important, with tiny economies such as the Republic of the Comoros and São Tomé e Príncipe excluded. In the same vein, those African economies in which a competitive banking industry has yet to emerge were also excluded. A final group of countries left out are those in which flows of information are too unreliable or too outdated for any meaningful conclusions to be drawn. Websites are generally useful sources of data; those not updated since early 2001 are not.
Best bank in sub-Saharan Africa:
Standard Bank of South Africa
(Stanbic)
For the first time, this year’s award for best overall bank goes to an indigenous player, Standard Bank of South Africa, which operates as Stanbic in most African countries where it has a presence. That is in spite of stiff opposition from its three principal multinational rivals, which have long and illustrious histories in Africa.
Barclays Africa, which has 217 branches and 1.5 million customer accounts in 11 African countries, is the largest bank by total assets in Botswana and Zimbabwe, the second largest in Zambia and the third largest in Ghana. In 2003 it posted an increase in operating profit from £89 million to £113 million ($200 million), and a rise in operating income from £275 million to £325 million. Its loan book rose from £1.5 billion to £1.8 billion, with deposits up from £2.5 billion to £2.8 billion and the cost to income ratio down from 58% to 57%.
Standard Chartered, which has 137 branches in 13 African countries, reported similarly impressive numbers in 2003, with the overall return on its investment in Africa beating those in all other regions in which it is active. Operating profit for the year ending in December 2003 rose from $101 million to $151 million. Its costs also rose by 24% to $283 million, a direct reflection of its aggressive investment and expansion programme in the region. The Standard Chartered loan book grew from $1.17 billion in 2002 to $1.74 billion in 2003, and its deposits rose from $2.5 billion to $3.1 billion.
Last year’s winner, Citigroup, surely would have retained the award had the principal criteria been the bank’s credentials at the higher end of the wholesale market. It has a direct presence in 12 sub-Saharan African economies but innovative structured trade transactions in 2003 for borrowers such as the Agricultural Bank of Ghana and the Commercial Bank of Ethiopia demonstrate that an on-the-ground presence is not necessarily a prerequisite for success. Unfortunately, Citi does not disclose its African financials separately, consolidating them instead into its EMEA results. Nevertheless, according to its Johannesburg-based director of strategic planning for sub-Saharan Africa, Donna Oosthuyse, Citi has been “exceptionally successful” in sub-Saharan Africa and in the year to the end of the first quarter of 2004 enjoyed a four-fold increase in its net income in dollar terms.
Against those benchmarks, Stanbic’s 1% increase in headline earnings in 2003 (48% in 2002), from R482 million to R489 million ($72.6 million), might seem modest. But those earnings were held back last year by the strength of the rand against other African currencies, which cost R111 million in headline earnings. On a currency-adjusted basis, therefore, earnings rose by about 25%, and return on equity climbed from 27.4% to 28.3% and the bank’s cost to income ratio on its African operations fell from 60.8% to 57.2%. Gross non-performing loans in Africa, meanwhile, dipped from R277 million to R250 million (or 2.3% of total loans) in 2003.
There are several reasons for Standard Bank’s success. First, the strength of its position and the efficiency of its operations in the key South African market give it a huge head start over its main competitors. Citibank, the sixth-largest bank in South Africa, is a long way behind, and Barclays and Standard Chartered have only just re-established a full presence. And although Standard Chartered has demonstrated its intent with the acquisition of a local bank, its choice of the internet bank, 20twenty, hardly gives it much of a foothold in South African banking. Established in July 2001, 20twenty closed its doors to new customers in 2002 when its partner, Saambou – then South Africa’s seventh-largest retail bank – went into administration.
Beyond the South African market, Stanbic’s footprint is now bigger than its competitors in terms of the economies in which it has established a direct presence. In much of the region, that dates back to 1992 when Standard acquired the African network of ANZ Grindlays. Today, Stanbic has shareholdings of varying sizes in banks in Botswana, the Democratic Republic of Congo, Ghana, Kenya, Lesotho, Madagascar, Malawi, Mauritius, Mozambique, Namibia, Nigeria, Swaziland, Tanzania, Uganda, Zambia and Zimbabwe, which between them have 230 branches and 214 ATMs, and employ 5,700 people. Sim Tshabalala, managing director of African operations at Standard Bank’s Johannesburg headquarters, explains that Stanbic’s business in sub-Saharan Africa can be described as “classical old-fashioned commercial banking focusing on retail and wholesale markets”. That means that while basic payment and other services for multinationals, parastatals, non-governmental organizations and government clients are handled by Stanbic Africa, more complicated structured deals are generally the responsibility of Standard Bank’s international division in London.
Stanbic has a well-developed acquisition strategy. In Botswana, for example, it recently bought Investec’s private-banking division. Elsewhere, in markets such as Malawi and Uganda, it has bought majority stakes in previously state-owned market leaders with substantial networks, enabling it to build on its fast-growing consumer and wholesale banking platforms across sub-Saharan Africa. A recent example of that strategy was the agreement reached by Stanbic in October 2003 to acquire 55% of Banco Standard Totta de Moçambique from Portugal’s Banco Totta & Açores. That takes its stake to 96% in one of Africa’s fastest-growing economies.
When, rather than if, Stanbic makes its next acquisitive move in sub-Saharan Africa, it is likely that it will be similarly decisive. The obvious main weaknesses in the current network are in Kenya, where it has a very small market share, and Nigeria where, like Barclays and Standard Chartered, its representation is insignificant. With Standard Bank’s board having publicly declared its ambition of increasing earnings generated in sub-Saharan Africa from 8% of the bank’s total in 2003 to between 15% and 20% over the next few years, it is probable that high-profile acquisitions in Kenya, Nigeria or both markets are not far away.
Botswana
Best bank:
First National Bank of Botswana
With a better credit rating than Japan, zero external debt, large and rising foreign currency reserves and annual per capita income of about $3,700, Botswana has been one of Africa’s most conspicuous success stories in recent years.
In an economy still dominated by diamond-related earnings, financial services have been identified as an important source of diversification, although none of the country’s five main commercial banks is indigenously owned. Barclays, Standard Chartered, First National, Stanbic and Bank of Baroda are all controlled by their UK, South African or Indian owners.
Barclays is the largest by capital, deposits and loans, although Stanbic is expanding fast, having acquired Investec’s local private bank in 2003. In terms of profit growth in 2003, however, First National (FNB) showed a clean pair of heels to its main competitors last year, posting an increase in earnings from P160 million to P174.5 million ($35.5 million), or an increase of 8.9%, compared with rises of 4.6% at Barclays and 3% at Standard Chartered.
In addition to recording impressive earnings growth in Botswana, FNB has played a key role in the development of the capital market, acting as joint lead on the P500 million bond issue launched by the government in March 2003 which kick-started its domestic issuance programme.
Ethiopia
Best bank:
Dashen Bank
If awards were given by size alone, Commercial Bank of Ethiopia (CBE) would win this one hands down. Since the 1974 revolution, when all banks were privatized, CBE has cast a dominating shadow over the entire Ethiopian banking sector. In the absence of any meaningful competition, however, CBE has built up a vast pile of non-performing loans (NPLs).
Dashen Bank, which is named after Ethiopia’s highest mountain, was one of a few privately owned competitors of CBE which opened for business in 1995 and now control a market share of more than 20%. Today, Dashen is among the fastest-growing private banks, reporting that its 28 branches serve more than 170,000 customers nationwide. This gives it a market share second only to CBE’s in terms of deposits and loans. Its NPL rate of 9% of total loans is low by Ethiopian standards. Dashen bills itself as being at the forefront of technological innovation in Ethiopian banking as the pioneer of credit cards. It plans to add ATM operations soon.
The Gambia
Best bank:
Standard Chartered Bank
The Gambia’s economy enjoyed another strong year in 2003, with GDP estimated to be up by 4% after 7% growth in 2002. That continued strong performance supported expansion at the country’s best bank, Standard Chartered. In 2003, pre-tax profits were D184 million ($6.3 million), 29% up on 2002’s D141 million, allowing Standard Chartered Bank (SCB) to declare a 12.5% increase in its dividend for 2003. Much of the growth was driven by a 61% rise in customer deposits to D1.816 billion, with the bank saying that its consumer banking operation had turned in its best ever financial performance in 2003.
Standard Chartered is being given an increasingly good run for its money by Trust Bank, which took over the Gambian operations of Méridien BIAO when that bank collapsed in 1997. Trust Bank was privatized in 1999 and its assets expanded from D835 million to D1,235 million between the third quarters of 2002 and 2003.
Ghana
Best bank:
Standard Chartered Bank
Last year was especially disappointing for Ghana Commercial Bank (GCB) which, with 130 branches and over 2,200 employees, is the country’s largest bank. Although GCB’s deposits and loans both expanded last year, its profit before tax fell by 23.5% and its earnings per share shrank from C1,057 to C568 ($0.06).
The leading foreign banks had a brighter year. For example, although Barclays Ghana is much smaller than GCB by total assets, branches and employees, it expanded its total assets by almost 30%, and increased operating income and net income by 25% and 8% respectively. Standard Chartered Bank (SCB), which has 22 branches in Ghana and is 80% owned by its London-based parent, with the rest quoted on the Accra Stock Exchange, enjoyed an even stronger year. In 2003, pre-tax profit rose by 38% to C287 billion ($32.3 million) while profits after tax expanded by 35% to C176 billion, with growth propelled largely by consumer banking. “I’m very pleased with our progress in Ghana, especially on the consumer banking side,” says Peter Sullivan, the London-based CEO of Standard Chartered Africa. “We’ve really begun to establish ourselves as a modern and viable consumer banking alternative in Ghana.”
Kenya
Best bank:
Barclays Bank of Kenya
There were 43 banks in Kenya at the end of 2003 but the nine largest account for about 75% of total assets. The largest in network terms, with almost 100 full-service branches, is National Bank of Kenya (NBK), which after several years’ losses posted after-tax profits of Ksh199 million in 2002 and Ksh404 million ($5.3 million) in 2003.
Total Kenyan bank assets rose by 9.5% in 2003, from Ksh459.6 billion to Ksh503.4 billion, with pre-tax profits expanding over the same period by 8.5%, from Ksh1.3 billion to Ksh1.4 billion. Roughly a third of those profits, however, were accounted for by Barclays Bank of Kenya, which has 66 branches nationwide and which in 2003 posted an 88% increase in pre-tax profit, from Ksh2.55 billion to KsH4.79 billion. Operating income in the same year increased by 21% from Ksh11.5 billion to Ksh13.9 billion, which the bank attributed to a “growth in loans and advances, trading income from fixed securities, gain in sale of surplus property and enhanced fee income arising from volume increases”.
Barclays is clearly prepared to invest in retaining its leadership position in one of Africa’s most profitable banking markets. Its 1.4% rise in costs in 2003 was principally a reflection of a Ksh677 million infrastructure investment programme enabling it to “implement among other programmes a new desktop platform, world-class technology and VSAT communication across the branch network”.
Malawi
Best bank:
First Merchant Bank
Malawi’s financial services sector is dominated by Commercial Bank of Malawi, which has been majority-owned by Stanbic since December 2000, and National Bank of Malawi. However, these two banks are facing increasing competition from smaller players, including: the Finance Corporation of Malawi, owned from October 1999 by South Africa’s Nedbank; the New Building Society, which is due to convert into a bank in 2004; and First Merchant Bank.
FMB’s principal focus is on providing the full range of traditional commercial banking products to clients ranging from medium to large corporates to high-net-worth individuals, international non-governmental organizations and donor agencies. Last year it built on its existing services by adding internet banking and diversifying into asset management, corporate finance and leasing.
In 2003 FMB continued to expand. Total assets rose by more than 6% in US dollar terms, from $55.8 million to $59.3 million, with net income increasing from $4.135 million to $4.36 million and total non-performing assets falling by 14%, from $531,000 to $458,000.
Mauritius
Best bank:
State Bank of Mauritius
With average annual growth over the past two decades of about 6% and annual per capita income of $4,000, the Mauritian economy since the early 1980s has often appeared to have more in common with Asia than with Africa. Since 1992, when offshore banking was kick-started on the island, financial services have played an increasingly important role, and now account for close to 15% of GDP.
Domestic banking is dominated by Mauritius Commercial Bank (MCB), and State Bank of Mauritius (SBM). They both have 42 branches and between them control about 70% of the domestic market. MCB is the larger in terms of assets, but it has not been helped by a $31 million fraud detected in February 2003.
Although Moody’s observes that this is unlikely to damage MCB’s reputation, and that the magnitude of the loss was “of limited significance given MCB’s strong earnings power”, the agency downgraded the bank’s financial strength rating (FSR) to D from D+ in June 2003. Moody’s attributed the downgrade to “concerns over a major failure of the bank’s internal systems and controls, and subsequent to charges … against the bank’s top two managers relating to money laundering of the fraud proceeds”.
The downgrade of MCB’s FSR to D compares with the D+ rating assigned to SBM, which in the year to June 2003 held a market share of 24.4% in assets, 21.6% in loans and 22.4% in deposits. In the same year, its net interest margin (4.56%), cost to income ratio (39.2%), risk-adjusted return on capital (22%) and return on average equity (20.4%) were all well above the average for Mauritian banking. Although 81% of SBM’s loan book is accounted for by its business banking operation, its personal banking division in general and premier banking segment in particular is its most profitable.
SBM attributes much of its profitability and efficiency to its investment in best-of-breed software, as well as to the development of its state of the art network of delivery channels which has recently focused on developing its internet banking services.
Namibia
Best bank:
Standard Bank of Namibia
Namibia’s banking industry took another step towards being wholly foreign-owned in July 2003 when the merger of First National Bank (FNB) and Swabou Bank came into effect. That brought together the 26-branch network of FNB, 78% owned by South Africa’s FirstRand Bank, and the 15-branch operation of Swabou, which itself had merged with the City Savings and Investment Bank (CSIB) in 2002.
Even after this merger, FNB remains smaller than its principal competitor, Standard Bank of Namibia, which is 100% owned by Standard Bank of South Africa and commanded a deposit market share of 32.9% in the year to June 2003. That compared with 23.6% for FNB, 16% for Commercial Bank of Namibia, which is 93% owned by South Africa’s Nedcor, and 27.4% for Bank Windhoek, which is still majority Namibia-owned but with a 36% Absa holding.
Sim Tshabalala, managing director of Stanbic Africa, says that Standard Bank has upped the tempo in promoting retail banking in Namibia in recent years. It shows: in 2003 loans rose 16% to R4.9 billion ($728.6 million) and deposits rose 17% to R5.6 billion. After-tax profits edged up by 5%, from R159.7 million to R168 million.
Nigeria
Best bank:
First Bank of Nigeria
First Bank of Nigeria (FBN), which traces its origins to 1894, is Nigeria’s largest financial institution and remains the most dependable bank in a market not noted for probity – since 1994 alone, the central bank has revoked the licences of some 36 institutions.
In 2002/2003 FBN’s assets rose by 20.4% to N320.6 billion ($2.4 billion), with profit before tax rising by 163% to N13.4 billion. Recent investment in IT infrastructure suggests that FBN is well placed to retain its lead in Nigerian banking. This has helped enhance FBN’s customer service platform and expand its delivery channels to include mobile banking, ATMs and internet banking. Today, 130 of its 339 branches are linked for online banking.
Senegal
Best bank:
Société Générale de Banques au Sénégal (SGBS)
Société Générale de Banques au Sénégal (SGBS), which was established in 1962 and today has a market share of about 30%, scoops this year’s award for the speed with which it is expanding its nationwide operation without compromising on earnings. In 2003 the branch network expanded from 24 to 31, which compares with just 11 in 2000. According to a spokesperson for Société Générale in Paris this will rise to 40 by the end of 2004. In 2003, against the backdrop of a fragile economy in a country in which GDP per capita is around $600, SGBS’s deposits rose from e380.7 million to e420.3 million, and its loan book from e366.6 million to e423.6 million. With non-performing loans falling from e67.5 million to e63.2 million, after-tax earnings increased from e10.7 million to e11.1 million.
South Africa
Best bank:
Standard Bank
Jacko Maree, chief executive officer of Standard Bank since 1999, had good reason to celebrate the bank’s results in 2003 – each of the targets he set for the year was met comfortably. Last year, they included delivering headline earnings of 16.8% – or inflation plus 10% – a return on equity of 20%, a cost to income ratio of 57% and a credit loss ratio of less than 1%. In the event, headline earnings rose by 19% in 2003 to R6248 million ($932.8 million), ROE reached 22.8%, the cost to income ratio dipped from 57.3% to 56.2% and the credit loss ratio fell from 1.08% to 0.91%.
Much of Standard Bank’s impressive growth in 2003 was a reflection of its fast-expanding presence in the domestic retail market, which accounted for 40% of earnings in 2003, compared with 35% for commercial and investment banking. In retail banking, Standard Bank’s share of the mortgage lending and credit card markets rose to 23% and 28.8% respectively in 2003, up from 20.3% and 24.9% in 2002. That robust growth helped domestic business ROE reach 30%, although the fastest growing operation in 2003 was Standard Bank’s international (non-African) business, accounting for 13% of earnings compared with 8% in 2002. African earnings, held back by the strength of the rand, contributed 8% of the group’s total last year.
Standard Bank’s healthy performance was recently acknowledged by the local ratings agency, Global Credit Ratings (GCR), which has upgraded it (with FirstRand) from AA to AA+.
Best debt house:
Barclays Capital
The past year has been quiet for South African issuance in international debt markets, with the sovereign itself having made its last visit to the market in May 2003. That e1.25 billion deal was led by Dresdner Kleinwort Wasserstein and Citigroup.
The spotlight has now switched to domestic issuance, in which asset-backed structures have continued to lead the way, with Rand Merchant Bank leading the market’s first true securitization for BMW last August. But the most exciting recent development in the domestic debt market has been the first transaction for a municipal borrower since Durban in 1993. For its role in arranging the debut issue for Johannesburg alongside ACMB, as well as for its growing role in the fledgling rand-denominated syndicated loans market, Barclays Capital takes this year’s award for best debt house.
Jonathan Berman, head of merchant banking at Barclays Africa, says the Johannesburg deal was significant for several reasons. As a transaction rated A– by Fitch, it was an important barometer of investor demand for lower-rated bonds, and it passed the test with flying colours. Oversubscribed by about 50%, the bonds were eventually sold to 14 domestic institutional investors, four of which were existing lenders to the municipality while the other 10 were taking on exposure to Johannesburg for the first time.
Most important, however, is that the Johannesburg deal amounted to a new asset class that should play an increasingly pivotal role in the domestic capital market, given the government’s desire to see more municipal borrowers raise finance through bonds.
As Euromoney was going to press Johannesburg was readying a follow-on R1 billion deal, and Berman reckons that between them the six largest municipals will be raising as much as R20 billion or R30 billion in the bond market over the next few years.
Best equity house:
Citigroup
In the primary market for South African equities and equity-linked deals, it was a close call between Citigroup and JPMorgan in 2003/04. Although JPMorgan has led several key transactions, including the first internationally targeted transaction in rand, the R1.7 billion convertible for Harmony Gold Mining in March 2004, Citigroup edges ahead to take this year’s award. It commanded a fractionally larger market share than its competitor, and was involved in a more diversified range of transactions, acting as bookrunner on a rare e123 million secondary offer for furniture and household goods company Steinhoff International Holdings.
In terms of size, however, the largest deal of 2004 so far from South Africa has been the $1 billion convertible bond for AngloGold in February, co-led by Citigroup and Deutsche Bank. It was increased from its originally planned $900 million and priced with a conversion premium at the bottom of its 60% to 65% range. This was AngloGold’s first foray into the international capital markets and, according to Citigroup, was oversubscribed within an hour of the books being opened.
Best M&A house:
JPMorgan
Although Citigroup can make a strong claim to having advised on one of the most important M&A transactions in South Africa in 2003/04, the $1.2 billion sale of Anglo American’s 20% stake in Gold Fields of South Africa to Russia’s Norilsk Nickel [see Norilsk’s golden opportunity, Deal insider, this issue], JPMorgan has been involved in a series of high-profile M&A deals in South Africa’s mining industry in the last year. Many of these have helped to support the development of Black Economic Empowerment (BEE) in the sector. Most notably, in 2003 JPMorgan advised Harmony Gold Mining on its $2.6 billion merger with ARMgold, creating the fifth-largest gold mining company in the world and the largest unhedged South African gold producer. Other clients advised by JPMorgan in South African M&A in the past year have included Gold Fields, African Oxygen (Afrox) and, most recently, the Mvelaphanda-led consortium on its landmark acquisition of a 10% stake in Absa (see below).
Special achievement award:
Absa
South Africa’s Financial Sector Charter was signed in October 2003, with the aim of extending financial services to 80% of lower income citizens by 2008. The charter also calls for black stakes in banks to reach 10% by 2008 and 20% by 2014. In accordance with those guidelines, while Investec was the first bank to announce the sale of a 25.1% stake to a black consortium, Absa more recently became the first of the big four South African banks to sell a direct stake to a black empowerment consortium. In April, it sold a 10% stake to the Batho Bonke consortium led by Tokyo Sexwale, chairman of mining group Mvelaphanda, which was the largest empowerment deal to date in the South African financial services sector. At the same time, Absa announced plans to launch an employee share-ownership programme worth 1% of the group’s enlarged share capital.
Although there has been substantial rhetoric in South Africa about black empowerment, the Absa move was delivery on a pledge made early in 2003, when at a workshop organised by Deutsche Bank it promised to “re-align the existing shareholding and directorship to include a meaningful proportion of black shareholders and directors”. Critically, however, the Absa initiative should not be misinterpreted as one motivated purely by political correctness. In a recent presentation, Absa insisted that the move was designed to “enhance and protect” its market position and that there would be “no compromises on the principles of sound business practice, risk management and adherence to regulatory requirements”.
Swaziland
Best bank:
Standard Bank Swaziland
Standard Bank Swaziland, which has 10 branches in the kingdom, traces its roots to 1988 when it was founded as Union Bank. Five years later it changed its name to Stanbic before becoming Standard Bank Swaziland in June 1997. At the end of 2003, Standard Bank Swaziland had total assets of R1,431 million ($211.8 million), up 10.6% on 2002’s total of R1,293 million, although the growth in its deposits and loans outstripped the expansion of its assets in 2003. Deposits increased by 11.3%, while the loan book expanded by 27.5% from R755 million to R962.2 million. With the cost to income ratio plunging from 61.1% to 55.1%, pre-tax earnings grew by 40%, while after-tax profits rose by 48%, from R43.4 million to R64.1 million.
Tanzania
Best bank:
Cooperative and Rural Development Bank
Since its privatization in 1996, Cooperative and Rural Development Bank (CRDB) has been the fastest growing bank in the Tanzanian market. Between 1998 and 2003 its assets rose by 371%, compared with 333% for the industry as a whole, and while profits stagnated in 2002, they rose fast in 2003, with operating income rising by 157% to TSh7.2 billion ($6.8 million) and net earnings expanding by more than 400% from TSh1 billion to TSh5.2 billion ($4.9 million).
True, CRDB has some way to go before it challenges the local operations of Citibank or Standard Chartered in terms of efficiency measures such as return on assets or cost to income ratio. But in a geographical region still characterized by a very low level of penetration of banking services, CRDB wins credit for the success it has had in helping to promote retail banking in Tanzania in recent years.
CRDB says that its vision is to become “the bank for the majority of Tanzanians”, and at the end of 2003 retail clients accounted for 58% of its loan portfolio and 72% of its interest income. Although much of that client base is accounted for by what rank locally as high-net-worth individuals, CRDB also reports that it is working on a number of initiatives through a network of intermediary micro-finance institutions aimed at opening up financial services to the rural and urban underprivileged.
Togo
Best bank:
Ecobank
The winner of the award for best bank in Togo could equally have won recognition as the best in Benin, Burkina Faso, Guinea or Niger, as well as a number of other countries in the region. Ecobank, West Africa’s first privately owned regional bank, is now active in 12 markets, but it wins this award on the strength of the location of its headquarters in Lomé, Togo.
When it began operations in Togo in 1988, Ecobank had a modest capital of $100 million. In 2002, its total assets passed the $1 billion mark for the first time, and operating income rose that year (the last year for which figures are available) by 7% to $117 million. In the same year, profit before tax expanded by 19% to $30.3 million and after-tax profit was up 29% to $16.6 million.
As of June 2002, Ecobank employed 1,670 people in 60 branches and offices and one priority is to ensure that all of those outlets are equipped with first-class technology. In the increasingly competitive banking industry in Mali, for example, the bank’s subsidiary reports that the introduction of internet banking and ATMs of the kind already being provided by several other members of the Ecobank network is imminent.
Uganda
Best bank:
Stanbic
Following extensive structural changes and closures, there are now fewer than 20 banks operating in Uganda, with Stanbic, Standard Chartered and Barclays between them controlling about three-quarters of the local banking industry.
Of the three, Stanbic has pursued the most adventurous strategy in recent years. Its acquisition of Uganda Commercial Bank (UCB) in February 2002 represented what the bank describes as a “paradigm shift” in its strategy, transforming it from a two-branch outfit into a bank with 65 branches located throughout the country. The risks involved in taking over UCB were substantial, given the political opposition to the sale of the bank to an overseas buyer.
Stanbic has energetically set about dragging UCB into the 21st century, renovating branches and installing ATMs at most of the bank’s outlets. Although deposits rose in 2003, with the cost to income ratio falling marginally, profitability was down from R119.2 million to R1093.9 million ($162.9 million). Nevertheless, Stanbic’s investment in UCB should stand the bank in good stead over the longer term.
Zambia
Best bank:
Barclays Bank
Foreign banks have been well represented in Zambia for close to a century. Standard Chartered, which today claims a market share of 30%, opened for business in 1906. Stanbic can trace its origins in Zambia to the opening of the first Grindlays branch in the country in 1956, whereas Citibank is a more recent arrival and is celebrating the 25th anniversary of its opening in Zambia this year.
Barclays, which takes this year’s award for best bank in Zambia, has been operating in the country for more than 80 years. It has 31 branches with 750 staff, and has capital and reserves in excess of ZK45 billion ($9.5 million). In 2003, Barclays Zambia posted impressive growth across the board, with total assets growing by 26% and profits rising by 18% in sterling terms. Its cost to income ratio was reduced sharply from 75% in 2002 to 64% in 2003.
Apart from its steady growth in Zambia, Barclays Bank has made an important contribution over the past year towards the development of the country’s rudimentary capital markets, launching a well-received ZK30 billion 12-year floating-rate note in May 2003, the largest private-sector bond ever issued in Zambia.
Zimbabwe
Best bank:
No award
Like its economy, characterized for example by demands for pay increases of 7,000% from its doctors and nurses, Zimbabwe’s banking sector lurches from one crisis to the next.
The entire banking system almost ground to a halt in January when about a third of Zimbabwe’s registered banks were reported to be suffering from acute liquidity shortages, with foreign banks benefiting as investors fled from domestic banks in a desperate search for safe havens. In the case of Barclays, for example, the local press reported that the bank’s assets rose from Z$566.4 billion at the end of December to over Z$900 billion ($199.5 million) in January.
Even for the foreign banks that remain active in Zimbabwe, recent experience has been anything but happy. Barclays, which has deconsolidated its Zimbabwean income from its accounts, has been dogged by industrial disputes and constant press rumours that it plans to pull out of the country.
Standard Chartered, meanwhile, which reports that it controls 40% of the market share of foreign banks and 20% of the share of all banks, has also been suffering at the hands of hyper-inflation and a rapidly depreciating currency.
