Youthful populations and less financialized economies mean African banks do not face the prospect of decline in the same way as their peers elsewhere in the world.
There is good growth in corporate and investment banking, too, as the financial needs of African clients are proliferating.
Partly because of this, Standard Bank – the continent’s biggest lender by assets – made almost twice as much money in corporate and investment banking in the rest of Africa than in South Africa last year.
Yet the question of how much emphasis to put on long-term growth over risk-adjusted profit is not an easy one in Africa. Indeed, there is a sense that this dilemma ultimately underlies the controversy around the exit of former Absa CEO Daniel Mminele this year.
The past few years have laid bare African banks’ vulnerability to regulatory risks
Absa’s separation from Barclays had tentatively coincided with a shift in power towards business divisions rather than control functions and – as at Standard Bank – a better recognition of the pan-African opportunity.
The reality is that banks have a starkly different set of risks and regulatory constraints to deal with than other sectors, such as technology – even where growth prospects are relatively good. Blanket optimism would, therefore, be as unjustified in Africa as anywhere in banking.
In terms of the operating model, federated networks of efficient businesses can do well and jump on opportunities quickly.
It is probably better for Africa’s banks to be content with steady and gradual growth – which is also the view of Segun Agbaje, chief executive of GTBank, Nigeria’s biggest bank by market capitalization.
Agbaje wants to reach 50 million clients in the next five years, just over double its number today. If the right deal came up, the bank would jump on an acquisition in Kenya, where it has a second-tier operation.
Partly because of risk concerns, on the other hand, GTBank has stepped back from M&A – even as the restructuring of Atlas Mara, Bob Diamond’s old African banking venture, has put banks up for sale across the continent.
Agbaje thinks Atlas Mara’s troubles amounted to more than just a bloated cost base in its early years. He says they reflect the industry’s wider malaise. Even at GTBank, with a return on equity (RoE) in the mid-20s, annual profit growth has dropped from about 20% during the early 2010s to barely 5% since then.
Agbaje spoke to Euromoney ahead of GTBank’s conversion to a more diversified financial holding company, of which he will be CEO.
African banks, it must be said, have been through an unusually difficult period since the end of the commodities super-cycle in the early 2010s.
The oil-price crashes of the mid-2010s and last year forced banks in Nigeria and elsewhere to restructure large swathes of their corporate loan books. Even now, there is little hope for a return to a prolonged period of oil prices above $100 a barrel.
The past few years have also laid bare African banks’ vulnerability to regulatory risks.
Nigeria, again, has been especially hard-hit thanks to the central bank’s policy of ramping up cash reserve requirements. Kenyan banks – generally more successful at lending to the real economy, as it is more diversified – have also suffered interest-rate caps and restrictions on charges for money transfers.
Greatest threat
According to Agbaje, Africa’s banks face an even greater threat from fintech and, in many countries, mobile phone companies. These new competitors are the main reason why he thinks banks – especially in Nigeria – have started to rely more on unsustainable income streams such as derivatives trading.
Safaricom’s M-Pesa, for example, is Africa’s best-known mobile money company. It is not the only one. Across Africa, firms such as Airtel and MTN also have lucrative mobile money operations, doing business that banks have failed to capture.
Homegrown payments companies such as DPO and Flutterwave are also growing rapidly and achieving valuations higher than all but the biggest banks.
No wonder the banks – as in more developed markets – are looking away from their core businesses.
Even in countries such as Kenya and Nigeria, where an RoE in the late teens or early 20s is not unusual, only the best-performing lenders are meeting their costs of equity, which Renaissance Capital reckons is typically in the early or mid-20s. Even GTBank is barely trading above book value; most others are well below it.
The banks’ answer is to invest more in their own payments and wealth-gathering businesses, and to better demarcate these from a banking business that has fundamentally different dynamics in terms of growth and risk – even if their networks still give an advantage; about half a million merchant relationships in GTBank’s case, for example.
This is something that GTBank and Access Bank – Nigeria’s biggest bank by assets, and Africa’s by customer numbers – are seeking to do, through new holding company structures.
“The only fintech I want to partner with is my own,” concludes Agbaje. “I don’t think there’s a partnership. There’s an unholy alliance. Their claws will come out.”
