Awards for excellence - Africa
BEST BANK IN SUB-SAHARAN AFRICA
Standard Chartered Bank
BEST LOANS HOUSE IN SUB-SAHARAN AFRICA
If awards for best regional banks were made on the basis of good intentions, it would already be game over in Africa. Barclays' protracted acquisition of a 60% stake in South African banking group Absa, which was given the blessing of finance minister Trevor Manuel early in May, is widely recognized as being the most important deal of its kind in the history of African banking.
Given that Barclays has committed some R33 billion ($5 billion) to the new venture, it is also the largest single foreign direct investment in South Africa, which is why it appears to have been met with something approaching euphoria even by the two banks' principal competitors.
The deal is "a stunning vote of confidence" in South Africa's longer-term economic prospects, says Martin Kingston, chief country officer at Deutsche Bank in Johannesburg and chairman of the International Bankers' Association in South Africa.
As Kingston and others point out, although flows of portfolio investment into South Africa have been buoyant in recent years, FDI inflows have been disappointingly thin. A widely shared hope and belief is that Barclays' preparedness to channel so much money into South Africa will prompt other flows of investment, and not just into financial services.
For senior management at Absa and Barclays, the hard work still lies ahead if the two banks are to maximize the opportunities arising from their merger by successfully bringing together two very different cultures. But if the popular prognosis about the impact of the merger is accurate, the initiative ought to have a positive ripple effect through much of sub-Saharan Africa.
That is because empirical evidence points to a generalized similar effect throughout the region from economic expansion in South Africa, which accounts for about 52% of sub-Saharan Africa's GDP. According to a March IMF paper, a 1% growth rate in South Africa is generally associated with growth rates elsewhere in sub-Saharan Africa of between 0.5% and 0.75%.
In the recent past, though, sub-Saharan Africa as a whole has been growing faster than South Africa, according to the IMF's latest Africa Regional Economic Outlook.
The overall growth figure is, however, distorted by the performance of the few African oil producers, whose 2004 performance was bolstered by soaring crude prices.
Even so, according to the IMF, more than one-third of African economies posted growth rates in excess of 5% in 2004, which appears to have established a strong basis for further expansion this year. "The [Africa Outlook] projects that both strong growth and subdued inflation will continue in 2005," notes the IMF.
Those positive indicators are feeding through into stable or improving credit ratings in Africa. As Standard & Poor's notes in its most recent report on the region, of the 13 sovereigns it now rates in Africa, only one, Cameroon, suffered deterioration in its credit quality in 2004. Among other rating agencies, Fitch Ratings upgraded Ghana in March and in the same month assigned its first rating to Uganda (B/B stable).
The flipside of this healthy growth rate is that in general it is from a very low base. The IMF warns "the most critical challenge for sub-Saharan Africa is to sustain and accelerate economic growth, [given] that even the recently improved growth rates fall short of the level required to achieve the Millennium Development Goal of halving income poverty by 2015."
Nevertheless, analysts appear to be broadly encouraged by the commitment a growing number of democratically elected governments throughout Africa are making to economic reform. In the banking sector, that is manifest in liberalization and privatization twinned, in some economies, with the promotion of consolidation, vastly improved corporate governance standards and enhanced capitalization.
Nigeria, which has at last started taking the scythe to its bloated, sprawling, undercapitalized and sometimes corrupt banking sector, is perhaps the most visible and significant example of that process. There, the central bank has made it clear that it wants its banking reform programme to whittle down the number of banks from 89 to no more than 25 within the next 12 to 18 months.
In Zambia, the government seems to be committed to pushing ahead with the privatization of the Zambia National Commercial Bank (Zanaco) in spite of fierce political opposition to the sale of a majority stake to an overseas partner. Malawi has recently awarded a contract on the restructuring and privatization of Malawi Savings Bank to a consortium made up of France's Caisse Nationale des Caisses d'Epargne, Swedbank and KPMG Blantyre.
Tanzania's National Microfinance Bank is inching towards privatization with the planned sale of a 49% stake to a consortium led by Rabobank Nederland and including Exim Bank (Tanzania), the National Investment Company of Tanzania and the Tanzania Chamber of Commerce and Industry. And in West Africa, Sierra Leone wants to sell 40% of the local Rokel Commercial Bank to a foreign investor in order to expedite bank reform and privatization.
Although bank privatization has clearly already helped to inject substantial productivity gains into the banking industries of a number of African economies, several of the larger state-owned banks – once synonymous with inefficiency, cronyism and overstaffing – have made impressive strides towards competing more effectively. Players such as Commercial Bank of Ethiopia and Kenya Commercial Bank, for example, have both done much to make up ground on private-sector competitors over the past 12 to 18 months.
For international banks assessing the prospects for investment and expansion in Africa, opportunities in retail and corporate banking are not the sole potential source of growth. The fledgling capital markets in several countries have also been a focus for banks attracted by the growing opportunities in bond markets. "We definitely see more and more opportunities emerging in capital markets throughout the region," says Zdenek Turek, head of sub-Saharan African markets at Citigroup in Johannesburg. "That will be driven not just by governments but also by large companies, many of which have a regional focus and will want to raise acquisition finance through the capital markets. Our main target client base is large companies such as utilities that are likely to tap capital markets."
For the time being, the general consensus appears to be that Johannesburg is still the location of choice from which to manage a pan sub-Saharan African banking franchise. "It is certainly the government's long-term intention to develop Johannesburg as a regional financial centre," says Richard Adcock, chief executive of HSBC in South Africa. "Things are stable from a political and macroeconomic perspective, while the volatility of the rand has also been very considerably reduced, allowing businesses to make much more reliable cashflow forecasts. It's no surprise that a number of the foreign banks have decided to use South Africa as their regional base for developing their sub-Saharan African business."
This year's award for best bank in sub-Saharan Africa was a tight contest between the four groups that have demonstrable credentials as pan-African players. The sub-Saharan African franchises of all four – Barclays, Citigroup, Standard Bank (through Stanbic) and Standard Chartered – had successful years in 2004/05.
Barclays continued to enjoy strong growth in its wholesale and retail businesses throughout its core markets, expanding its network in Kenya, for example, and introducing a home loan facility in Zambia. The UK banking group has also continued to play an important role in guiding African borrowers of all shapes and sizes to international as well as local debt markets. In terms of size and geography, those mandates have ranged from South Africa, where Barclays co-led the sovereign's highly successful dollar benchmark transaction in 2004, through to Ghana, where its South African branch arranged a small club facility in April for Tema Offshore Mooring.
Clearly, however, all Barclays' achievements in Africa in 2004/05 pale into insignificance when set against its acquisition of Absa in South Africa. Although marrying the Barclays and Absa cultures might yet bring hefty challenges, and while management will in the first phase be concentrating on the banks' South African operations, over the longer term it is clear that a formidable new pan-African player will emerge.
Citigroup has remained focused on its obvious strengths at the larger end of the corporate market in the 11 countries in which it has a presence in sub-Saharan Africa, as well as in the 20 or so that it describes as "non-presence" countries. Zdenek Turek, head of sub-Saharan African operations at Citigroup in Johannesburg, says the bank has made significant progress in recent months in such areas as electronic banking, treasury risk management and corporate finance. It has also arranged a series of highly innovative transactions throughout Africa, such as its pioneering project finance deal relating to the privatization of the Uganda Electricity Distribution Company. And it clearly has a head start on its international competitors in the key Nigerian market, where its position as the largest foreign bank has been reflected in the string of high-profile syndicated loans arranged by its local subsidiary, Nigeria International Bank.
For Standard Bank, the winner of the regional award in 2004, progress in sub-Saharan Africa in 2004/05 has been steady rather than spectacular. The principal focus for Stanbic (the name under which Standard operates in most African markets outside South Africa) has been the continued alignment of the bank's retail and wholesale operations with its counterparts in South Africa. "While we've had a relatively quiet year on the acquisition front, a clear highlight has been our operational results, which have seen a growth in our return on equity (ROE) of 30%," says Greg Brackenridge, managing director of Stanbic Africa. "In the last year we've lifted the stake in our Mozambique subsidiary from 40% to 96% and acquired Investec's banking operations in Botswana. Together, those acquisitions only accounted for about 5.4% of the 30% year-on-year growth. The balance has come from organic growth in spite of some strong headwind in the form of a continuing squeeze on margins."
Less encouraging for Stanbic in 2004/05 has been its failure to negotiate an acquisition in Angola and, more seriously, its inability to gain a significant toehold in Nigeria. There, Stanbic was beaten by a short head in the race to acquire United Bank for Africa, the country's third-biggest bank as measured by branches. "Standard Trust pipped us at the post on the basis that a merger between those two Nigerian banks would create a national champion," says Brackenridge. "Nigeria is a key market for us and although UBA was our favoured target, it was not the only one." Stanbic will therefore continue to focus on the potential for a Nigerian acquisition in 2005, as well as on the development of key franchises in such markets as Kenya, Tanzania and Uganda.
Although Barclays and Standard Bank have favoured acquisitions as their means of expanding their African operations, this year's winner of best bank in sub-Saharan Africa, Standard Chartered, has consistently developed a business model based largely on organic growth. Although it has bolstered its presence in South Africa with the acquisition of Cape Town-based internet bank 20twenty – soon to be rebranded as Standard Chartered – the bank remains committed to a bold strategy of organic growth in the key South African and Nigerian markets.
In South Africa, that approach is starting to steer Standard Chartered in the right direction. In recent months it has become the first foreign bank in the market to launch mortgage and personal loan products. On the wholesale side, it is focusing on using its global network to support South African corporates looking to expand globally. According to John Kivits, chief executive at Standard Chartered in Johannesburg, "networked revenues" arising from what he describes as being "at both ends of the transaction" increased by about 50% last year, suggesting that the strategy is starting to bear fruit.
In Nigeria, Standard Chartered has five well-located branches that have yielded encouraging results over the past 12 to 18 months. "Our top-line growth in Nigeria in the past two to three years has been anywhere between 25% and 30%," says Sherazam Mazari, Standard Chartered's chief executive officer for Nigeria. "That is a good growth rate in a key market but we feel we still need to expand our network in Nigeria."
Because there is so much untapped potential in African markets such as Nigeria, Mazari is convinced there is room for banks to generate rapid growth and strong profitability from their own organic evolution. "Our estimate is that corporate and consumer loans account for about 15% of 1.2% of GDP respectively in Nigeria," he says. "If you compare that with an economy like Malaysia, where the figures are 62% and 53% respectively, it is obvious that there is considerable headroom for growth."
Standard Chartered has set about harnessing the potential of Nigeria with the recent rollout of its SME banking business model, which builds on the highly impressive track record it has built in servicing smaller and medium-size companies in Africa. Between 2002 and 2004 its SME banking business grew at a compounded annual growth rate of 34%, which Standard Chartered says is "substantially higher than the natural growth rate of the market".
Supporting SMEs is at the heart of Standard Chartered's strategy throughout its African network, which continued to post strong growth in 2004 in such markets as Tanzania, Zambia, Uganda, Zimbabwe and Ghana. And although Standard Chartered's performance in Kenya was a disappointment in 2004, Mazari says that its network of 140 branches in 13 African countries posted overall pre-tax profits of $215 million in 2004, up an impressive 41% on 2003.
Although capital markets in sub-Saharan Africa are not yet sufficiently well developed to warrant individual awards for banks' performance in the debt and equity markets, the same is not true for the syndicated loan market, which has been tapped by an increasingly diverse range of borrowers.
The impressive range of financings that Citigroup has led for African borrowers has reflected that diversity. In Nigeria, where it is the largest foreign bank, its local subsidiary Nigeria International Bank (NIB) has led key pre-export facilities for oil companies Total and Shell as well as a groundbreaking remittance-backed $40 million loan for Nigeria's largest local bank, First Bank of Nigeria. More recently, in April 2005, Citi leveraged on its strong pan-African presence when NIB arranged local-currency financing on behalf of Nampack South Africa's Nigerian subsidiaries supported by guarantees from Citibank South Africa.
Citigroup has also been active in several of what it calls "non-presence" countries where the bank has no local branch or subsidiary. Highlights have included its role as arranger of a $40 million syndicated structured remittance-backed facility for Commercial Bank of Ethiopia and as sole arranger on pre-export facilities for groundnut processor Sonacos in Senegal and oil refiner Sonara in Cameroon. At a pan-African level, Citi was mandated lead arranger on the complex $190 million syndicated loan spanning 13 different African jurisdictions for Celtel, Africa's largest mobile telecoms company.