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Banking

Covid-19 spurs domestic bank M&A in Africa

The coronavirus pandemic is intensifying the case for domestic bank M&A in Africa, but cross-border deals will be challenging to execute.

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Access Bank’s Zambian subsidiary announced plans for the acquisition of a 100% stake of domestic lender Cavmont Capital Holdings Zambia in mid July.

Following the collapse of Equity Bank’s plans to acquire Atlas Mara’s subsidiaries in Rwanda, Zambia, Mozambique and Tanzania in June, the deal is a sign that an anticipated Covid-19-driven spate of bank mergers may be on the cards.

Analysis by McKinsey suggests that the coronavirus crisis could result in African banking revenues falling by between 23% and 33% between 2019 and 2021.

Over the same period, African banks’ return on equity could fall by between 5% and 15%, driven by rising risk costs and reduced margins.

African banks currently have among the highest cost-to-asset ratios in the world at 4% to 5%, twice the global average.

As they cannot rely on the same level of support from central banks as European or US counterparts, the risk to balance sheets of forbearance on loan repayments and mortgages is high.

“Because of heightened asset-quality risk that will hurt liquidity and capital ratios for multiple banks, it is logical to expect you will see more bailout-type M&A deals as we go,” reckons Adesoji Solanke, director in frontier/sub-Saharan banks equity research at Renaissance Capital.

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