A European retreat opens the door to Middle East banks in Africa
As European and Chinese banks scale back in Africa to cut costs and redeploy capital to core markets, Middle East lenders are happily jumping in to fill the gap, buying assets and putting more boots on the ground as bilateral trade between the regions increases.
The financial and commercial ties that bind the Middle East and Africa may never have been stronger than they are today. Almost every month there is news of an important deal involving investors on both sides.
In March 2022, the Islamic Corporation for the Insurance of Investment and Export Credit, part of the Saudi Islamic Development Bank, signed a deal to promote bilateral trade and investment with African Export-Import Bank.
In June, three Gulf-based sovereign wealth funds (SWFs), led by the investment authorities of Abu Dhabi and Kuwait, joined forces with nine African sovereign funds, including those from Egypt, Morocco and Nigeria. The result was a new platform for promoting investments in Africa, in sectors ranging from logistics and transportation to environmental protection.
Some of the deals are complex and multi-agency. Take the agreement signed in June by Dubai’s Etihad Credit Insurance and Israel Export Insurance to fund healthcare projects worth Dh540 million ($147 million) in Ghana. It is a complex tie-up made possible by the Abraham Accords peace deal signed in August 2020 by the US, Israel and the UAE.
Capital markets deals led by key Middle East banks also abound.
In June 2021, First Abu Dhabi Bank (FAB) helped National Bank of Egypt finalize a $1 billion loan. Five months later it structured and led a three-year, $3 billion loan for the sovereign, divided equally between green and Islamic financing. And in August 2022, Egypt’s central bank turned to FAB and Abu Dhabi Commercial Bank to help raise $5.2 billion from local lenders to ease pressure on the nation’s finances.
With regards to sectors of interest for investment in Egypt, areas of focus include energy, logistics, manufacturing and services
Martin Tricaud, group head of investment banking at FAB, says a blend of economic diversification, an improved political climate and structural reforms have “encouraged the return of foreign investors to Egypt.”
“We are also actively looking toward contributing to Egypt’s strategic Vision 2030 to strengthen our presence in the market,” he adds. “With regards to sectors of interest for investment in Egypt, areas of focus include energy, logistics, manufacturing and services. We… will continue to look for strategic opportunities in the market.”
Another firm busy blazing a trail in Africa is the UAE’s largest private-sector lender, Mashreq Bank.
“We primarily facilitate trade and increasingly provide funding and financing solutions,” says James Pearson, Mashreq’s global head of financial institutions and non-bank FIs. “We are a very committed partner in a few countries, and we are looking at expanding further. Our playbook is to focus only on the top banks and to access the full product wallet.”
Mohammed Shaqra, regional head of FIs and non-bank FIs at Mashreq, points to the lender’s simple but effective plan of offering a “wider range of products” than its peers in target markets.
“[Our] portfolio skews toward short-term transactions, but we have some selective medium- and long-term products," he says, "particularly in the sovereign segment of our portfolio such as loans to finance ministries, repos against sovereign bonds and Eurobonds of commercial banks, and medium-term tranches of selective syndicated loans.”
Pearson reckons Mashreq has built up a deep well of trust by staying the course in tough times – as it did in 2020 when Covid hit and some banks retrenched.
“We don’t suddenly reduce our exposure when markets face challenges," he says. "So, when market conditions are good, we tend to see a strong uptick in our business as we are not seen as a here-today-gone-tomorrow partner.”
Both Mashreq and FAB are in expansion mode.
FAB completed its acquisition of the Egyptian assets of Lebanon’s Bank Audi in June 2022 and rebranded the new entity FABMISR. Tricaud tipped the full integration of the vehicle into First Abu Dhabi Bank to be completed in the final quarter of this year, noting: “This has set us up as one of the largest foreign banks operating in the Egyptian market, with assets of over E£185 billion ($9.62 billion).”
Post-pandemic, as a result of supply-chain disruption and higher volatility, many banks view the market risk as increasing, so there are credit gaps in the markets as some financial institutions withdraw
Not all acquisitions go to plan. In April 2022, FAB withdrew its non-binding offer for EFG Hermes, a deal that would have valued Egypt’s biggest investment bank at $1.2 billion. The bank blamed the collapse of the deal on market volatility following Russia’s invasion of Ukraine and rising inflation, but it had also faced long regulatory delays.
Mashreq’s Pearson insists a move to buy assets in the region in the longer term is not out of the question.
“I wouldn’t rule out us having resources on the ground in Africa, but it’s not on the agenda right now,” he says.
For now, its expansion plan is based on extending its reach into key markets without having to invest in costly office space. Mashreq is looking to replicate its business model in non-Anglophone markets, notably Côte d’Ivoire and Angola, by steadily acquiring clients and building local knowledge and expertise.
“Our level of knowledge drives what we do in each market,” says Pearson. “In the likes of Tanzania and francophone Africa, we will be primarily focused on trade-focused low-risk business while we get to know the market.”
In November 2021, Mashreq’s head of international banking, Tarek El Nahas, told Euromoney that a commitment to key Africa markets was a key selling point for international clients.
“No big US firm will come and talk just because my name is Mashreq,” he said. “But… if I can offer solutions in five MENA [Middle East and north Africa] countries, suddenly we are having a discussion. And that connectivity creates corridors.”
And the flow of investments by financial institutions isn’t just one way. In July 2022, Nigeria’s United Bank for Africa opened its first Middle Eastern branch in the Dubai International Financial Centre. It will focus on providing correspondent banking, advisory and relationship management services to corporates and financial institutions across the Gulf.
There are many reasons behind the spike in two-way deal flow and investment between the Middle East and Africa. One is the sheer amount of wealth being thrown off by a resurgent hydrocarbon sector.
The IMF said on August 19 that energy-rich Middle East sovereigns would earn $1.3 trillion in additional revenues over the next four years due to surging oil prices, topping up the coffers of regional SWFs.
Investors are targeting high-yielding sectors including telecommunications, logistics, infrastructure, agritech, healthtech, fintech and traditional financial services.
“There’s a widespread view – and not just in the Middle East – that Africa is a place to find higher returning assets right now,” says one investment banker.
A lot more bankable projects are coming to the fore, supported by Middle East and Asian banks, multilaterals and sovereigns
Saloshni Pillay, chief country officer for South Africa at Deutsche Bank, says investors are “looking for sustainable and untapped markets that over the next 10 to 15 years will allow them to diversify their exposures. This has been a theme given the impact of the recent geopolitical headwinds.”
That is a nod towards central and eastern Europe, a region expecting to see inward foreign direct investment fall sharply in 2022 and beyond following Russia’s invasion of Ukraine.
“A sizeable chunk of the emerging-market capital that was earmarked for the CEE will go to Africa instead,” one banker says.
That makes sense if you compare the growth prospects for the two regions. In its latest World Economic Outlook, published in July, the IMF tipped the economic output of emerging and developing Europe to contract by 1.4% year on year in 2022. By contrast, the collective economies of sub-Saharan Africa are projected to grow 3.8% this year and 4% in 2023.
Part of this is due to a belated post-Covid bump. GDP expanded at a slower rate in sub-Saharan Africa in 2021 than in any other part of the developing world.
But growth is growth and the appeal of yield-bearing local assets is undeniable.
“We are seeing growing interest out of the Middle East for Africa assets in key sectors, which is exciting,” notes Pillay. “A lot more bankable projects are coming to the fore, supported by Middle East and Asian banks, multilaterals and sovereigns.”
The Middle East is more healthily muscular about its presence in Africa, which is a good thing, and this is replacing some of the retraction from China
She points to the February 2022 purchase of South Africa’s Imperial Logistics by DP World for $890 million. On completion, the UAE port operator called it the firm’s most important acquisition in the region. Deutsche Bank was a financial adviser to DP World.
The United Arab Emirates is the Middle East’s key sovereign player in this story. Capital investment by the UAE in Africa between 2016 and 2020 totalled $23.8 billion, according to data from EY. Only China invested more over the same period.
“The Middle East is more healthily muscular about its presence in Africa, which is a good thing, and this is replacing some of the retraction from China,” notes Mashreq’s Pearson. “There is greater desire for Middle East banks to be involved in the region. Middle East banks are pushing at an open door in a region where there is less competition from international banks.”
He highlights a recent roadshow organized across the Gulf region for a key Nigerian client, Bank of Industry, which was attended by 65 Middle Eastern clients, including banks, funds and private equity firms.
“Post-pandemic, as a result of supply-chain disruption and higher volatility, many banks view the market risk as increasing, so there are credit gaps in the markets as some financial institutions withdraw,” says Shaqra.
Even if a mid-sized market in west Africa offers a bank’s bottom line a moderate annual profit bump, is that capital not more valuable put to work in larger and more developed markets?
Banks ask themselves this all the time. Witness for example Citi’s decision in April 2021 to close 13 retail markets in Asia, Europe, the Middle East and Africa and plough the savings into higher growth areas such as investment banking, China and wealth management.
Working-capital finance has been a key growth area for countries like Egypt and Morocco and for sub-Saharan Africa in Kenya and Nigeria,” says
Yet this overlooks Africa’s potential. Economic growth and high returns on capital deployed are available here if you look in the right places. So is an awful lot of goodwill: on August 23, China said it would forgive 23 interest-free loans to 17 African countries and channel $10 billion of its IMF reserves to regional states.
The kind of risk and uncertainty that makes some financial institutions blanch is attractive to other lenders. Take west Africa’s largest market.
“Many view Nigeria as less predictable due to various crises,” says Pearson. “But we like the market because it’s large and well diversified, with a very good central bank and financial system.”
For many banks in the region the demand among clients for a full range of corporate banking services is undimmed.
“Working-capital finance has been a key growth area for countries like Egypt and Morocco and for sub-Saharan Africa in Kenya and Nigeria,” says Yusuf Khan, head of trade and working capital solutions, Middle East, north Africa and Pakistan at Citi. “Regional corporates and sovereigns are very focused on securing supply chains and creating financing efficiencies in their balance sheet.
“We are one of very few international banks with a truly pan-African footprint,” he adds. “That makes us an attractive partner for clients looking for facilitation of not only trade flows and cash management but also FX mitigation tools and advisory services.”
Sustainable investing is an area of vast potential and one where Africa has long underperformed. Global issuance of green bonds hit $700 billion in the first six months of this year, according to Bloomberg data, and is on track to top $1.5 trillion in 2022 for the first time.
Yet to date, just four Africa sovereigns have issued a green, social or sustainable bond, despite the fact that the region is highly exposed to climate change risks, dependent on jobs in mining and oil, and facing daunting energy and food shortages.
For us, the ESG angle and impact on each such opportunity is a key focus
On May 26, a workshop organized by the World Bank and the UN’s Economic Commission for Africa noted that while Africa is the destination for 23% of all official climate finance, the continent has so far raised less than 1% of global green bonds by volume.
This needs to change. Fortunately, it looks like it is happening. Global investors want to invest in environmental, social and governance (ESG)-friendly projects in Africa, from funding clean energy projects to building green infrastructure.
“ESG is massive both onshore and offshore for clients who are looking for sustainable-linked financing and angles,” says Deutsche’s Pillay. “Our ability to come up with solutions in that space will be very important.”
Others point to a more pronounced and secular shift in the nature of funding. In the post-global financial crisis era, sub-Saharan Africa sovereigns tapped capital markets aggressively, soaking up much of the available institutional capital.
“Today, against the current volatile backdrop, there is more focus and interest from our clients on raising bilateral structured financings, with the benefit of multilateral support,” notes Maryam Khosrowshahi, global sub-Saharan Africa chair, co-head of Africa coverage and head of central and eastern Europe, Middle East and Africa sovereign debt capital markets at Deutsche. “For us, the ESG angle and impact on each such opportunity is a key focus.”
There is, she adds, “a lot of interest from the Middle East and Asia in project infrastructure and other investment opportunities, either direct flows from sovereign wealth funds or contractors looking at the region.”
Assessing the opportunity
Europe’s big banks can’t quite make up their minds about Africa. For some, Africa is a place of narrow opportunity, where business is clearly there but only in specific deals, markets and sectors.
When Saloshni Pillay joined Deutsche Bank in February 2022 as chief country officer and head of the institutional client group and global emerging markets for South Africa, she got to work hiring and assessing the bank’s reach in a market it first entered 40 years ago.
In came Neeran Govender, following Pillay from Absa as director of corporate sales and origination. Ed Marlow, former head of sub-Saharan Africa coverage and sales head at Credit Suisse, was hired as managing director sub-Saharan Africa, to work alongside Pillay and global sub-Saharan Africa chair, co-head of Africa coverage and head of central and eastern Europe, Middle East and Africa sovereign DCM, Maryam Khosrowshahi.
“We have a three-year plan,” says Pillay. “We are not going ‘big bang’ but are focused on bringing value to client relationships across state-owned enterprises, institutions, multinationals and large listed corporates.”
She adds: “We have spent a lot of time bringing senior [Deutsche] leaders to Africa to engage with clients.”
Pillay says the focus over the next 12 months is to onboard customers and serve the needs of 50 to 70 core clients, including commercial and development banks and state enterprises, across products such as structured lending and infrastructure financing.
Barclays has a very similar strategy. On September 1, it raised £538 million by selling its remaining 7.4% stake in South Africa’s Absa. It also divested a similar sized chunk of shares earlier this year, for £526 million.
Barclays’ history in Africa is a winding one. It was the region’s largest lender before it withdrew in 1986 at the height of the apartheid, only to return in 2005 to buy a controlling stake in Absa.
Under chief executive Jes Staley from 2016, it did another volte-face, shedding its stake in the group in stages, even though Africa was, as Euromoney wrote at the time, “one of the few parts of its core business that generates a return on equity above its cost of equity.”
Barclays didn’t completely retreat, retaining an investment banking and private banking presence in Johannesburg, as well as offices in Nairobi and Lagos. Country chief executive, South Africa and market head Amol Prabhu insists the staggered exit “gave us a unique opportunity internally to step back and really think about our Africa business. I spoke to over 200 clients and asked them these exact questions to understand why they use Barclays, what they like, which other banks they use and why.”
Asked if he regrets the asset sales, Prabhu replies: “I was not at the top table when that sale decision was made. It’s the same with our Africa franchise as it is with life: you don’t look back with regret, you merely learn from the past but focus on the go-forward.”
He points to the current focus on big anglophone markets, notably Nigeria, South Africa and Kenya, as well as Ghana, Tanzania and Mauritius.
Asked if the bank is exploring a return to growth markets in north Africa, he replies: “Morocco and Egypt are relevant markets to us. The brand resonates well there. If a Moroccan client wants to list on the London Stock Exchange or a global client is seeking opportunities in Morocco, we know that market extremely well.”
Barclays sold its Egypt business to Morocco’s Attijariwafa Bank in 2016 for a reported $400 million.
Other long-entrenched European names are choosing to scale back. Societe Generale has rebutted rumours it may trim its interests in Africa after exiting Russia and taking a €3.1 billion hit.
Standard Chartered, whose presence in the region stretches back 160 years, is paring back its presence in non-core markets. In April 2022, it formally announced its intention to exit its operations in Angola, Cameroon, Gambia, Sierra Leone and Zimbabwe. It will also close its consumer and private banking businesses in Tanzania and Côte d’Ivoire to focus on corporate, commercial and institutional banking.
And in February 2022, Credit Suisse said it was closing its business in nine countries including Kenya, Ghana and Nigeria, as part of a wider move to exit non-core wealth management markets. The Swiss bank signed an agreement to refer its private banking clients in those markets to Barclays, which is now busy onboarding clients.
That move made good sense for the UK bank. Barclays offers private banking services across Africa, the Middle East and south Asia, and large amounts of wealth flow between all three regions, often emanating from the same family group.
Prabhu breaks down the structure and private banking needs of an archetypal ultra-high net-worth family: “Global Indian families are likely to have a third- or fourth-generation family business based in Africa, with extended operations and market focus into the Middle East and India. In addition, they often naturally have personal links to the subcontinent, where they may also look to invest their personal wealth.”
Europe’s big emerging market banks aren’t alone in reviewing their long-term plans. China’s state lenders are no longer as active in Africa as they once were, bankers say. This is in large part due to domestic issues such as the property sector slump, rising unemployment and a wheezing economy.
Strict Covid lockdowns, which make it hard for state-linked banks and enterprises to exit and enter China, have put the brakes on many Belt and Road Initiative projects. China outbound M&A into Africa tumbled from $5.24 billion in 2016 to $1.38 billion in 2021, according to data from Dealogic.
“African airports used to be full of people busy doing China-related deals,” notes a Middle East banker who visits Africa every month. “I see China getting cold feet and pulling back at the moment. This poses two questions. First, does that create opportunities for Gulf lenders in the future. Second, China always says it measures its focus in any market in centuries, not years. Perhaps it isn’t so long term after all.”