Retail banks in Sub-Saharan Africa have expanded their activities on the continents as never before over the past six years, with the crisis barely slowing them down. Whilst this mass market of 400-500 million potential clients offers outstanding opportunities in the long term, there remain major challenges that are cutting into profitability for the time being. For the major African banks, the question is no longer ‘whether” but ‘how” they can take part in this process.
Following the ‘tragic” banking decade of the 1980s, the emergence of African banking players, in the context of surging commodity prices, led to the redrawing of the Sub-Saharan banking landscape throughout the 90’s. This reshuffling accelerated in the mid-2000s, with the opening up of new regional zones, the adaption or, in some case, innovation of products to local markets and growing initiatives to attract, until then, neglected retail clienteles. These shifts raised hopes of a real take-off of banking services on the African continent.
‘Bank-africanisation”driven by a rampant consolidation
Today’s landscape was born from this first transformation. Since 2010, the sector has been in a structuring phase as the initial models mature.
Whilst all players are doing fairly well, the biggest groups really stand out:
· South African banks: following several years of subdued growth, the Big Four Banks (FirstRand, Standard Bank, Nedbank, Absa) are seeking to recalibrate their presence by raising their fairly weak exposure to the continent (less than 15% of their activity);
· Moroccan banking groups (Attijariwafa and BMCE via Bank of Africa), which benefit from their many years of experience expanding on the African continent;
· The latter’s example is increasingly emulated, as seen by the market entry in 2012 of Banque Centrale Populaire, which now operates in nine Sub-Saharan African countries. Moroccan banks now have more market share in some countries of the WAEMU zone (West African Economic and Monetary Union) than domestic or Western banks, with three in 3 Moroccan banks sharing market dominance in Ivory Coast;
· Nigerian banks whose gigantic domestic market, central bank-imposed restrictions and AMCON-type [1] restructurings leave them fenced in their domestic market;
· Alliance strategies, as evidenced by the 20% capital stake taken by South African bank Nedbank in the biggest African banking franchise, Ecobank, and Barclay’s expansion strategy in eight countries through Absa (held by Barclays Group).
This ‘bank-africanisation” characterised by consolidation and a desire to achieve a continental footprint, has revolved since the mid-2000s around four categories:
· G1 – Groups from the African Continent, i.e. African-owned banking groups operating outside domestic market (Standard Bank in South Africa, Attijariwafa in Morocco, UBA in Nigeria);
· G2 – Pan-African or pan-regional African-owned banking groups (Ecobank, Bank of Africa, etc.);
· G3 – Non-African groups : all the subsidiaries of parent groups with non-African capital ownership (Société Générale, Barclays, Standard Chartered, etc.);
· G4 – Banking groups focused on key countries: e.g. KCB, highly focused on Kenya and the EAC zone.
DEVLHON Consulting highlights that, groups G1 and G2 posted the strongest retail network expansion (respectively, +12 % and +9 % branch openings between 2006 and 2010, which compares with +2 % for G3). The main rationale for African banks is seek growth prospects beyond their saturated domestic markets (loan distribution running out of steam, frozen positions), pushing them to look for bridges-to-growth. This has led to a relatively strong cross-border activity of the continent vis-à-vis other emerging zones and the dynamic of inter-regional African trade.
Still behind other emerging banks
Sub-Saharan banks are catching up with their branch networks growing fast. According to DEVLHON Consulting, sub-Saharan branch networks grew over 6% in 2011, behind Asia (+9.7%), but ahead of South America (+3.8%).
However, sub-saharan banks still lack critical mass compared to other emerging banks. It is hard to compare them to international peers. They are underperforming in terms of ROE and have a limited presence outside of the African continent.
This phenomenon is illustrated by the case of Standard Bank, which shelved its ambitions to become a leader in emerging countries (Argentina, Russia, etc.) and reverted to a pure African strategy. African banks have a higher cost-to-income ratio (generally above 50%) than those of other emerging markets, particularly in Asia. Moreover, the stock market valuation of the major South African and Nigerian banks (or Moroccan, to a certain extent) is still well below emerging market levels.
What to expect in 5 to 10 years down the line ?
Our analysis of retail banking expansion in the past 10 years backs the scenario of a upcoming consolidation on both national and regional levels. According to DEVLHON Consulting’s forecasts of urban nodes and banking activity growths, the branch networks of leading banks should grow between 95% (bull case scenario) and 46% (bear case scenario) between now and 2020, based on a sampling of 19 African markets. This translates into growth of between 1,700 and over 3,600 branches just for the top 3 national players. That equates to the creation ex nihilo of a retail bank network comparable to combined networks of the Moroccan and South African leaders, representing two or three times the absolute retail banking growth than that posted in the mid-2000s.
Different strategies, same challenges
The pan-African strategy of the major banking groups is to capture future growth and even monetise distribution capacities, but also to capture business and SME clientele. The constantly changing banking landscape in Africa makes it difficult to operate on set growth models. The big players with national positions and financing are typically the most aggressive in terms of expansion. Standard Bank, one of the most internationalised banks and a member of the above-mentioned category, today has a strong exposure to the continent (20% of top line revenue and 15% of tied in capital). Following the new agreement with its parent group, Barclays, Absa’s revenue exposure to the continent will climb to 15% from 10%.
Moroccan banks are extremely dynamic, both in terms of organic growth and acquisitions. Although its sub-Saharan exposure in loans and advances
to customers comes to about 9% of its balance sheet, Attijariwafa’s sub-Saharan subsidiaries (mainly from Credit Lyonnais’ old network) already generate nearly 8.6% of its net profit. Another specific feature of Moroccan banks is that they initiated their international expansion in Europe (e.g. operations set up in 7 European countries for Casablanca-based BCP – Banque Centrale Populaire) to capture the money transfer flow from individuals (over 25% of Moroccan banking system deposits stem from residents living abroad. They benefit from a dual advantage: they can now rely on a Europe/sub-Saharan Africa/Maghreb triangle, both from transfers carried out by the diaspora and from transactional and trade finance banking. As for the Nigerian banks, the costs of their domestic networks and their limited presence on big markets, like in Kenya, put somewhat of a brake on their ambitions to expand.
Retail banking in Africa is not for everyone
Not all banks have the means to transform themselves into pan-African banking groups. Some of the obstacles to overcome include achieving critical mass, the complexities of refinancing on growth markets and the difficulty of building high-performance operational, sales and technology platforms. In short, the sort of challenges that can hinder profitability: the ROE [2] of African subsidiaries hovers round 10%, which is less than that generated by the parent group (15% to 20%). For example, Absa’s subsidiaries in Africa are loss-making (excluding those held directly by Barclays).
In that respect, product offering and sales strategy are key to the success of the simultaneous ‘3 fronts”:
1) the ‘battle for market share” … and for new sub-markets or segments. Increasingly, banks have to become multi-specialist and diversifying away from their historical client base. They strive to tap into very new and distinct segments such as low income banking, high end clients as well as SME markets which made up 5.4% of total loans granted in sub-Saharan Africa (versus an average of 13.1% in emerging countries);
2) the ‘battle for growth” consisting of players expanding their footprint simultaneously in urban, city fringes and rural areas. They roll out development models suited to local needs (mobile low-cost branches) combining physical distribution and alternative channels (retail agent, M-payment and mobile banking);
3) Last but not least, the ‘battle for product penetration”, which will mainly be won or lost on the product adaptation front (sub-Saharan product penetration rarely exceeds more than two products per client with often less than half the clients equipped with electronic payment products). DEVLHON Consulting’s analysis has made this point for the 2006-2011 period concerning the level of non-interest income as a percentage of overall net banking income.
More African banks are able to carry out such product innovations today, despite being complicated to launch, monitor and develop to maturity. Some product adaptation in Africa even serve as sources of inspiration, like the mobile revolution in Kenya (via M-Pesa for Equity Bank).
Expansion into mass-market retail also brings forth exposure to new risks, not to mention that of political crises, like in the Ivory Coast or Mali. The regulatory framework should tighten, as countries bring themselves up to international compliance standards (KYC [3], Anti-Money Laundering, Basel II and III). In this context, African risk models are maturing. As such, for many players, like Ecobank, over 60% of their local subsidiaries have been in operation for less than 6 years. Their risk management also remains somewhat centralised. For some players, it would thus be beneficial to obtain backing or become a member of a major banking group.
Positive outlook for those able to go the distance
Whilst the African banking sector has become much mature, driven by impressive economic growth, the situation on local markets raise new questions about opportunities and growth strategies in the coming years. The first challenge is the scarcity of sizeable value accretive investments; the second is the lack of appealing targets, given revenue per inhabitant, lower economic growth and the level of ‘bankability” (the most dynamic markets in these terms are often found in English-speaking Africa and in East Africa).
The African banking sector’s potential is much like a long-distance race to gain access to savings and management of the customer relationships of tomorrow. Therefore, key to success will be the expansion of branch networks and acquisitions. As the current structuring of African banking landscape might mean fewer opportunities for the time being, it will probably require forward-looking approach to invent locally-adapted and robust business models. Such a strategy could work to the advantage of players which expanded into new geographies over the last 5 years. We believe there is clearly a first-mover advantage for those banks. Given that Egyptian banks have been pretty much out of the picture, South African and, probably, Moroccan or Kenyan banks will lead the way.
As for the Non-African banking groups , the strategy of Barclays (One Africa Bank) as well the cooperation agreements between Chinese ICBC and Standard Bank have been significant milestones. The question remains how long will it take for other non-African players to end their hesitation and to join this process, either through alliances or M&A.
(1) Asset Management Corporation of Nigeria (AMCON) was the joint
initiative of the Ministry of Finance and the Central Bank of Nigeria and was established to purchase non-performing loans from Nigerian universal banks and recapitalise them
(2) Return on Equity
(3) Know Your Customer rules
Author : Yoann Lhonneur – partner at DEVLHON Consulting
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