The banking sector across Sub-Saharan Africa dominates in terms of total assets and services and remains on the top of the agenda for African policymakers. Various reforms over the past decade have contributed to a more open and conducive banking environment. The progress is represented by the robust growth in the depth and coverage of the financial sector across the continent, as measured by the ratios of broad money and private sector credit to GDP. Yet these improvements still leave Sub-Saharan Africa as underdeveloped, trailing other global regions with some indices indicating a growing gap between Sub-Saharan Africa and the rest of world.
South African Banking
South Africa (and Mauritius) is the most notable exception on the continent in regards to the banking sector. It leads the pack with its closest competition in terms of sector assets – Nigeria and Angola – barely accounting for two-thirds of its total assets. As of 2014, South Africa’s banking sector accounted for $361 billion in assets, compared to $166 billion in Nigeria and $79 billion in Angola, with growth north of 10 percent. Only high growth, small base countries – those starting at a lower base level –, including Ghana ($14 billion), Mozambique ($10 billion), Zambia ($ 8 billion) and Malawi ($2 billion), showed considerably larger growth rates.
Another notable exception in South Africa is its growingly outward interest in other Sub-Saharan African banking sectors. South Africa’s large banks (i.e., FirstRand, Nedbank and Standard Bank) garnered 15% of their revenue from the rest of Africa in 2014 – a proportion that should continue to drastically grow in the near term.
Seeing the Opportunity through South Africa’s Eyes
Unequal growth and unsynchronized methods
Sub-Saharan Africa (ex South Africa) has among the lowest levels of both financial institution coverage and debt penetration in the world. A combination of GDP growth and ongoing expansion in financial access will create substantial growth opportunities for the banking sector. But the story is not the same for each country. South African companies, particularly through consumer goods (and now financial institutions), have learned that the continent cannot be painted with a broad brush.
The potential for stark (and subtle) differences in economic, regulatory and competitive dynamics can create drastically different results (or experiences) for new entrants. For example, the world’s growth projections have suffered with falling commodity prices, tightening debt markets and shrinking consumer pockets across the globe. GDP growth estimates have accordingly fallen to a modest 3.3 percent compared to 4.1 percent last year for Sub-Saharan Africa. That number jumps to a more impressive 5.3 percent projected for 2015 if you exclude Angola, Egypt, Nigeria and South Africa – countries who have suffered more than their neighbors with mining strikes, unsettled local (and regional) conflict, as well as significantly lower oil prices in the last year.
Competition is one of the most underappreciated aspects of the Sub-Saharan African banking sector. Despite the relatively small size of GDP in a number of countries and remaining issues with financial access (particularly in rural areas), the continent has benefited from a strong growth in participating commercial banks. A recent study on the Herfindahl-Hirschman Index (HHI) – a measure of concentration in a sector (i.e., less concentrated being more competitive) – shows that many African countries, including Namibia and Mozambique, have become moderately concentrated (from being highly concentrated) while other countries, including Ghana, Nigeria, South Africa, Tanzania, and Uganda are growingly viewed as not being concentrated.
Cross-border banking has provided the biggest bump to the competitive landscape. The number of foreign subsidiaries operating in the Sub-Saharan African region more than doubled in the last decade between 2005 and 2015. Pan-African banking subsidiaries – those owned by the likes of Standard Bank – have grown faster than the subsidiaries owned by non-Sub-Saharan African banks. Kenya’s Equity Bank is helping to make Kenya the next big player in the cross-border market after South Africa and Nigeria. Togo’s Ecobank however is the surprise bank in the conversation with 36 subsidiaries.
South Africa’s Large Banks
Standard Bank has the largest, most geographically diverse footprint of the South African banks. It generates approximately one-third of the bank’s revenue from the rest of Africa. Corporate and Investment Banking (CIB) growth has been its bread and butter with personal and business banking (PBB) benefiting from a high level of investment in IT and branch infrastructure.
FirstRand has employed a more organic growth strategy. Acquisitions in Nigeria (Sterling Bank of Nigeria in 2011), Zambia (Finance Bank in 2012), and Ghana (Merchant Bank in 2013) have been contemplated, but the bank has not closed on the potential transactions, referencing (and equivalently demonstrating a high discipline around) price. Its efforts in Mozambique and Zambia are final exams on whether it can replicate its market leading presence (and consequentially its banking model employed) in Botswana and Namibia.
Nedbank is a relatively new player in Sub-Saharan Africa (ex South Africa) through its acquisition of a 36% stake in Banco Unico in Mozambique (in 2013) and 20% stake in the leading Pan-African bank Ecobank (in late 2014). This is definitely a wait-and-see investment as well as a manifestation of the appetite from South African banks.
Lessons from experience of South African banks
There is a growing reorientation towards focusing on cities versus countries. The strategy raises risks in the long term as most African countries cannot be captured by one or two cities. Yet there are strong statistics that suggest that banking in near term is concentrated around larger business districts. Standard Bank’s percent of total country banking branches in a particularly city can easily be near 50 percent or higher – i.e., 77 percent in Luanda (Angola), 52 percent in Accra (Ghana), 50 percent in Dar es Salam (Tanzania), and 48 percent in Nairobi (Kenya).
Investment Banking THEN Transaction Banking and Market Trading
Investment banking, including debt & equity capital markets and M&A, in Sub-Saharan Africa, do not generate similar fees to those in developed markets such as the United States and the United Kingdom. Still the investment banking fees generated, in Sub-Saharan Africa, are significantly more profitable than transactional banking (including cash management and trade finance) and market trading (including foreign exchange, credit trading and equities). Transactional banking requires a significantly greater presence on the ground. It has the greatest long term potential and return considering that new customer entrants, like their developed market counterparts, possess a high level of stickiness, remaining with the same bank for significantly long periods and continue to provide income to banks as their incomes increase. Market watching and trading requires a similarly greater presence on ground and large investment in IT. It is unclear which banks are completely committed to investing full-force in both the on-ground presence and IT.
Organic is great but you may have to buy
FirstRand is employing organic methods while NedBank jumped in head-first with its purchase of Ecobank. Yet the difference is not that distinct as FirstRand also continues to contemplate future purchases to make bigger competition and market share gains. Even the most organic growth strategies require a purchase (albeit small or moderate sized) to jump to a greater level of competition in Sub-Saharan Africa, especially if the market is already competitive (i.e. not highly concentrated).
Going forward, it is still unknown
Okay this is not a lesson from South Africa to the rest of us interested in Sub-Saharan Africa but one that highlights the complexity of the current situation. There is currently high growth and great opportunity in Sub-Saharan Africa. But choosing a strategy that will best succeed is not particularly clear. South African banks cover a broad spectrum of strategies with differing histories (in time and experience) of involvement outside South Africa and varying levels of success. The comparison among banks accordingly can wait for a clearer conclusion to prevail…but a potential bank entrant cannot do so (if it wants to beat the curve).