Algeria’s banking sector is one of the biggest in Africa, but it is also one of the most opaque and is dominated by state banks. Yet private lenders, all of which are foreign-owned, still find ways to operate profitably and many are wanting to expand.

Private banks in Algeria outnumber public banks by 14 to six, but by every other metric the hydrocarbon-rich north African country’s banking sector is dominated by the state. Public banks accounted for 86% of banking assets at the end of June 2013. Their AD8300bn ($102bn) of assets compares to a total of AD1350bn among private banks, all of which are foreign owned, according to the International Monetary Fund (IMF). Combined annual private sector banking revenues amount to not much more than $1bn, according to a senior executive at one international bank operating in the country.

The imbalance is largely due to the fact that the Algerian economy is dominated by public sector investment, and state-owned firms are obliged to borrow from state-owned banks. After the collapse of a major local private bank, Khalifa Group, in 2003, the government introduced a ruling that public companies could only use state-owned banks. This stipulation was lifted in 2007, but in practice little has changed.

“It’s an unwritten rule that companies have to deal with public sector banks,” says the senior executive, who did not want to be named.

Algerian financial stability indicators

Regulatory stranglehold

The lack of access to public deposits shuts the door to private banking involvement in the bulk of Algeria’s economy. The government’s past two five-year plans – the second of which ends in December – allocated $150bn and $286bn, respectively, to public spending on infrastructure. State-owned energy company Sonatrach, one of the top 10 largest companies in Africa by revenues, has a monopoly on the development of oil and gas transport and distribution projects in the country, and a majority stake in all other hydrocarbon projects.

In other sectors, regulations stipulate that local companies must have a majority stake in joint ventures with foreign firms. More often than not, these local companies are also owned by the state. “The growth of private banking in Algeria is directly correlated to growth in the private sector,” says the executive. “So there are opportunities for growth, but there are constraints too.”

The treasury’s intimate relationship with state-owned banks makes the performance of the sector difficult to evaluate, and figures on individual banks are hard to come by. (Algeria was one of the few countries excluded from The Banker’s latest Top 1000 ranking because its banks do not make their annual results publicly available.)

“When we tried to cover Algeria in the past we found it very difficult to get good information on the sector,” says Darren Stubing, an analyst at ratings agency Capital Intelligence, which covers Morocco and Tunisia but not Algeria.

NPLs down

According to an assessment of Algeria’s financial system published by the IMF in June 2014, the performance of the banking sector, the fifth largest in Africa by assets, is on an upward trend. Capital support from the government to state-owned banks has contributed to a decline in non-performing loans (NPLs) from 21% in 2009 to 11.5% in 2012, and provisioning covers 70% of NPLs, according to the report. Banks also tend to be highly liquid: 46% of total assets at the end of 2012 were classified as liquid.

The monopoly public sector banks have over state-led investments means that they hold almost all of the market’s liquidity. Five of the top six most liquid banks in the country at the end of 2012 were state owned. One of them, Banque Extérieure d'Algérie – in which Sonatrach deposits about 20% of its receipts from hydrocarbons exports – has excess liquidity roughly equivalent to the rest of the sector’s excess liquidity combined.

Returns on equity (ROEs) and assets (ROAs) in Algeria are high compared with the rest of the Middle East and north Africa. For public banks, the aggregate ROE in 2012 was 23% (albeit down from 30% in 2010) and the ROA was 1.6%. Private banks made ROEs of 25% in 2012 (up from 20% in 2010) and ROAs of as much as 4.6%.

The IMF has bemoaned a lack of competition in the public banking sector, and says that government policy on the treatment of NPLs undermines the banking system. “NPLs are not written off, with the consequence that they remain for several years on banks’ balance sheets, muddying the analytical value of financial statements and delaying the resolution of bad credits and their underlying collateral,” according to a report by the organisation.

Private players squeezed

The dominance of public banks has left few opportunities for private lenders to develop. “The potential is there, but progress is very slow and there is a lack of desire for real change on the authorities’ part,” says Mr Stubing. He adds that if the regulatory environment was improved there “would be very interesting opportunities for regional and international banks to make inroads into the market”. But for this to happen, he says, the authorities would need to provide more transparency, a more robust regulatory and legal environment, and provide a level playing field for public and private banks.

Nonetheless, foreign banks operating in Algeria, Africa’s fourth biggest economy, have found ways to work within the limits of the tough environment. “In this region Algeria is quite attractive,” says the executive. “It’s a big market with steady economic growth and rising incomes. It has foreign reserves of $200bn, per capita gross domestic product of $5000 to $6000 [which is high by African standards] and it has been stable throughout the Arab Spring. There are a number of foreign banks here and no one is rushing for the door.”

Foreign banks operating in the former French colony include BNP Paribas and Société Générale. They have developed the most extensive networks among private banks, with 70 and 84 branches, respectively. Natixis, also from France, and Bahrain’s Arab Bank Corporation and Al Baraka have networks in excess of 20 branches each. Al Baraka plans to expand its network from 26 to 30 this year. Others operators, such as the US's Citi, the UK’s HSBC and France’s Crédit Agricole, mostly focus on corporate finance.

“Private banks provide Algeria with a level of technology and quality of service that it is easier to achieve for an international bank, and we have capacity to develop different sectors, such as the financing of trade,” says Alexandre Maymat, who heads Société Générale’s African operations and visits Algeria often. “We also have the capacity to innovate, offering services such as mobile and internet banking.”

Trade finance cut

Retail banking operations have plenty of room for growth, given that just 33% of the Algerian population has an account with a financial institution. These institutions were hit hard by the government’s decision in 2009 to ban consumer credit in an effort to suppress imports (particularly of cars) and reduce household debt. But the lost income was more than made up for by another measure the same year stipulating that imports could only be financed by documentary credit.

In June 2013, however, new rules were introduced stipulating that letters of credit would no longer be the only means of financing imports. This has hit the profitability of banks by cutting their trade finance businesses. “Most importers have tried to shift from documentary credit to remittances, which generate very low revenues for banks,” says the senior executive working in the country.

At the same time, the government brought in a cap on trade finance commissions in an effort to divert activity into funding small and medium-sized enterprises. “Foreign banks were making 50% to 80% of their revenues on trade finance,” says the executive. “Since the government put a cap on trade finance commissions, revenues have fallen by 30%.

“As the measure was only brought in half way through the year, they will continue to fall in 2014, by another 20%, I would estimate. Last year was the end of the free lunch for private banks in Algeria. Those banks relying on corporate finance will suffer a lot.”

Some relief could come from the government’s announcement that it will lift the ban on consumer credit in 2015 (albeit only for locally produced products).

In the meantime, however, the liquidity available to private banks is falling with the repatriation of dividends by Algerian-based foreign partnerships. In April, a long-running dispute between the government and Orascom Telecom Algeria (OTA), in which Russia’s Vimpelcom owns a controlling interest, was finally resolved, meaning that the company could begin to repatriate dividends. “Djezzy [OTA’s mobile service] has huge deposits in foreign banks, but most will be transferred outside,” says the executive. “Many other foreign companies are doing the same thing.”

Stock market reforms

Meanwhile, the government says that it plans to breathe life into a stagnant stock exchange with the listing on the Algiers bourse of eight public companies and one private company, Avenir Décoration, which sells advertising space. On the list of state businesses are three cement companies, an insurer, a construction firm, state mobile telecoms operator Mobilis and Credit Populaire d’Algerie, a bank that has been the centre of privatisation talk for several years. The exchange currently has just four listing companies and almost no trading.

“We’ve heard plans for listings before, but it seems to be a bit more serious this time,” says the executive. “The listing of profitable public sector companies could be used to jump-start the market, but it will be a long process. And would they be open to foreign buyers? The jury’s still out.”

There are also tentative moves to create a bond market. “The bond market and the foreign exchange market are developing, but very [slowly],” says Mr Maymat. “Swaps and futures are highly regulated and very limited in terms of maturity, but it is progressing.”

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