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African banks show most promise beyond Top 1000

African banks may be small, but they are among the world’s most profitable, as our survey of the lenders pushing for places in the Top 1000 World Banks shows. 
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African banks show most promise beyond Top 1000

African banks are minnows when it comes to size. But in terms of profitability, they dominate their peers from other regions of the world. That is at least according to The Banker’s survey of lenders just outside the Top 1000 World Banks, published in July.

The list of Top 1000 contenders comprises the biggest 267 banks by Tier 1 capital that did not make it into the Top 1000, for which the cut off was $255m. The rankings exclude institutions that failed to provide 2010 data, so should not be seen as definitive. But timely reporting is a just reward for entry, especially in a world that is ever more focused on transparency among banks.

The composition of the biggest 10 banks in this year’s Top 1000 contenders survey is far less diverse than last year, when there were eight different countries and the US, with three lenders, was the only one to feature more than once. This year the US has taken seven places, the others falling to Malta (HSBC Bank Malta is in top spot), India and Bosnia-Herzegovina.

Africa stands out

Top 25 Top 1000 contenders, tier 1 capital

African banks are the ones that stand out, however. They are still small, with only two featuring in the top 50. But they have punched far above their weight when it comes to profitability. Of the top 10 lenders measured by return on capital (ROC), five are African, while seven of the 10 with the highest on returns on assets (ROAs) are too.

Top 25 Top 1000 contenders, return on assets

Overall, African banks – there are 17 in this survey, compared with 40 in the Top 1000 – made average ROAs of 3.65% (on an unweighted basis) and ROCs of 35%. These levels are far higher than the next most profitable region, South America, where banks made returns of 1.95% on their assets and 19.6% on their capital.

Top five ROC, ROA Africa

Astonishingly, despite accounting for just 5% of the overall Tier 1 capital in the rankings of $38bn, African banks made 38% of the total profits of $1.66bn (a figure that was net of losses of $727m among the 103 North American institutions listed and $150m among the central and eastern European ones).

Top 25 Top 1000 contenders, tier 1 capital
Top 25 Top 1000 contenders, tier 1 growth

The 33 lenders from the Asia-Pacific made aggregate profits of $711m, more than any other region. Two Nepalese banks, Standard Chartered Bank Nepal and Nabil Bank, were among the most profitable. The former made an ROA of 4.2% (the highest in Asia-Pacific) and ROC of 55%. Nabil’s ROA and ROC were 3.1% and 44%, respectively.

Top five ROC, Asia, Top 1000 contenders

US banks struggle

African banks have been able to achieve high levels of profitability without taking substantial risks. Their capital adequacy ratios (CARs) average 11.3%, only slightly below those of banks in South America, which have the highest CARs of 12.3%. Also, the data counter arguments that banking in Africa, which often involves building branches in remote, sparsely populated areas, is prohibitively expensive and necessarily inefficient. African lenders have the lowest average cost-to-income ratios (49%) in the survey. Those in the Asia-Pacific and South America have respective ratios of 57% and 64%.

Top five ROC, South America, Top 1000 contenders

The lowest-capitalised banks in the rankings are from Asia-Pacific and North America. Asian lenders have capital adequacy ratios of 8.11% and those in North America 9%.

The struggle of North American institutions was highlighted in particular by their aggregate losses of almost $730m, suggesting the US mortgage crisis is far from over. These losses amounted to an average negative ROC of 5%. North American banks were also the most expensive to operate among those surveyed, with cost-to-income ratios of 72%.

Top five ROC, North America, Top 1000 contenders
Top five ROA, North America, Top 1000 contenders

Breakthrough imminent?

Despite the success of African banks, they seem unlikely to increase their numbers much in next year’s Top 1000 World Banks ranking. Most are still far from the $250m to $260m Tier 1 threshold needed to enter those rankings. And they are growing slower than peers in other regions (only two made the top 25 rankings for Tier 1 growth).

Several US banks are, however, among the contenders for moving up. Tower Bancorp, whose Tier 1 capital grew a huge 67% to $248m in 2010, and whose assets rose 390% between 2008 and 2010, surely cannot be kept down much longer. Hampton Roads Bankshares and Sterling Bancorp are also likely to make a strong push.

As for the rest of the world, India’s fast-growing Tamilnad Mercantile Bank, TSB Bank of New Zealand and Bahrain’s Future Bank are ones to watch.

Top five ROA, Europe, Top 1000 contenders
Top five ROA, central and eastern Europe, Top 1000 contenders
Top five ROC, central America, Top 1000 contenders
Top five ROA, central America, Top 1000 contenders

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