Though Angola’s economy has been hit hard by the sustained drop in oil prices, the impact on the country’s banking sector has been more nuanced. After accruing total assets of about $79bn during the boom years, according to KPMG, the country’s lenders are now squaring up to an altogether different operating environment. Severe challenges exist – not least of which is a US dollar liquidity crunch – and system-wide change in the form of consolidation is on the way.
But on the whole, Angola’s larger banks have weathered the worst of these strains, even if most of them have taken serious hits to their profitability and asset growth. Strong capital positions are helping, as is the forward-looking approach to regulation and compliance adopted by some of these players. Smaller banks, however, are having a tougher time of it. The twin burden of an economic slowdown and a more stringent regulatory environment are beginning to take their toll.
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In Angola, 26 lenders jostle for position in a market of just over 25 million people, and with traditionally favourable sectors such as energy and real estate on the wane, growth opportunities are less abundant than they once were. These conditions have fuelled a rise in non-performing loans across the system (these currently sit at 14%), and have revealed instances of loan book overexposure to certain corporate groups and economic sectors.
Trio of challenges
Meanwhile, rising inflation and a tighter monetary policy environment have been hitting banks’ business volumes. Research from Eaglestone Securities shows that the year-on-year inflation rate increased by 23.6% in March, up from 20.3% in February, and well above the annual forecast figure of 15%. Benchmark interest rates were at 14% in June, with few analysts predicting an immediate increase to this figure, following a 200-basis-point hike in March. As a result, consumer confidence has been heavily dented, adding to an already difficult situation.
“For Angola’s banks there are three main challenges: the quality of their credit portfolio, issues around regulations including increased capital and liquidity requirements and meeting anti-money laundering [AML] obligations,” says Emídio Pinheiro, chief executive of Banco de Fomento Angola (BFA), the country’s largest private lender.
Indeed, the central bank, the Banco Nacional de Angola (BNA), has been pushing hard to augment financial sector supervision in recent years. This has come as fears over perceived flaws in the country’s regulatory environment allegedly contributed to the Bank of America and Standard Chartered both halting dollar supplies to the country at the end of 2015. Speaking to The Banker, a senior source in Angola’s private sector said that twice in the past decade, US dollars supplied to the country had ended up in proscribed jurisdictions, and that this was likely to have been an indirect outcome of trading activity associated with legitimate Middle East-linked businesses in Angola.
While there is no evidence to support these claims, the country is nevertheless suffering from reputational issues around its oversight of AML and combating the financing of terrorism regulations. In response to this disruption in dollar supplies, the BNA has pledged to enhance Angola’s regulatory environment further. The BNA declined to be interviewed for this report.
Speaking to the Financial Times in February 2016, then central bank governor José Pedro de Morais said there had been a fundamental revision of Angola’s financial regulations, with 41 new laws drafted, 23 of which had already been implemented. The remaining laws would be enacted through the course of 2016.
More to do
Daniel Santos, chief executive of Banco Millennium Atlantico, says: “For the past four years, following the central bank’s guidelines, Angolan banks have been subject to different exercises in order to gradually implement new regulatory requirements in line with international practices for the banking sector. In order to properly accomplish that goal, the banks have been improving their risk management and internal control system models.”
To this end, in February this year Angola was removed from the Financial Action Task Force blacklist, a move attributed to the success of the government drive to improve the regulatory landscape. Yet the fact that two international lenders halted their supply of dollars to the country months earlier also signals that more work needs to be done to enhance system-wide regulation and compliance.
This distinction accentuates a notable divide in Angola’s banking sector. One the one hand, many of the larger institutions, often with international shareholders, have established good governance structures and now meet international norms in terms of compliance. On the other hand, some smaller banks are struggling to progress in the same fashion. “It is up to individual banks to harmonise their standards with regulatory norms. This is going to be very demanding for a number of lenders,” says Mr Pinheiro.
Consolidation drive
The cost of regulatory pressures and the difficult market environment are therefore driving consolidation. In May 2016, two of the country’s largest lenders, Banco Millennium Angola and Banco Privado Atlantico, finalised a merger to create Angola’s second largest privately held bank.
“The rationale for the merger results from the combination of the opportunities and challenges of the sector as well as the characteristics of each bank,” says Mr Santos. “The merger enhances relevant business synergies between both banks, which operate in complementary business segments, while reinforcing the investments needed to achieve more conservative compliance standards.”
Changes are also afoot as a result of the European Central Bank (ECB) directive that Portuguese lenders reduce their exposure to Angola. The ECB requirement obliges Portugal’s banks to fully provide for their exposure to Angolan credit or debt. As reported in The Banker’s Angola report in 2015, one of Portugal’s largest lenders, Banco BPI, sources a substantial amount of its profits from its controlling stake in BFA.
The daughter of Angola’s president, Isabel dos Santos, who holds a 20% stake in Banco BPI, has been in discussions with Spain’s Caixabank for well over a year to sell her position in the Portuguese bank. This would provide Caixabank with a controlling position in Banco BPI, while Ms dos Santos in turn is hoping to acquire Banco BPI’s dominant position in BFA.
At the time of writing, it was unclear where the negotiations were heading following the collapse of an initial agreement in April 2016. If a deal were executed, it would likely address Banco BPI’s exposure to Angola under the ECB directive, while providing Ms dos Santos with a controlling stake in one of Angola’s most successful banks. At present, she holds 49% in BFA through her telecoms venture Unitel.
ECB inequity
Meanwhile, there is some disquiet over the ECB’s directive, particularly among Portugal’s lenders. “The ECB directive obliging Portuguese lenders to reduce their exposure to Angola is slightly unfair. The same principle has not been applied to French banks [in Africa], for example, because they are deemed to be larger and better able to accommodate risk,” says Pedro Ferreira Neto, chief executive and founding partner of the Eaglestone group.
But Portuguese-linked banks have not been alone in generating market-moving news. In May 2016, international and local press reports claimed the minority stakeholder in Standard Bank Angola, AAA Activos, was selling its 49% stake in the bank to local investment and holding company Inpal-Investimentos e Participacoes. Reasons for the potential transaction were not given and a spokesperson for Standard Bank Angola declined to comment on the reports.
As the shape of Angola’s banking market begins to change, the priorities of most lenders are changing in tandem. The challenge of a lower oil price environment is forcing the government to pursue economic diversification in an unprecedented fashion. With new laws, tax incentives and investment priorities in place, the untapped economic potential of Angola’s non-oil sectors are coming to the fore. While these positive developments remain embryonic, several banks see a longer term growth story emerging.
“The way the economy is moving means that Banco Economico is receiving increased demand from [new] businesses and sectors. In terms of our own strategy we will not be focusing on sectors such as construction and real estate,” says Sanjay Bhasin, chief executive of Banco Económico. “These trends will help us to change the way our balance sheet looks in a few years’ time.”
Only way is up
This is an encouraging divergence in a banking market that has traditionally relied on a few dominant sectors, including construction and real estate, to fuel growth. According to KPMG’s latest Angola Banking Survey, real estate activity accounted for about 13% of total credit extended to the country’s banks. As prices cool and construction slows, this could prove problematic for a number of lenders with high exposure to the sector.
“BFA has minimal exposure to Angola’s real estate sector. But for many lenders, this is a real concern as the foreign exchange crisis means that imports can’t be sourced for ongoing and future real estate developments,” says Mr Pinheiro.
If Angola’s banks can take any positives from their current predicament, it is that the economy appears to have hit rock bottom. While most bankers agree that little will change in the next year, the longer term growth picture is more promising. The International Monetary Fund expects a slow recovery to begin sometime in 2017. Until then, the country’s lenders will have to navigate their way through a market in turmoil.
