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Country reportsMay 1 2014

Angolan banks learn from their excesses

Angola’s banking sector has been hit by a recent rise in non-performing loans, a legacy of reckless lending in the past decade. But bankers are optimistic that the worst is over. 
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Angolan banks learn from their excesses

In the past two years, Angola’s banks have been given a sombre reminder of their excesses in the first decade of this century. When the country’s civil war ended in 2002, the financial sector was, much like the overall economy, in a bad state. The few banks that existed were mostly state-owned and inefficient. They had barely $3bn of assets between them.

Since then, their growth has been dizzying. At the end of 2012, they had almost $62bn of assets, says consultancy firm Deloitte. The number of lenders has swollen to 24. Only three of them are controlled by the state. The rest are either owned by local investors or by foreign banks, with those from Portugal, the former colonial ruler, having the heaviest presence.

The sector benefited handsomely from Angola’s boom that followed the war. As oil production rose from 800,000 barrels per day in 2003 to almost 2 million in 2008, gross domestic product (GDP) grew more than 10% annually, making the country one of the most buoyant economies in the world. Banks’ profitability ratios peaked in 2008 when they made a huge aggregate return on equity of 35%, according to Tiago Dionisio, an analyst at Eaglestone, a sub-Saharan-focused investment bank.

But conditions are now a lot tougher for banks. The government has cut tax exemptions they used to enjoy as it seeks to diversify its revenues from oil. Banks have also been hit by a declining interest rate environment. Angolan inflation fell to single digits for the first time on record in mid-2012 and has continued to decrease, measuring 7.5% this February. Yields on government bonds, which banks tend to buy in large quantities, have dropped in tandem. Short-term treasury rates, as high as 20% in 2010, are today just over 3%.

“The industry is facing huge challenges because traditional, safe sources of revenue have decreased,” says António Henriques, chief executive of Millennium Angola, which is controlled by Portugal’s Millennium BCP. “The decline has severely affected banks’ profits.”

Non-performing loans up

Even more worryingly for banks, non-performing loans (NPLs) have gone up significantly. The economy slumped amid a collapse in oil prices in 2008 and 2009 and has not regained its former vigour. GDP increased 4.1% in 2013 and is forecast to increase by just over 5% this year.

Construction and real estate companies, to which banks lent heavily and often recklessly before the crash, have been hit by the slowdown and a build-up of government arrears to contractors. José Massano, governor of the Banco Nacional de Angola, the central bank, says the NPL ratio for the banking sector is about 11%.

Bankers in the capital Luanda are generally confident that the situation is under control, arguing that lenders have put aside big provisions for potential losses. But they admit that the industry needs to learn from its mistakes. “The level of NPLs as a whole is high,” says Pedro Coelho, head of Standard Bank Angola, which started operating in 2010. “It’s not healthy. The financial system has to be more cautious in the way it lends.”

He adds, however, that policy-makers should address inefficiencies in the legal system that make it difficult for banks to recover loans. “The central bank has to help banks recover loans more easily,” he says. “Today, that is not a straightforward process.”

The problem of NPLs worsened for some banks last year. The net profit of Banco Angolano de Investimentos (BAI), the country’s largest lender by assets, fell 31% in 2013 due to loan write-offs and provisioning. Meanwhile, income after tax at Banco Espírito Santo Angola (BESA), the second biggest bank, dipped to $55m. Only two years earlier it earned $313m.

The developments have led to shake-ups at these institutions. BAI has bolstered its credit recovery department and changed its lending criteria. BESA has replaced some board members, including its chief executive. In December 2013 it increased its share capital by $500m to about $1.6bn, making it by far the highest-capitalised bank in Angola. At the same time, however, it says that because of its recent experience, it wants to lower its loan-to-deposit ratio of roughly 190%.

“We want to continue growing, but not as fast as in the past,” says Rui Guerra, its new chief executive. “We have to deleverage. The idea is to get down to a 100% transformation ratio in two or three years.”

Prudential reforms

The changed market environment comes at a time when the central bank has been pushing through a host of regulations to bring bank practices more in line with the rest of the world. It has sought to strengthen anti-money laundering controls and risk management. It has also focused on improving corporate governance and transparency, especially after BAI was criticised in a 2010 US Senate report for not disclosing a list of shareholders. BAI has since done this.

As part of these aims, banks have been given two years to adopt International Financial Reporting Standards, which bankers say are stricter about declaring overdue debts than current Angolan accounting practices.

“The regulations encompass a whole range of things,” says Emídio Pinheiro, head of Banco de Fomento Angola (BFA), a subsidiary of Portuguese bank BPI. “There’s a lot of pressure on banks and their management to comply in the next two years. It will be very demanding. But it will help the sector be better understood by the international financial community.”

Analysts say the prudential reforms have already led to significant improvements. They cite the fact that BAI became the first Angolan bank to get an international credit rating (of Ba3 from Moody’s) earlier this year as evidence that the sector is becoming more transparent and sophisticated. “The banks have come a long way in the last few years,” says Nuno Alpendre, a financial services partner at Deloitte in Luanda. “Everyone knows it’s crucial for them if they hope to bring in foreign investment.”

New opportunities

Despite all the troubles Angola’s banking sector has gone through in the past few years, it remains in a good state. Many lenders seem to have reversed the trend of falling profits. BFA’s net earnings rose more than 10% last year to roughly $245m, while those of Banco BIC, which has the largest branch network in the country, climbed 20% to $201m. Standard Bank, meanwhile, broke even for the first time last August, ahead of schedule, and expects to post its first full-year profit in 2014.

Even though the economy is no longer expanding at a double-digit pace, banking opportunities keep on emerging. A new foreign exchange (FX) law for the oil and gas sector has boosted revenues for some lenders. Introduced by the central bank to encourage greater use of the kwanza in what is a heavily dollarised economy, it forces oil producers to pay their suppliers through the Angolan banking system.

Oil companies were worried that local banks would not cope with their billions of dollars of transactions. But the transition has so far been smooth, testifying to banks’ efforts in the run up to the law, the final phase of which was implemented last October.

The changes required banks to update their systems to ensure they could provide straight-through processing, and set up dedicated oil and gas desks. “Most [oil firms] are positive about what’s happened,” says BFA’s Mr Pinheiro. “Everyone at the banks – on the commercial side, on the systems side, on the payments and transactions side – committed a lot towards this. They did a good job.”

The oil and gas sector will probably come to be dominated by a handful of banks. Bankers say oil firms will only want to work with the biggest local institutions or specialists in the sector such as Standard Bank and Standard Chartered, which got an Angolan licence late last year. “It’s not a business for every bank,” says Mr Pinheiro. “You need to have a strong balance sheet and lots of liquidity. You have to comply with certain rules and criteria. Not all the banks can participate.”

One the main benefits for banks that have won oil business is that they have a new way to access dollars. Previously they had to rely on the central bank’s FX auctions. The extra supply of the currency has enabled them to increase their FX sales to companies in need of dollars to pay for imports. “The banks that have managed to attract the oil operators are in a better position than those that haven’t,” says Standard Bank’s Mr Coelho. “It’s a strong source of dollars. It’s created a bit of an imbalance between banks that deal with the oil sector and those that don’t.”

Top Angolan banks by assets

Diversification play

The diversification of Angola’s economy from oil, which accounts for almost 50% of GDP, has been slow. Businesses struggle because of a poor logistics networks, electricity shortages and red tape. The government’s much-touted Angola Investe programme, designed to subsidise and partially guarantee loans to small firms, has seen low uptake from banks, which say too few proposals meet their risk criteria.

But bankers are generally optimistic that the situation is improving. They say that conditions for manufacturers are getting easier as the government invests more in infrastructure.

Some banks are positioning themselves with this in mind. BESA opened 30 branches in 2013 and plans to add another 11 to 14 to its network this year. Mr Guerra says it is doing this as part of a strategy to exploit the growth of companies outside the oil industry. “More and more clients are meeting us to see if we can help them invest in non-oil sectors,” he says.

Investment banking is likely to be increasingly important for Angolan lenders. Many are trying to win advisory and structuring mandates on the various large infrastructure and energy projects taking place across the country. A few are preparing for the opening of a secondary debt market, which will be a precursor to a stock market. Angola’s capital markets regulator, CMC, has been developing a legal framework to enable trading in government bonds and encourage corporate issuance.

The process has suffered delays, but last October CMC published regulations outlining rules for brokers, banks and investors. Jorge Ramos, head of investment banking at BESA, hopes that trading in government securities, at least on a small scale, will start by the end of 2014. “The regulators are building the market from scratch, but they are doing it properly,” he says. “The country needs capital markets. We don’t expect them to be very liquid from day one. But the liquidity will come. If in two or three years Angola can create a decent treasury and corporate bond market, that will be a major achievement.”

The retail banking market is shallow. The vast majority of Angola’s population is unbanked. Bankers say they are trying to work with the government to rectify this, but claim that little progress can be made with so many of the country’s 21 million people living in poverty.

They are more excited about services and products targeted at the small but growing middle class in major cities such as Luanda and Lobito. A few banks are looking at introducing mortgages soon. Some have started offering insurance and car leasing loans, while a few have pushed into private banking. Last year Millennium Angola launched prestige banking for its more affluent clients by opening seven branches dedicated to them. “It’s been very successful,” says Mr Henriques.

Consolidation looming?

Angola’s banking sector is already fairly crowded. Yet it could get even more so in the near future. Togo-based Ecobank and several local investors have applied for banking licences. If they are successful, it would take the number of banks in the country to almost 30.

Analysts argue, however, that some consolidation may be inevitable in the next few years as small lenders find themselves squeezed out of the market by bigger rivals. “I don’t think the number of banks is sustainable,” says Eaglestone’s Mr Dionisio. “Some probably don’t have enough capital to compete in the long term.”

Takeovers are rare in Angolan banking. But earlier this year VTB of Russia merged its small local subsidiary with Banco Privado Atlantico, the sixth largest bank in the country. Mr Dionisio says the move could encourage more such deals.

Consolidation could be driven by regulators. The central bank recently gave lenders until June this year to meet a minimum capital requirement of Kz2.5bn ($25m), up from Kz600m previously. But some bankers, pointing to Nigeria, which has a minimum capital requirement of $160m, say the new level is still too low and that $100m would be more appropriate for an economy the size of Angola, which has sub-Saharan Africa’s third largest GDP.

“Angola needs higher-capitalised banks,” says Mr Ramos of BESA, whose own $500m capital-raising last year led to questions about whether its main rivals would follow suit. “It is a country of big numbers and big development needs. The projects require big money.”

Winners and losers

A lot has changed for Angola’s banks in the past four years. Gone are the days of them routinely making returns on equity of 30% by doing little more that piling into treasuries. Today, in what many believe to be a reflection of a maturing financial sector and an economy growing more sustainably, they face an environment in which their margins are shrinking and competition is becoming fiercer.

Some banks will fall by the wayside, unable to adapt to the new market. Those that hope to emerge on top will have to find innovative ways of reaching new clients and developing products. It will also be crucial that they do not repeat the mistakes of the sector’s boom years by lending recklessly.

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