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AfricaAugust 1 2013

Citi eyes African investment banking riches

Africa might still account for only a small amount of investment banking activity globally, but the business it generates is only set to rise, according to Citi’s Miguel Azevedo. He talks to Paul Wallace about the continent’s exciting prospects and which sectors hold the most promise.
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Citi eyes African investment banking riches

Most of Africa is a backwater as far as investment banking is concerned. According to Thomson Reuters, investment banking fees from the continent totalled $318m in 2013, of which $232m came from South Africa. To put that into perspective, Norway’s investment banking activity – while relatively small on a global scale – generated $339m of fees.

Yet Africa’s rapidly rising economy, particularly in the sub-Saharan part, is leading to more capital markets and advisory activity. Exemplifying this, the volume of Africa-targeted mergers and acquisitions reached $20bn in the first half of 2013, up 30% from the same period a year earlier.

Africa's integration

Miguel Azevedo, Citi’s head of investment banking for Africa outside Egypt and South Africa, says that despite starting from a low base, the continent’s growth prospects make it an exciting place for investment bankers. He points to increasing international bond issuance from African borrowers as an example of the region becoming more integrated with global financial markets.In the past few years, several sovereigns, including Namibia, Nigeria and Rwanda, have sold Eurobonds for the first time. Others are expected to follow, including Cameroon, Kenya and Uganda.

Many countries have managed to sell their bonds with interest rates that would have been unthinkably low just a few years ago. Zambia, a copper-rich but poor country in southern Africa rated B+ by Standard & Poor’s and Fitch, issued a $750m 10-year debut Eurobond last September with a yield of 5.625%.

Since late May this year, when chairman Ben Bernanke suggested the US Federal Reserve was considering slowing its programme of quantitative easing (QE), African dollar bonds have widened, in some cases by as much as 200 basis points. But the environment for issuers remains good, according to Mr Azevedo. “For African countries to raise 10-year dollar debt at below 6% was amazing when you look at it historically. It’s a combination of investors looking for yield and confidence in Africa,” he says. 

“My advice to governments would be for them to take advantage of this opportunity. Times are changing on the back of QE tapering, but conditions are still quite attractive.” 

Corporate borrowers

Once African sovereigns are more firmly rooted in international debt markets, bankers hope the private sector will also start to tap them. So far, few corporations from Africa – aside from some South African companies and Nigerian banks – have issued deals. But Mr Azevedo says sovereign bonds can have the effect of opening debt markets to other would-be borrowers from the same country. He cites the possibility that Kenya’s banks, which are seeing more demand locally for dollar loans, will issue Eurobonds for the first time in the wake of the sovereign, which is expected to come to market by the end of 2013.

Banks will probably provide a large chunk of future African investment banking business, and not just in the form of bond mandates. Mr Azevedo says that some countries are likely to experience periods of banking sector consolidation, which would lead to opportunities for advisory work.

He says Nigeria, which in the past decade has seen the number of its banks drop thanks to regulatory-driven takeovers and some lenders having come unstuck during a financial crisis a few years ago, is one. Part of the reason is that mid-sized Nigerian banks tend to trade at big discounts to their larger rivals, giving the former an incentive to build their balance sheets through acquisitions. “I believe there’s going to be another wave of consolidation in Nigeria,” says Mr Azevedo. “The gap between the tier-one and tier-two banks is widening. There’s pressure on the tier-two banks to do something and gain tier-one status.”

Africa’s economic buoyancy is as much down to rising consumer demand as high commodity prices. Growth in many countries of 6% or more is putting greater disposable income in the hands of Africans, even if they remain far poorer on average than Asians or Latin Americans, let alone citizens in the developed world. Mr Azevedo says that global firms involved with fast-moving consumer goods (FMCG) are thus increasingly looking to the continent to expand their operations. “There’s not much growth elsewhere in the world,” he says. “So all these FMCG companies are very keen on making sure they don’t lose out in Africa. Africa is going to be very significant in terms of the proportion of global growth in consumer goods.”

Mr Azevedo admits that putting money into Africa is anything but a risk-free process and that some investors are unrealistic about the potential for returns. But he has little doubt the continent’s status as an investment destination will only be enhanced in the next few years. “Africa in the past was more a place for pioneers and adventurers. Now, the big players are coming. It’s becoming far more mainstream,” he says.

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Read more about:  Analysis & opinion , Interviews , Africa , Nigeria