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Country reportsMay 1 2013

A new landscape for Angola's fast-growing banks

Life for Angola’s banks is getting harder, thanks in no small part to falling interest rates and new taxes. But, as the country's economy continues to perform impressively, growth opportunities will remain. The challenge will be to make sure that this growth is sustainable. 
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A new landscape for Angola's fast-growing banks

Angolan banks have benefited handsomely from the country’s oil-fuelled economic boom since its 27-year civil war ended in 2002. At this point, they were tiny, with less than $3bn of assets between them. That figure had risen to $54bn by the end of 2011, making Angola's the largest banking sector in sub-Saharan Africa after South Africa and Nigeria.

Yet despite this growth, Angola’s banking system was until recently unsophisticated, with lenders making the bulk of their earnings from government bonds rather than growing their loan books, e-payments being all too rare, and the regulatory framework far below international standards.

However, plenty of progress has been made in the past three years towards creating a more mature banking sector. The use of credit and debt cards has climbed sharply, while banks have significantly expanded their networks of ATMs and point-of-sale terminals, which barely existed before 2008.

Leading the charge

The Banco Nacional de Angola (BNA), the country's central bank, has implemented many regulatory and monetary reforms in that period. In 2011, it introduced new money-laundering rules, which bankers say was badly needed. It also set up a monetary policy committee, a base interest rate and an interbank rate. These reforms, along with a greater use by the central bank of overnight repurchase agreements (repos), are leading to the establishment of market-based interest rates for the first time, says José Massano, who has been governor of the BNA since 2010.

“In the past, commercial banks struggled to set interest rates,” he says. “Some would use inflation as a reference, some would use government securities, while others would use prudential regulations set by the BNA. It was very confusing. Now, most banks are using repo rates or the BNA’s base rate as a reference for loans.”

The interbank market remains largely inactive, aside from a small amount of overnight lending, while the base rate is not yet a powerful tool for managing liquidity. But bankers say that will change in the coming few years and that the BNA’s reforms have done much to strengthen the sector. “In the past three years, you can see that progress has been made,” says Pedro Coelho, head of Standard Bank Angola. “The central bank has been laying out rules and instruments that allow the financial system to become more solid.”

Tough times looming?

Thanks to their soaring growth over the past decade, Angola’s banks have not struggled to make money. Their profitability ratios are among the best in Africa, with returns of equity (ROEs) averaging 33% in 2010 and 25% in 2011, according to a survey published by accountancy group Deloitte.

The days of sky-high earnings may not last, however. Inflation, which had long blighted Angola, fell to less than 10% for the first time on record in August 2012. As a result, interest rates on government bonds, from which banks derive so much of their income, have tightened sharply. Yields on three-month securities, which were 20% in early 2010, had decreased to 3% by the start of this year.

Mr Coelho says this has changed the banking environment significantly. “It’s certainly tougher than it was five to seven years ago,” he says. “Interest rates are low compared to then, when some of the banks grew very fast without necessarily doing a lot of credit.”

The government is, moreover, starting to increase taxes on banks in an effort to widen its revenue base beyond the oil industry. The exemptions they used to enjoy – Angola’s biggest six lenders paid effective taxes of 12% in 2010, despite a corporate tax rate of 35% – are being phased out, while a new withholding tax of 5% is being applied to treasury bills. These developments are combining with weaker yields on property assets to put pressure on banks.

“The trend in the banking sector will be of shrinking net interest margins due to the 5% withholding tax introduced on investments in treasury bills, while expense ratios will go up,” says Anthony Lopes-Pinto, managing director of investment bank Imara Securities Angola. “There is also significant pressure arising from declining yields on property portfolios, as the high end of the market is oversupplied, and most of the largest banks have invested heavily in real estate. This will ultimately affect banks’ bottom lines.”

Several analysts say it is no bad thing if the profits of Angola’s banks stop rising so quickly. They claim the sector’s overall growth is unsustainable and has left regulators struggling to keep up. “Until a few years ago, the major systemic concern people had was the price of oil,” says one Africa-focused private equity investor. “Now, the banking sector has become, thanks to its sheer size, a systemic concern. It has grown faster than the regulatory framework.”

Others add that a rise in bad assets is a sign that slower growth levels are needed. Net profits at Banco Angolano de Investimentos (BAI), the country’s largest lender, fell 15% last year because of extra provisions for non-performing loans, the ratio of which went up from 4.9% to 7.2%.

Real estate worries

One source of concern is the real estate market. Property prices in Luanda, Angola's capital, remain high, but they are still below their peak of 2008, just before the country's economy was hit by a crisis triggered by a collapse in oil prices. “A big part of the banks’ growth has been financing the real estate bubble,” says António Henriques, chief executive of Millennium Angola, which is controlled by Portugal’s Millennium BCP.

Despite the possibility of banks slowing their property lending, they are likely to start to make more effort to expand their loan books. In part because of the high, tax-free returns they were making on treasuries until recently, credit provision in the country is low. The banking sector’s loan-to-deposit ratio was 52% at the end of 2011, compared with 91% in South Africa. Bankers admit that will have to change if they are to maintain their profitability ratios.

“The economic incentive is there,” says Emídio Pinheiro, head of BFA, Angola’s third largest bank. “If the yield on treasury bills has been reduced to 4% or 5%, obviously we have to look for alternatives and domestic credit is one of the options. We will have to be more active and aggressive in the credit market.”

Much of the non-oil sector is thriving, which should provide banks with opportunities to lend. Yet finding good assets is not easy in a country that the World Bank ranks as one of the toughest business environments globally. Bankers say that local companies, none of which are listed because of the absence of a stock exchange, usually lack proper auditing and governance structures. And many struggle to expand because of infrastructural constraints.

The recent creation of credit bureaux and big investments by the government in infrastructure have led to improvements, although bankers say it is a long-term process. “Angolan companies and entrepreneurs are maturing,” says Mr Henriques. “But there’s still not much information about the businesses. And the quality of information is very poor. Only a few companies are audited, so you never know what you have. It’s a big challenge.”

Foreign exchange law

Perhaps the single biggest change this year for the banking sector is a new foreign exchange (FX) law for the oil and gas industry. It will ensure that all payments to oil suppliers are made through the local banking system, rather than offshore. Since October last year, oil producers have had to pay local suppliers via domestic banks. From July this year, those payments will have to be made in kwanzas (many payments are currently made in US dollars).

The biggest development will happen this October, however, when foreign supply companies, which make up the bulk of those serving the industry, will have to be paid through the local banks, either in kwanzas or in foreign currency.

Upstream oil companies opposed the law, fearing that Angola’s banks would not be able to cope efficiently with their billions of dollars-worth of transactions to suppliers. “It will be a test of the maturity of the banking system in Angola,” says Jorge Ramos, head of investment banking at Banco Espírito Santo Angola, the second biggest lender in the country. “We know that most of the big oil operators have lobbied against the change, which is understandable. If you are a BP, Chevron or Exxon and you’re used to working with a JPMorgan or Citi that guarantees your payments, you get comfortable with that. If you are obliged to go through domestic banks, there will be a degree of uncertainty.”

So far, however, the process has seemingly been smooth. Local banks invested heavily in their IT and payments systems in anticipation of the law, particularly to ensure they could guarantee straight-through processing, while some set up corporate desks dedicated to oil companies. BFA’s has five people serving about 20 clients. “We are very satisfied with the results, as are the clients,” says Mr Pinheiro. “We are moving a lot of money and everything is going according to plan. The initial fears that we would not handle this have been overcome.”

The law will be lucrative for those banks that oil companies choose to work with. For one, they will make fees from any transactions made. Most analysts also claim that deposits will soar as oil companies move money into the local banking system. Several say that up to $30bn, equivalent to 50% of today’s total deposit base, will be brought onshore.

But others doubt those predictions, arguing that because the majority of oil service companies are foreign, much of the money that flows into the country when they are paid will swiftly move out again. “The new FX law’s impact on liquidity in the banking sector is being overplayed,” says Mr Lopes-Pinto. “The fact is that oil producers’ expenses are typically foreign expenses related to imported goods and services and expatriate staff. The notion that the new FX law will increase long-term deposits by $20bn to $30bn is exaggerated.”

New source of dollars

Nonetheless, Angolan officials are optimistic that in the long term, the FX law will augment the use of the kwanza in the economy and make it easier for local businesses and entrepreneurs to compete with foreign oil suppliers by more closely linking the upstream sector with the onshore economy.

“We want to see a better connection between the oil companies and the Angolan banking system,” says Mr Massano at the BNA. “We want to make sure the process helps us strengthen the role of the kwanza, creates more opportunities for local businesses and provides banks with more resources to finance the economy.”

Another consequence of this law will be to open up the FX market to some extent. At the moment, banks access dollars via the BNA at weekly auctions. The new law’s requirement for foreign suppliers to be paid locally (many will continue to be paid in dollars, rather than kwanzas) will give them a new source of FX liquidity. It could even be one of the first steps towards Angola liberalising its capital account and allowing for the free convertibility of the kwanza.

“When banks get access to those funds from the oil industry, they will be able to mediate in the buying and selling of dollars outside the BNA,” says Mr Henriques. “It will start a new market. That’s a major change, and a good one for the banks and the economy.”

Angola’s unbanked population of roughly 80% remains high, albeit in line with much of the rest of Africa. That figure has, however, come down from 90% just two years ago, partly as a result of banks investing heavily in new branches, especially in areas outside Luanda. “Although the banks have become stronger, they haven’t grown apart from society,” says Mr Massano, who previously was chief executive of BAI. “They have actually become more inclusive and made a tremendous effort to increase Angolans’ access to financial services.”

Another factor in the reduction of the unbanked population has been the BNA introducing accounts targeted at low-income Angolans that can be created with deposits of just Kz100 ($1.03). Bankers were initially sceptical as to whether these so-called ‘Bankita deposits’ – which, so as to encourage banks to offer them, do not count toward compulsory reserve requirements – would catch on. But tens of thousands have been opened. Mr Massano says the growth of these and other deposits in the past two years suggests that Angolans have more trust in the banking system. “In the past, when inflation was very high, people were afraid of losing money by keeping it in the bank,” he says. “That’s now totally disappeared.”

Hunt for licences

Foreign banks have long sought access to Angola. Lenders from Portugal, Angola’s former colonial ruler, have a heavy presence. But aside from them, South Africa’s Standard Bank, which was awarded an Angolan licence in 2009, is the only foreign lender to offer full banking services in the country. Ecobank and Standard Chartered, which both have representative offices in Luanda, and Nigeria’s United Bank for Africa are among the many others thought to have applied for licences.

Bankers say that while the licence process takes at least two years to complete, and usually involves a requirement to partner with the government or other entities, the attractions of Angola’s big and rapidly growing economy make it worth their while. “There’s a long queue coming out the BNA of banks trying to get licences,” says one banker in London. “Ultimately, if a bank wants to say it is in sub-Saharan Africa, it has to be present in a place like Angola.”

Analysts warn, however, that while Angola might be profitable for established lenders, new ones will have to make hefty investments if they are to gain market share. Standard Bank Angola will probably not break even until next year, mainly because of the cost of building its branch network, which is expected to number about 27 by the end of 2013. “Although the market is very attractive, it’s very competitive,” says BFA’s Mr Pinheiro. “New banks have to make huge investments.”

Angola’s banking sector has become more sophisticated and complex in the past decade. That process, far from being over, will likely accelerate over the next few years. Not only will lending pick up thanks to low yields on government bonds and a maturing of the non-oil sector, but local capital markets instruments will start to play a greater role. The new FX law could also herald the liberalisation of the capital account, which would give Angolan banks the ability to tap international capital markets. All this, combined with a buoyant economy, means that while they might not expand as quickly as they did a few years ago, their growth is hardly likely to be pedestrian. It will be up to the banks and regulators to make sure that growth is carried out sustainably.

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