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AfricaSeptember 3 2018

Angola banks maintain profitability amid hopes of speedier reforms

In the year since João Lourenço became president, Angola has begun diversifying away from its oil dependency. Meanwhile, the country's banks are hoping a reduced role by the state and business reforms will shore up the economy. Peter Wise reports.
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After weathering a challenging economic climate for almost four years, banks in Angola are looking for fresh opportunities to expand as the country gradually recovers from a deep downturn sparked by the collapse of oil prices from mid-2014.

Over the medium term, plans by the new government to move the economy away from its heavy dependence on oil are expected to generate profitable new business openings for sub-Saharan Africa’s third largest banking sector after South Africa and Nigeria.

“Angola is well known for its oil and diamonds,” says Luís Lélis, chief executive of Banco Angolano de Investimentos (BAI), one of the country’s top five lenders. “But the country also has enormous potential in agriculture, fishing, forestry, semi-precious stones and other areas. All these sectors can be linked up with production companies to create industrial clusters.”

Programme of diversification

In February, the government unveiled an export diversification and import substitution programme, known as Prodesi. The aim is to boost non-oil production by making the private sector the engine of growth as restraints on doing business are eased and the state’s predominant role in the economy is scaled back.

The programme, which will simplify procedures for business licensing, property registration and contract enforcement, is one of several significant reforms introduced since João Lourenço was elected president in August 2017. The former defence minister succeeded José Eduardo dos Santos, who had run Angola for 38 years, in what is seen as a marked shift towards restoring economic stability and improving the business climate.

“The Prodesi programme reflects an increased awareness among the Angolan authorities of the need to implement more structural reforms to diversify the economy,” says Pedro Ferreira Neto, chief executive of Eaglestone, a financial services company that specialises in sub-Saharan Africa. “This is clearly a step in the right direction, but it is going to take time before we see a material impact on the economy.”

Angola’s heavy dependency on oil is a critical challenge for banks, whose business models are closely linked to the petroleum sector. In its Article IV consultation for 2018, the International Monetary Fund (IMF) said: “Oil price volatility and pro-cyclical public spending create feedback loops for liquidity and credit, leading to windfalls for some banks while building vulnerabilities for others, especially state-owned banks.”

Long years of oil dependency, however, are likely to make diversifying the economy a difficult process. “Outside the oil sector, the Angolan economy is heavily based on trading imported goods,” says Sanjay Bhasin, chief executive of Banco Económico. “It takes time to wean people off trading [and] into production, and production itself requires foreign exchange. If you’re setting up an agricultural project, for example, you need foreign currency to import tractors, seeds and fertiliser.”

The limited availability of foreign exchange has long been a critical factor for Angolan banks. In essence, they have been allocated foreign currency by the central bank, Banco Nacional de Angola (BNA), based on the size of their balance sheets, deposits and customer foreign exchange orders, removing a substantial part of their business from their direct control.

More flexibility on FX

Under the new government, Angola has moved towards a more flexible foreign exchange system. In 2018, the BNA moved from a peg to the US dollar to a trading band. It has also reactivated foreign exchange auctions under revised rules that effectively cap the depreciation of the exchange rate at 2% per auction. The financial authorities plan to phase out direct foreign exchange sales to priority sectors in the near future.

“The central bank is allocating foreign currency in a far more transparent and professional way than in the past,” says António Coutinho, chief executive of Standard Bank Angola, the in-country unit of South Africa’s Standard Bank. “This benefits everybody and is an important strategy for encouraging import substitution.”

Banks are hopeful they will eventually be allowed to buy foreign currency directly from exporters. “Banks should be openly competing in the market for foreign currency and selling it on to their customers,” says Mr Coutinho. “We would then be in a position to start marketing different kinds of derivative products such as forwards and swaps. An importer would then know exactly how much local currency they were going to have to pay on a US dollar letter of credit in, say, five months’ time.”

The loss of direct US dollar correspondent banking relationships in 2016 is another pressing issue for Angola's banks. The loss means banks are no longer able to service their customers’ cross-border payment needs, which has pushed up the cost of doing business in Angola and damaged its capacity to stimulate growth. 

Banks have sought to mitigate the loss by using euro and nested US dollar correspondent relationships through intermediaries. But these are less efficient and more costly. The central bank is working to regain the correspondent relationships by opening up channels of communication between domestic and foreign banks and regulators.

“Regaining correspondent banking relationships is a key challenge for the Angolan banking sector,” says Jorge Albuquerque Ferreira, chief executive of Banco de Fomento Angola (BFA). “They are a decisive factor for improving the functioning of the country’s economic and social systems, and bring clear benefits for Angolan companies and families.”

Top banks dominate

In terms of profitability, many Angolan banks have performed well despite the downturn triggered by the fall in oil prices. A total of 29 banks operate in Angola, but the largest five account for more than 80% of total assets, deposits and loans. BAI, founded in 1996 as the country’s first private bank, posted an 11% increase in net profit in 2017 to Kz56bn ($212.6m). Return on average equity was above 30%.

Net profits at Standard Bank Angola more than doubled in 2017 to Kz17bn, the bank’s strongest performance to date, while return on equity rose to 60%. BFA increased net profit by more than 11% in 2107 to Kz7.2bn, while Banco Económico recovered from a net loss of Kz4.3bn in 2016 to post a net profit of Kz6bn last year.

Tiago Dionísio, Eaglestone’s head of research, says solvency ratios have also remained high, reaching an average of 23.2% in the first quarter of 2018, well above the regulatory requirement of 10%. These strong performances stem partly from the fact that the balance sheets of most banks include large exposures to treasury bills, which have provided attractive returns in the current environment of high interest rates.

“Low oil prices led to an increase in the state’s internal financing needs, which in turn resulted in the issue of more public debt securities at higher interest rates,” says BAI’s Mr Lélis. “This led to a sharp increase in earnings from financial investments and assets.” BAI’s financial assets and investments have grown only 6% in volume since 2015, but net profit has increased from Kz22bn in 2015 to Kz156bn in 2017.

Mário Palhares, chief executive of Banco de Negócios International, says commercial banks have been channelling their liquidity into purchasing public debt securities and foreign currency to the detriment of lending to the economy. The sector’s positive performance also reflects “increased financial margins and the appreciation of foreign currency-denominated assets”, he says. 

Daniel Santos, chief executive of Banco Millennium Atlântico (BMA), says: “While return-on-asset and return-on-equity ratios rose as the foreign currency and indexed assets of the main players appreciated, the ratio of net interest income to the gross intermediation margin decreased from 60% in 2014 to 40% in 2018.” This, he says, was a result of higher interest rates (raised to tackle inflation) having a bigger impact on deposit rates than lending rates.

Tighter conditions expected

Bankers expect the central bank to continue tightening monetary policy to help contain inflationary pressures. Inflation fell to 26.3% at the end of 2017, down from almost 42% a year earlier. This reflected tighter monetary conditions, while a more stable kwanza helped moderate food and fuel prices. The IMF sees inflation falling to 15% by December 2019.

“The business model of Angolan banks remains focused on investing in treasury instruments, as opposed to attracting deposits and lending money to clients,” say Eaglestone’s Mr Ferreira Neto. This is reflected in the loan-to-deposit ratio for the sector, which, at about 50%, he considers “quite low when compared with banks in more developed countries”.

While most banks have profited from increasing their exposure to domestic public debt, the IMF warns that increased T-bill purchases could leave some lenders “vulnerable to sovereign distress”. At the six banks in which the state owns a majority or minority stake, contingent liabilities that reached 4% of gross domestic product (GDP) in 2014 have since fallen to about 1%.

Bank profits have largely held up, but the downturn has hit asset quality hard. According to the BNA, the non-performing loan (NPL) ratio for the Angolan banking sector rose from about 12% before the oil crisis to 31.2% in March 2018. Most banks have seen some deterioration in their asset quality ratios, according to Mr Dionísio, but the sharp overall increase is mainly the result of one or two isolated cases. At the end of 2017, state-owned Banco de Poupança e Crédito (BPC) accounted for 80% of the banking system’s NPLs.

The financial authorities are taking steps to address asset quality issues. A state-funded asset management company called Recredit has been created and this year acquired about one-third (Kz300bn) of BPC’s distressed assets. It is working with other banks to purchase NPLs worth a further Kz180bn. The new government has also set a goal of settling domestic payments estimated at 4.5% of GDP by the end of 2019, a move seen as crucial to reducing NPLs in the banking sector.

Capital requirements rise

In other measures, the BNA has increased the minimum capital requirement for Angola's commercial banks to Kz7.5bn (or $32m), three times the current minimum. Banks have to meet the new criteria by the end of 2018. Bankers expect the measure to trigger consolidation in the sector, as smaller players are likely to find it difficult to comply with the new rules.

The central bank has also introduced new liquidity requirements for banks. By June 2018, they were required to reduce their daily net foreign exchange liquid positions (excluding bonds and loans dominated in foreign currencies) to 10% above or below their regulatory capital requirement. The measure has had a negative impact on six banks. All banks in Angola have also migrated to the internationally recognised International Financial Reporting Standards accounting system, which has more robust provisioning requirements.

Some banks have used the downturn to reassess their business strategies and to invest in expanding their businesses. Standard Bank Angola, which has been operating in the country for eight years, is investing in a new multi-million-dollar head office in Luanda, the Angolan capital. It expects to move its staff of about 570 from the bank’s current rented offices to the new building in June 2019.

Standard Bank has also invested significant sums in upgrading software systems and hardware. “When the economy is booming, you don’t necessarily have time to pause,” says Mr Coutinho. “When things are quieter, you can decide on investing in better systems and processes for when the economy comes back to speed. Our decision to build a new headquarters is a sign of our confidence in Angola.”

Staff training is also crucial. “We invest permanently in improving the capacity of our human resources with the aim of providing them with the necessary skills to meet future challenges,” says Mr Santos of BMA.

“There is a shortage of skilled people in Angola and we invest a considerable amount in internal capacity building and upgrading skill levels within the bank,” says Mr Coutinho. “To be sustainable, you have to train local people who plan to stay in Angola, rather than recruiting staff who will only be here for a couple of years.”

A privatisation matter

Bankers see planned privatisations as another potential source of new business. In May 2018, the prospectus for a $3bn Eurobond issue said the government intended to privatise 74 public companies, mainly in the industrial sector. The companies provided the state with income totalling little more than $22m between 2013 and 2017. However, no list of the firms to be sold and or any estimate of the amount the state hopes to raise from their privatisation has yet been made public.

In another recent example of the government’s plans to open up the economy, a presidential decree in July authorised diamond extraction companies to sell up to 60% of their production freely. Previously, they had to deal with 'preferred customers'. Some bankers, however, believe fostering entrepreneurship will prove more beneficial to the economy in the long run. “The danger of concentrating on natural resources is that everyone focuses on what we already have,” says Mr Bhasin of Banco Económico. “I don’t doubt that we will catch up with countries such as Nigeria in terms of entrepreneurship – but I wish we could move even faster.”

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