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AfricaJanuary 2 2008

Basic services but a booming industry

Angola’s retail banking network, while at an early stage of development, is growing fast along with an oil-driven economy. Rodrigo Amaral reports.
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Solid profits and stellar rates of growth have been the rule over the past few years for Angola’s banking industry, as the country takes advantage of huge oil reserves to pursue fast economic growth. Record oil prices are providing a well-deserved breakthrough for a nation that for more than 40 years was ravaged by civil war.

Banks have been making the most of this growth. Total assets in the banking system increased by 51% in 2006, after a 57% hike in the previous year. The volume of deposits increased fourfold in three years and the number of branches in the country increased 40% by the end of 2006.

The pace of growth has been such that banks have posted strong results, despite a wide range of cost-creating obstacles to their operations. These include a dearth of qualified labour and the absence of communication and transport infrastructure.

The devastation brought by the civil war, which ended in 2002, still makes banks’ operations a logistical nightmare. Even so, profits were up 18% in 2006 and are expected to remain strong in 2007. The return-on-equity ratio for the whole sector in 2006 was almost 26%, with some firms such as Banco Espirito Santo Angola (BESA) reaching more than 50%.

However, the feeling in the market is that the industry is starting to evolve at a steadier, more sustainable pace. “Profit levels remain very high, but they are starting to come down,” says Luis Folhadela, an associate director and banking expert at KPMG Angola. “There is a growing number of players in the market, marketing strategies have become increasingly aggressive and the scope for differentiation is narrow, as the offer of products and services is very basic,” he says.

International players

Mr Folhadela adds that four or five banks start operating in the country every year. Most are owned by Angolan groups, with varied levels of participation by foreign investors, but international players seem to be keen on entering the market too. Barclays is already there, by means of its South African subsidiary Absa, which owns Banco Comercial Angolano (BCA), one of Angola’s oldest banks. Santander also has an Angolan presence, gained when it bought Portugal’s Banco Totta. Russia’s VTB opened a bank in the country in September 2006.

Another South African player, Standard Bank, maintains a representative office in Luanda and is believed to be planning for an expanded presence. Market sources say that several global groups have started to make queries about the possibilities of getting into the Angolan market in the past few months.

The bulk of foreign banks in Angola, however, are from Portugal, the old colonial power. In addition to Banco Espirito Santo, Banco Portugues de Investimento (BPI) owns Banco de Fomento de Angola (BFA), the market leader. Millennium BCP, which is Portugal’s second largest bank, started operations in the former colony last year and state-owned Caixa Geral de Depósitos, Portugal’s largest bank, is finalising the acquisition of 50% of Banco Totta Angola.

In theory at least, foreign players should be able to set foot in the market if they want to. “There is no barrier to new entrants in the market – just the opposite,” says Pedro Barreto, managing partner of Deloitte Angola. “The government is keen to diversify the profile of the banks operating in the country, as there is a concentration of Portuguese players.”

Some analysts believe the Angolan government nurses an anti-Portuguese bias, reflecting lingering bad blood that dates back to the colonial era. Others argue that the authorities are mainly interested in fomenting locally owned business groups.

Booming market

New arrivals are likely to find a group of established competitors striving to extend the range of services they offer to meet the fledgling needs of a market that is little developed but booming. In the past two years, BFA, for instance, has launched branches specialising in corporate banking, a number of dedicated investment centres for affluent clients and an investment banking unit, all in addition to its core retail business.

“We have an ambitious growth strategy, as we trust the economy will keep going strong in the forthcoming years,” says Emídio Pinheiro, chairman of BFA’s executive committee.

Banks have diversified their activities since the government reduced interest rates at the end of 2005, slashing the fat yields of up to 40% that financial companies had been used to getting from government securities. One of the segments where competition has intensified is retail banking, boosted by the emergence of an expanding Angolan middle class.

Fernando Duarte, executive director of young but highly successful outfit Banco BIC, says that for a long time Angolan banks overlooked retail clients and concentrated on segments with higher margins. He recalls that Banco BIC started out in 2005 with 80% of its business in corporate banking, but retail banking now accounts for 45% of its revenues.

“It is necessary to stop thinking about short-term profitability and start looking at the long-haul,” he says. Banco BIC has been in the market less than three years but is already Angola’s second largest bank.

In Mr Duarte’s view, there are still “only two or three” other companies offering true retail banking in Angola, which creates opportunities for growth. Only 6% of the population have access to bank services, according to a recent report by Deloitte and Abanc, Angola’s bank association. Even allowing for the fact that the population has a very young age structure – 43.5% of Angolans are younger than 15 – the potential for growth in the retail banking business looks overwhelming. Mr Duarte estimates that considering Angola’s income levels, the percentage of the population using bank services should be about 20%. In other medium-income countries in sub-Saharan Africa, the average is 25%, and in South Africa, the reference nation for the region, it reaches 46%.

Changes in the market environment have also convinced banks that they need to increase the volume of lending to customers, companies and even the government. Helped by a sharp cut in interest rates by the central bank in the second half of 2005, the volume of credit conceded by the sector doubled in the 18 months to June 2007, reaching $5.6bn (most loans are granted in American dollars rather than in kwanza, the local currency).

Reconstruction effort

Many banks have adopted more aggressive credit policies, particularly Banco BIC, which posted a 63% rate of conversion of deposits into loans last year. The market average breached the 50% mark in mid-2007, up from 37% in 2005. The evolution is due not only to the rise in volumes lent to private companies and individuals, but also to the government, which is developing a huge reconstruction effort in Angola.

However, banks face a number of hurdles in their quest for new clients, including cultural factors dating back to the period from 1975 to 1991 when banks were nationalised. During that time, misguided policies such as freezing deposits helped kill confidence in the industry. “Angolans developed antibodies against banking services,” says Mr Duarte.

One of the main challenges for banks in Angola is to find ways to beat the country’s acute lack of transport, communications and other infrastructure. The government and private sector have been spending heavily to repair roads and other infrastructure that was completely destroyed during the civil war. However, the job has just begun and day-to-day business operations can prove frustrating, as anyone who needs to make telephone calls to the country with any regularity will no doubt attest to.

“Sometimes our branches outside Luanda stay without electricity for months,” says Mr Duarte. “It is not unusual for them to be without running water too, so the logistics of working with those agencies is very tricky.” Not to mention the extra costs implied by the need to come up with alternatives to national power and communication services, such as the maintenance of power generators and use of communications via satellite.

“It is still impossible to set up a bank branch relying on public infrastructure,” says Mr Folhadela. The sheer size of the country – Angola’s territory is five times the size of the UK – makes the problems worse. Maintaining branches outside the capital, Luanda, is a daunting task.

In Luanda things are a little better, but difficulties still exist. The fast pace of growth, a strong currency and the prevalence of imported goods have turned the capital into one of the most expensive cities in Africa.

Proper facilities are hard to find and building branches from scratch can prove a very expensive exercise. Prices of cement and other imported materials that are in great demand because of reconstruction work in the country have reached sky-high levels. “It is more expensive to build a branch in Luanda than in a richer country,” says BFA’s Mr Pinheiro.

Hiring staff is another challenge for the industry. The sector created more than 1300 new jobs in 2006, taking the total to 5335 – a spectacular increase by the country’s standards, according to Mr Folhadela. About half of BFA’s 1,440 employees as of September 2007 only started working with the bank after January 2006. Five years ago, the bank’s payroll included a mere 205 names; the projection for 2011 is 2243.

However, few qualified people can be found in the local market and banks and companies in other industries hungry for labour quickly snap up graduates in economics.

Some banks bring qualified professionals from abroad, but in-house training is usually the chosen alternative. This entails not only training costs, but also employing more people than present operations really require. For instance, at Banco Bic, Mr Duarte estimates that more than 100 of the 850 staff are employed mainly as trainees to fill future vacancies.

The general expectation is that, for all the difficulties, the sector will carry on growing fast in the foreseeable future, not least thanks to the imminent creation of a local stock exchange, expected next year. Mr Folhadela forecasts that one or two Angolan banks will make it into The Banker’s Top 1000 World Banks list within the next two years.

Oil dependency

But the health of the sector depends on the state of the Angolan economy, which will be subject to the vagaries of oil markets for some time to come. Angola has been increasing its oil production steadily and caught the eyes of the world when it overcame Saudi Arabia to become China’s main oil provider.

The oil industry accounts for 57% of the country’s GDP and is the main driver of astronomical rates of economic growth – an average of 19.7% in the past three years.

Therefore one of the government’s main tasks is to diversify economic activity away from oil and the production of diamonds, Angola’s other major export. Some signs are encouraging: in 2006, non-oil activities increased by an impressive 28%.

However, other risks loom on the horizon. Inflation has been kept under control for some time, but there are fears that fast economic growth is putting renewed pressures on prices.

The regulatory environment is also not ideal: the World Bank recently described the business environment in Angola as “one of the least favourable in the world”. Red tape hinders companies and not everybody trusts the country’s cumbersome judiciary to solve disputes. Individuals and small companies often struggle to contract loans because they do not have properly registered properties or other assets to offer as guarantees.

Corruption remains widespread: Angola ranked 142 among 163 countries in the latest Corruption Perception Index, released by Transparency International.

The jury is also still out on Angolan politics. President José Eduardo dos Santos, a former Marxist guerrilla, has kept power in the country since 1979 and critics often cast doubts over his democratic credentials. A new Parliament will be chosen this year and a presidential election is due in 2009. Both events should put the Angolan political system to the test.

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