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AfricaJune 1 2015

The spark amid a slump: Will Angola's banks emerge from oil price dip stronger?

The Angolan banking sector has been hit hard by the oil price slump, adding to concerns about systemic loan book weakness. However, a tough new asset quality review should improve matters, as should the expansion of the country's capital markets.
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The spark amid a slump: Will Angola's banks emerge from oil price dip stronger?

In a country that relies on oil for 95% of its exports and about 80% of government revenues, the drop of more than 40% in crude oil prices over the past year has dealt a sharp blow to Angola’s petroleum-dependent economy. Banks have been no exception. Cuts in public investment and a dearth of foreign currency as oil revenues tumbled have hit business volumes, reduced the demand for credit and triggered an increase in provisions as asset quality deteriorates.

Beyond the immediate pain, however, many bankers see the oil-price shock as a stimulus that could accelerate efforts to diversify the country's economy, open up Angola to a wider range of international investment, spur regulatory improvements and fast-track the launch of a domestic capital market. “Economic diversification will be the main driver of growth in the coming years and strong efforts to replace imports with local production will create new opportunities for banking,” says António Henriques, chief executive of Banco Millennium Angola, which is controlled by Portugal’s largest listed bank, Millennium BCP.

Size matters

The banking sector has prospered amid Angola’s 21st century oil boom and double-digit gross domestic product growth. From the handful of state-owned banks that were operating when two decades of civil war ended in 2002, the number of lenders in the country has expanded to 25, with total assets soaring from less than $3bn in 2003 to more than $60bn today.

Despite the growing number of lenders, however, the top five groups control between 70% and 75% of total assets, loans and deposits, and bankers expect consolidation among smaller players. “Some banks have fewer than five branches,” says Pedro Ferreira Neto, chief executive of Eaglestone, a sub-Saharan-focused investment bank. “An increasingly challenging economic climate and a more competitive business environment is likely to lead to merger and acquisition activity in the not too distant future.”

Tighter central bank regulation could also make the going too tough for some small lenders. “Demanding bank regulations aimed at meeting international standards and a highly volatile economic environment reflecting Angola’s dependence on oil will push less well-prepared banks into joining forces and leveraging their cost efficiency,” says Millennium’s Mr Henriques.

At the same time, bigger banks and insurance companies are jostling to extend their reach by expanding branch networks and increasing their range of products and services. “Angola is so big that you have to reach a certain scale and you have to do it pretty quickly,” says António Coutinho, chief executive of Standard Bank Angola, part of South Africa’s Standard Bank Group, which sees Angola as a priority market.

Fernando Marques Pereira, chief executive of Caixa Geral Totta de Angola, which has shareholders including Portugal’s state-owned Caixa Geral banking group, fellow Portuguese lender Banco Santander Totta, and Sonangol, Angola’s state-owned oil company, says: “The biggest challenge facing banks in Angola is to improve their capacity to offer products and services to an emerging middle class and support the diversification of the economy by supporting small and medium-sized companies."

In an economy where less than one-third of the population of 21 million have bank accounts, opportunities abound. But Angola’s low level of infrastructure development – resulting in unreliable energy and water supplies and poor communications, together with a shortage of skilled employees – remains a logistical challenge to the growth of bank networks, and a drain on costs. 

“You need scale in your chosen market segment – branches, ATMs, staff – which can make the cost of entry quite high,” says Mr Coutinho of Standard Bank, which is targeting Angola’s expanding middle class. “Our competitors are doing a good job at the bottom end of the market, but we believe we can better exploit this niche,” he adds.

Banco Espírito Santo worries

Angola’s close economic ties with former colonial ruler Portugal are at their strongest in the banking sector, where, until recently, six lenders, accounting for about half of the country’s total banking assets, were majority owned by Portuguese banks. That changed last year, when shockwaves from the collapse of Banco Espírito Santo (BES), one of Portugal’s biggest lenders, hit the troubled group’s Angolan unit.

Banco Espírito Santo Angola (BESA), the second largest Angolan bank by assets and 55% owned by BES, came under increasing pressure as the difficulties at its main shareholder mounted. A subsequent audit of BESA, commissioned by the Bank of Portugal, found that 70% of €3bn in credit extended by the Angolan bank could be considered as bad loans.

In August 2014, shortly after the Portuguese authorities split BES into 'good' and 'bad' banks as part of a €4.9bn rescue, Angola’s central bank appointed administrators to manage BESA and withdrew a sovereign guarantee of up to $5.7bn that covered most of its loan book. It also agreed a recapitalisation plan for BESA as part of a deal that converted part of BES’s €3.3bn in loans to its Angolan unit into equity.

The agreement also involved the subscription for £650m-worth ($1.02bn) of new shares by existing shareholders and new investors, including Sonangol. The oil company, with a stake reported at more than 35%, is now the biggest single shareholder in the bank, which emerged from three months under central bank administration with the new name of Banco Económico (BE). The other shareholders include Portugal’s Novo Banco, the 'good bank' salvaged from the ruins of BES – with 9.9%; Angolan company Geni, with about 19%; and Lektron Capital, another Angolan investor.

Bankers see this intervention as an isolated case. “The incident involving BESA could have had serious repercussions [for Angolan banks and was a] clear warning sign” for regulators, says Eaglestone’s Mr Neto. But “the local authorities dealt with the issue” appropriately to “minimise the contagion effects”, he adds, while stricter rules were introduced by the central bank and more powers confided to regulators to protect the interests of depositors and investors.

Sanjay Bhasin, chief executive of BE, says that the reshaped lender’s main objectives for 2015 and 2016 are “to expand our customer base and reiterate that BE is an Angolan bank with strong support from its shareholders”. He adds that the bank is committed to providing innovative products and good service, saying that “we will focus on profitability and branch consolidation”.

Portuguese-led consolidation?

Some bankers believe that the next round of consolidation in Angolan banking could be driven by Portuguese lenders rather than local players. “I would say consolidation will depend more on what happens in Portuguese banking than on the will of the leaders of the main Angolan banks,” says Caixa Totta’s Mr Marques Pereira.

In effect, the outcome of a continuing takeover bid for Portugal’s Banco BPI by Spain’s CaixaBank could have important repercussions in Angola. BPI, whose board has rejected CaixaBank’s initial bid as too low, controls Banco de Fomento Angola (BFA), one of the country’s top five banks. The second largest shareholder in BPI, however, is Isabel dos Santos, daughter of Angola’s president and Africa’s first female billionaire.

In response to the Spanish bank’s bid for BPI, Ms dos Santos has proposed the alternative of a merger between Millennium BCP and BPI. Sonangol is the biggest single shareholder in Millennium BCP with just over 19%. Whatever the outcome, the tussle for control of BPI in the coming months clearly has the potential to reshape Angolan as well as Portuguese banking.

Slippery business

Following a previous collapse in oil prices in 2008 and 2009, the slump of the past year has highlighted how reliance on a single commodity continues to make Angola, Africa’s second largest petroleum producer after Nigeria, highly vulnerable to external shocks. As a consequence, banks are being hit by a slowdown in economic activity and increased delays in government payments, which are damaging credit quality among companies that rely heavily on state contracts.

“We believe that both of these effects could continue to hurt the profitability of the banking sector in the foreseeable future as well as its solvency levels,” says Mr Neto.

In response to the oil price drop, the Angolan government has imposed restrictions on imports and, since October, has required oil companies to sell their US dollars to the Banco Nacional de Angola, the central bank, whereas previously they had been able to sell them directly to local banks. This is squeezing the amount of foreign currency flowing through the economy, which in turn, says Mr Henriques, “impacts negatively on bank income raised from foreign exchange intermediation and trade finance commissions”.

Credit quality is a leading concern, particularly against a backdrop of rash lending during the boom years. “The quality of credit books is of huge importance,” says Emídio Pinheiro, chief executive of BFA. “We have quite a strong and robust credit portfolio, so we don't expect anything too severe. But other banks will feel the contraction, especially those focused on the real estate sector.”

According to the latest available data, the non-performing loan ratio of Angolan banks increased from 9.8% at the end of 2013 to more than 14% in December 2014. “The current economic climate means that this deterioration in credit quality is likely to continue,” says Mr Neto. “It also means that banks are likely to continue increasing their provisioning levels to protect their balance sheets from future risks.”

Everything is changing

In the second half of 2014, Angola's central bank, with support from international auditing firms, carried out an asset quality assessment of the country's 14 largest lenders with a view to identifying problem areas and adopting monitoring programmes and corrective measures where required. Banks were required to provision against any discrepancies found in their 2014 accounts.

The move reflects a general tightening of prudential rules by the Angolan authorities amid what bankers see as a sustained effort to bring bank regulations closer to international standards. “A big move is being made in this area,” says Mr Pinheiro. “New anti-money laundering regulations have been introduced, as well as new rules on internal controls, transaction permits and the protection of consumer rights. Everything is changing.”

International Financial Reporting Standards (IAS/IFRS) are due to be adopted by all banks in Angola by the beginning of 2016 in what global accounting firm KPMG says will be a “demanding and complex process”. Banks are required to disclose the impact of adopting the new standards in their 2015 accounts and prepare financial statements for 2015 against which their 2016 accounts using IAS/IFRS can be compared.

“This is a major and positive move that will change the way banks operate, impacting, for example, how provisioning and balance sheets look,” says Standard Bank’s Mr Coutinho.

Gaining credibility 

In another move towards meeting international standards, Banco Angolano de Investimentos (BAI), the country’s largest lender, last year become the first Angolan bank to acquire a credit rating when Moody’s assigned it a 'Ba3/not prime' rating for domestic currency deposits and a 'B1/not prime' for foreign currency deposits, both identical to Angola’s sovereign ratings. BAI said it expected other lenders to follow suit in a trend that would “increase transparency and enhance the credibility of the Angolan banking system”.

Angola’s efforts to gain greater international business and financial credibility are partly aimed at redressing its poor rating by several business climate indices. Angola ranks 181st out of 189 countries in the World Bank’s Doing Business report for 2014, for example. It also ranked 142 out of 148 countries in the World Economic Forum Global Competitiveness Index for 2013-14, with respondents noting corruption, an inadequately educated workforce, inefficient government bureaucracy and access to financing as the most problematic areas. Angola also ranked 155 out of 177 countries in Transparency International’s Corruption Perception Index for 2013.

In a further opening of its financial sector to the outside world, Jorge Ramos, head of investment banking at BE, says Angola is poised to move into capital market trading with the launch of a secondary market in public debt, beginning with treasury bills and overseen by the Angolan stock exchange authority, Bovida, and the Capital Markets Commission of Angola. He also sees the long-mooted issue of an Angolan Eurobond as a possibility over the short term, as the country seeks to raise $10bn in external funding to help finance $25bn of planned investments in badly needed infrastructure, including ports, roads and a $6bn oil refinery.

The Eurobond, the first test of investor appetite towards an emerging African market since oil prices began to fall, would aim to raise between $1bn and $1.5bn. “The government’s willingness to find new funding solutions to finance infrastructure projects could result in a greater openness towards private entrepreneurs and foreign investment,” says Mr Ramos. “This means banks in Angola could see new business opportunities opening up in the area of public-private partnerships and project finance.”

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