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RegulationsMay 1 2012

African banks seek expansion beyond home markets

African banks are increasingly looking outside of their domestic markets, and many of the continent's biggest lenders are now active in multiple countries, buoyed by greater access to vast unbanked populations and a more stable political environment.
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African banks seek expansion beyond home markets

Africa’s banks have traditionally been parochial, rarely venturing beyond their home markets and, when they have, only doing so on a small scale. But in the past five years many have become much more adventurous, rapidly building up their foreign businesses.

Banks from the continent's biggest economies have largely led the way. Morocco’s Attijariwafa, thanks to quick expansion throughout Francophone west and central Africa, has become Africa’s biggest lender by assets outside of South Africa. Nigerian firms have moved abroad, too. United Bank for Africa (UBA) now operates in almost 20 countries apart from Nigeria, including ones as far afield as Mozambique and Zambia. Access Bank, First Bank and Guaranty Trust Bank, another three big Nigerian lenders, have also been growing their foreign arms. And banks from Kenya, east Africa’s dominant economy, are pushing into neighbouring countries more and more.

Longer-established African powerhouses, such as South Africa’s Standard Bank, the continent’s largest lender, say that this trend is leading to more banks having clout on a regional basis, rather than just in the individual countries they operate. “Compared with five years ago, there’s no doubt that these players have begun to be much more regional competitors than country-by-country competitors,” says Chris Newson, chief executive of Standard Bank Africa.

Sub-Saharan Africa’s high growth – with many economies experiencing rises in output of 6% or more annually – has been one of the main factors causing regional expansion, with banks keen to tap these fast-growing markets. Arnold Ekpe, the head of Togo-based Ecobank, which with operations in 32 countries is the continent’s biggest lender by geographic reach, says his firm’s assets could rise 10-fold in the next decade because of this buoyancy. “Banks grow very rapidly if the regions in which they’re positioned grow quickly. Just look at what’s happened with Brazilian lenders in the past 10 to 15 years,” he says. “We might be a $17bn bank today, but there’s nothing stopping us being 10 times that size in a decade if Africa continues growing quickly.”

Pastures new

Some institutions view moving abroad as necessary to lessen their exposure to their home economies. UBA’s strategy, for example, is to diversify from Nigeria by having its foreign subsidiaries make up half its assets in the medium term, compared with slightly more than 15% today. “Nigeria is currently a mono-product economy that is heavily affected if there is a sharp movement in the price of oil,” says Phillips Oduoza, the bank’s chief executive. “We can cushion the impact of any fall in Nigerian revenues from our operations in countries unaffected by a drop in oil prices.”

Africa’s least developed banking sectors are particularly sought after by lenders, especially those in countries with attractive macroeconomic environments. Mr Ekpe says Ecobank has largely finished its physical expansion, but it wants to get licences for Angola, Mozambique, South Sudan – all of which are enjoying high, commodities-fuelled economic expansion – and Ethiopia, which is growing at about 10% annually. Many other banks are also targeting those four countries, each of which has an unbanked population of 75% or more.

Angola, the second largest oil producer in sub-Saharan Africa after Nigeria, is one of the fastest rising economies in the world. Yet because of a devastating civil war that ended only 10 years ago, its banking sector is immature, which gives lenders plenty of scope to grow their businesses. Although several Portuguese banks own stakes in local institutions, Standard Bank is the only foreign entity operating in the country. But many more African banks have applied for licences in the past two years.

[Ecobank] might be a $17bn bank today, but there’s nothing stopping us being 10 times that size in a decade if Africa continues growing quickly

Arnold Ekpe

South Sudan, which gained independence from Sudan in July last year, is in many ways in the same situation that Angola was in a decade ago. It is also a big oil producer and has plenty of agricultural potential, but only recently came out of civil war with Khartoum, which left its infrastructure crumbling. Kenyan banks have been the first to move into South Sudan, although plenty more from elsewhere in Africa are expected to follow suit, including Standard Bank, which is close to getting a licence. “Given that it’s a new country, the opportunities are immense,” says Martin Oduor-Otieno, head of Kenya Commercial Bank, which has been operating there since 2005. “Over the next 10 to 20 years, it will be a big economy.”

Ethiopia is enticing because it has 90 million people, making it Africa’s second most populous country after Nigeria. Its economy is still fairly closed, a relic of its socialist past. Foreign banks are not allowed to get licences or buy stakes in local lenders. However, the government is seeking to liberalise the banking sector as it has done with many other parts of the economy in the past five years. When it does, there will be no shortage of African lenders trying to get a foothold in the country.

Target: Nigeria

Banks are, however, also targeting some of Africa’s more developed banking markets. Nigeria is a case in point. Local institutions largely dominate its financial industry, but foreign firms want to boost their presence. Ecobank last year bought Oceanic Bank, which overnight turned it from Nigeria’s 14th largest lender by assets to its fifth largest. Ecobank believes the takeover was necessary to fulfil its aim of being one of the top three banks by assets in any country it operates, something it would have struggled to achieve organically in Nigeria. “Scale is important,” says Mr Ekpe. “Being number 14 in Nigeria wasn't a very interesting proposition for us. With the Oceanic transaction, we're ranked in the top five. That gives us a fighting chance of getting to the top three.”

Attijariwafa Bank

Stepping up: Morocco's Attijariwafa Bank has expanded throughout Francophone west and central Africa, becoming Africa's biggest lender by assets outside of South Africa

South African lenders are also focusing more on Nigeria. Standard Bank, which operates through its subsidiary Stanbic IBTC, opened more than 30 branches there last year to try and win more retail banking business. Absa, FirstRand and Nedbank, none of which has a Nigerian licence, are thought to be considering acquisitions and may be among the bidders for three nationalised banks – Enterprise, Keystone and Mainstreet – that Abuja wants to privatise in the next two years.

Most African lenders have shied away from South Africa’s banking sector, which is the continent’s most developed. Few think they would be able to compete with local banks, the biggest of which have balance sheets that dwarf those of any other lenders in Africa. In 2008, Ecobank opted to form an alliance with Nedbank rather than obtain a South African licence. Through the partnership, clients of Nedbank, which only has a presence in southern Africa, can use Ecobank’s services elsewhere. Mr Ekpe says this enables his firm to do business with many South African companies, which are the largest investors in sub-Saharan Africa excluding the oil industry. “We don't have a keen interest in breaking into South Africa,” says Mr Ekpe. “There are all these big banks there and we don't think we have a fighting chance of taking them on. But through the Nedbank alliance, we get access to South African companies operating in sub-Saharan Africa.”

Minnows attraction

Banks’ strategies when it comes to expansion in Africa depend largely on whether they are targeting retail or corporate business. For those that focus on the former having a presence in several countries is increasingly important. This is especially the case as it becomes easier and more lucrative, through mobile and agency banking, to tap Africa’s mass population, even those with very low incomes. “Frankly, I think the bottom of the pyramid is bigger than the top of the pyramid in Africa,” says Mr Ekpe.

Mr Oduoza agrees, saying this was the reason UBA wanted to move into places such as Benin, Chad and Sierra Leone – all of which have small economies and populations. “Those countries definitely make a difference to the bank’s bottom line,” says Mr Oduoza.

For those primarily seeking corporate or investment banking opportunities, geographical expansion is less of a priority. Mr Newson cites Standard Bank being a bookrunner on Senegal’s $500m Eurobond in 2011 as proof that a bank does not have to be operating in a country to win mandates from its companies or government. “For us, it’s not necessarily a race to be represented in an increasing number of places,” he says. “It’s more about the logic of [expansion] and making the returns and supporting the strategies of clients.”

Despite the rise of continental banks, they remain cautious when it comes to foreign acquisitions, not wanting to stretch their balance sheets and trying to maintain as much cash as possible. Ecobank’s two large takeovers in 2011 – of Oceanic in Nigeria and Trust Bank of Ghana, which made it the biggest bank in that country – were paid for with shares. And part of the reason it has decided to slow its geographical expansion is to boost its profitability. Ecobank’s return on equity (ROE) has been fairly low by African standards in the past few years, which Mr Ekpe says is a result of the high cost of moving into new countries. The bank’s ROE was 12.6% in the first nine months of 2011. It is targeting a figure of 25% within three years.

Liberalisation and integration

Economic liberalisation across Africa has been crucial to banks moving beyond their borders. Almost all of sub-Saharan Africa’s banking sectors are open to foreign lenders, even if restrictions, including the need to have a local partner, are still widespread. Those, such as Ethiopia’s, that are completely shut stick out more than ever before.

Increased integration between countries has also helped, making it easier for banks to link their different foreign subsidiaries and sell the same services and products everywhere they operate. Standard Bank will run its branch in South Sudan, which is increasingly tying itself to the rest of east Africa, as a subsidiary of its Kenya arm. “One of the [attractive] things about east Africa is that it is increasingly operating as an economic bloc,” says Mr Newson.

Another consequence of growing political and trade ties between countries is that African banks are slowly crossing the divide between French- and English-speaking parts of the continent. Ecobank and UBA are perhaps the only two lenders that can claim to have done that on a large scale. Most other African lenders with foreign operations tend to operate in one or the other, as is the case with Attijariwafa, which only has a presence in Francophone countries. Similarly, Standard Bank’s 16 African subsidiaries outside South Africa are all in Anglophone countries, apart from those in Portuguese-speaking Angola and Mozambique, and French-speaking Democratic Republic of Congo. But Mr Ekpe, a Nigerian who speaks French as well as English, says banks are less wary of language barriers today. Mr Oduoza says that UBA regularly sends its employers on language courses and has Nigerians in charge of its branches in Benin and Côte d’Ivoire, both Francophone countries, and Mozambique.

Political stability

Political stability in Africa has largely increased alongside integration in recent years, thus making African banks more tempted to diversify from their home markets. Military coups in Maliand Guinea-Bissau in the last two months and a near civil-war in Côte d’Ivoire early in 2011 reminded investors that Africa still holds significant political risks. All Ivorian banks had to shut down during the height of the crisis. Nonetheless, such situations are often far from disastrous for banks. Ecobank Côte d’Ivoire was profitable last year, and while UBA’s Ivorian subsidiary lost money, it expects to be back in profit in 2012.

Many African bankers believe, moreover, that similar instances of unrest will become rarer. “We think more and more political stability will be achieved as we go forward,” says Mr Oduoza. “That’s not been a concern to us. We have seen a lot of countries have peaceful elections and successful transitions in the past decade.

“It’s a lot better today than 10 to 15 years ago, when so many African countries were in conflict.”

Banks from outside Africa tend to be far warier, however, and are thus much more cautious in their approach to the continent. As such, Mr Oduoza says home-grown lenders are far better placed than overseas ones to exploit its plentiful banking opportunities. “African banks have significant advantages because the risks on the continent aren’t well understood by non-Africans. We understand those risks a lot better.”

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