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AfricaMarch 9 2020

Sub-Saharan Africa's two-pronged M&A trend

M&A activity has been a prominent feature of sub-Saharan Africa's banking sector in recent years, with the reason behind these moves tending to be one of crisis or expansion. John Everington reports.
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Sahel

Consolidation has been a key trend within banking in sub-Saharan Africa for several years now, with the steady pipeline of mergers and acquisitions (M&As) across the continent showing few signs of petering out.

According to data compiled by Mergermarket, the number of M&A deals in the banking space in the region increased to eight during 2019, double the number for the previous year, albeit slightly lower than the nine deals registered in 2017.

Expansion or survival?

The sustained M&A activity across sub-Saharan Africa stems from two opposing trends; on the one hand, the continent is home to some of the world’s fastest growing economies, often with large unbanked populations. Such markets continue to provide significant opportunities for non-organic growth for banking groups, most of them situated within the continent itself, looking for geographic expansion.

Most of the deals struck on the continent since mid-2018, however, have been motivated less by growth opportunities than by a need to partner to survive. As profitability and growth across several countries concentrates in just a handful of lenders, smaller institutions are increasingly struggling to survive in an ever more competitive and cost-conscious operating environment.

Such pressures are frequently accompanied by increasing demands from central banks, which has been tightening regulatory requirements for lenders in a bid to strengthen local financial service sectors, often with the explicit aim of forcing smaller, less secure banks out of business.

"The number of small banks [in sub-Saharan Africa] is declining, while the largest are growing steadily, [which means they have] stronger credit profiles," said Akin Majekodunmi, vice-president and senior credit officer at Moody's.

"We expect this trend to continue as regulators push for banking system consolidation, and subdued economic growth across much of the region causes banks to seek growth through M&A."

Ghana's high standards

Nowhere has this trend of smaller bank exits been more pronounced on the continent than in Ghana, with two bank mergers being worked through during 2019.

Such deals form part of a complete overhaul of the financial sector by the central bank, Bank of Ghana (BoG), from 2017 onwards, after several years of loose supervision drove non-performing loans (NPLs) to worryingly high levels. In February 2020, the government announced it was filing charges against the country’s former finance minister, the former deputy governor of the central bank and several other high-profile banking executives. The charges range from money laundering to defrauding depositors, according to Bloomberg.

Particularly significant was the BoG’s decision to oblige all universal banks to meet a minimum capital requirement of 400m cedis ($75m) by December 2018, more than treble the previous level.

It perhaps should come as little surprise that the announcement of the two merger deals involving Ghanaian lenders – which saw First National Bank acquire GHL and Atlantic Bank agree to buy Energy Commercial Bank Ghana – came just weeks before the December 31 deadline. In early January 2020, the BoG approved the merger of OmniBank with Sahel Sahara Bank, which had been announced in mid-2018.

While such deals effectively removed three lenders from the market, a further eight have exited since the BoG began tightening controls in 2017, either going out of business or having their licences revoked by the central bank. Such consolidation has already born fruit, with NPLs falling to 13.9% in December 2019, down from a peak of 23.5% in April 2018.

While such an improvement is credit-positive for the country, asset risks remain the key credit challenge for the banks, according to Christos Theofilou, a vice-president and banking analyst at Moody’s.

And while the number of banks in Ghana has reduced by 11, the country’s population of about 30 million is still served by 23 banks, with five institutions accounting for more than half of the sector's total operating assets. Such figures suggest further consolidation may be in the offing.

Kenya consolidation

A similar trend of ‘crisis’ mergers has also been in evidence in Kenya, the continent’s most active market in terms of deals during 2019 according to Mergermarket data (see story on page 82). Of the four acquisitions listed by Mergermarket within Kenya during the year, two fell into the crisis category. Both acquisitions were made by market leader KCB, which completed the acquisition of troubled state-owned lender National Bank of Kenya (NBK) in September, and also purchased assets worth about Ks5bn ($49m) from defunct lender Imperial Bank, which was placed into administration in 2015.

Direct comparisons between Ghana and Kenya deals are problematic, however, according to John Ashbourne, senior emerging markets economist at Capital Economics.

“In Ghana this has been a government-led process which took place in the context of policy-makers’ efforts to clean up the banking sector, whereas in Kenya things have been more self-directed,” he says.

Although the issues facing Ghana’s financial sector are significantly more deep-rooted than those in Kenya, asset quality remains a concern for lenders in the east African country. The NPL ratio among listed banks stood at 9.8% in the third quarter of 2019, higher than the five-year average of 8.2%, according to a report from Nairobi-based Cytonn Investments.

And despite the exit from the market of NBK and the merger of Commercial Bank of Africa (CBA) and NIC Group in 2019, the country remains overbanked, with more than 35 lenders serving a population of just over 50 million.

“Problem loans will remain high given the accumulation of payment arrears, and problems at select large corporates,” said Moody’s in its forecast for Kenyan banks for 2020. “Smaller banks will remain more challenged, facilitating further consolidation.”

Positive mergers

Yet merger activity in Kenya – and indeed the whole of sub-Saharan Africa – was not confined to the ‘crisis’ category during 2019, with lenders joining forces to improve scale in competitive markets. In September. the Central Bank of Kenya gave its blessing to the merger of CBA and NIC Group, creating the country’s second largest lender by assets.

The continent’s other merger within this category of building scale came in South Africa, with the acquisition of Mercantile Bank by Capitec Bank, which was formally approved in October.

Mercantile Bank was put up for sale by its Portugese owner Caixa Geral de Depósitos as part of the latter’s divestiture of its non-core overseas portfolio, following a recapitalisation programme introduced in the wake of the global financial crisis of 2008.

Capitec – which was shortlisted alongside Nedbank and PIC as potential buyers of the bank – plans to use Mercantile’s traditional banking business to complement its own strength within the retail market, retaining the Mercantile brand in the short term.

Continental expansion

In addition to domestic deal making, sub-Saharan Africa’s largest players continued to spread their wings in a bid to build up their regional footprints, with central and eastern Africa the main targets for 2019.

Less than a year after becoming Nigeria’s biggest lender with the acquisition of Diamond Bank, Access Bank expanded its footprint in east Africa with the purchase of a majority stake in Kenyan small-tier lender Transnational Bank. The deal, completed in January 2020 for an undisclosed sum, proves not only Access Bank’s international ambitions (it has operations in seven African countries and the UK), but the growth potential of the Kenyan market.

Meanwhile, Equity Bank, Kenya’s second largest lender after KCB, announced plans in September to acquire a 72% stake in Banque Commercial du Congo, the second largest lender in the Democratic Republic of Congo, for $140m. The acquisition complements Equity’s existing small and medium-sized enterprise and retail business in the country, allowing it to compete for a greater slice in the corporate market.

The large number of M&A deals signed in 2019 reflects both the strong growth opportunities available within Africa’s banking sector, as well as the risk factors associated with a number of the continent’s largest markets. The consolidation trend witnessed in markets such as Ghana and Kenya is only likely to increase across the continent in coming years, as banks seek to achieve a perfect balance between growth and sustainability.

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John Everington is the Middle East and Africa editor. Prior to joining The Banker, John was the deputy business editor of The National in the UAE, and has also worked for Dealreporter, Arab News and The Telegraph. He has also covered the telecom sector in Africa and the Middle East, living and working in Qatar and the UK. John has a BA in Arabic and History and an MA in Middle Eastern Studies from the School of Oriental and African Studies (SOAS) in London.
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