Sub-Saharan Africa’s banking markets are buzzing with merger and acquisition (M&A) activity as a combination of regulatory changes and attractive business opportunities stirs up the region’s financial services landscape.
From Ghana to Angola to Kenya, a number of the continent’s biggest banking markets are being shaken up. The consequences could be positive: larger banks are emerging with the clout to support big-ticket projects and improve efforts to foster financial inclusion. Weaker institutions are disappearing from the map, leaving behind stronger and more resilient banking systems better able to weather the uncertainties of the future.
“Consolidation has been quite a key theme for the African banking system for a while now,” says Akintunde Majekodunmi, sub-Saharan Africa banking analyst with ratings agency Moody’s. “Nigeria led the way in the mid-2000s after its central bank raised minimum capital requirements. There was a degree of regulatory-based consolidation in Ghana and Angola in 2018, while deals in Kenya and Nigeria were led by the market.”
Ghanaian restructuring
This distinction between regulatory and market forces is an important one to make because it defines many of the major M&A deals taking place across the region today. In Ghana, for example, the central bank issued a directive in September 2017 that raised the minimum capital requirements for all universal banks from 120m cedis ($22.8m) to 400m cedis, setting a deadline for the end of December 2018. The result has been swift consolidation.
In August 2018, the Bank of Ghana announced that it had dissolved five smaller lenders (Beige Bank, uniBank, Sovereign Bank, Construction Bank and Royal Bank) and merged their businesses to form the Consolidated Bank of Ghana. This move came as concerns grew over the health of the banks’ individual liquidity positions. The Consolidated Bank of Ghana was granted a universal banking licence and assumed ownership of the assets and liabilities of the five institutions.
The central bank’s intervention came almost a year after it revoked the licences of two other local lenders, UT Bank and Capital Bank, and placed them under the control of GCB Bank, the country’s largest lender by total assets, for failing to meet capital and liquidity requirements.
“A number of Ghanaian banks couldn’t raise the capital required by the central bank and had their licences revoked, or had to consolidate,” says Mr Majekodunmi. “As a result, the number of banks in Ghana has fallen to 23 from more than 30, an example of the regulator driving consolidation in the market.”
A similar dynamic is at play in Angola’s banking sector. With the country’s top lenders, which include Banco Angolano de Investimentos, Banco Economico, Banco de Fomento Angola, Banco BIC Angola and Banco de Poupanca e Credito, controlling about 80% of the banking market according to the Financial Times, smaller banks are left with minimal opportunities for growth. Consequently, the central bank raised the sector’s capital requirements in December 2018 and revoked the licences of two lenders, Banco Mais and Banco Postal, in January 2019 for failing to meet these standards.
Kenyans get creative
Elsewhere on the continent, consolidation is being driven a number of market forces. Kenya, where a number of domestic M&As have occurred in tandem with buy-ins from regional lenders, is a case in point. In January 2019, two Kenyan banks, Commercial Bank of Africa (CBA) and NIC Group (which includes NIC Bank, a subsidiary) announced that an agreement had been reached pertaining to a share-swap ratio for their planned merger. The proposed deal will be a game-changer, creating the country’s third largest lender with about $4bn in assets. The merged bank will have a market share of about 9.4%, according to research from Moody’s.
“The deal is quite substantial in the context of Kenya’s banking sector as it involves two of the country’s leading medium-sized lenders,” says Eric Masau, head of research at Standard Investment Bank in Nairobi.
Under the terms of the proposed merger, NIC Group will be the holding company for the merged entity and will continue to be listed on the Nairobi Stock Exchange. Though CBA is a privately held institution, its 34 shareholders will assume a 53% ownership in NIC Group, with NIC’s existing shareholders taking the remaining 47% share, according to Moody’s.
“The reason for the merger is to create positive synergies,” says Mr Majekodunmi. “NIC Bank specialises in asset financing and corporate lending, whereas CBA is predominantly a retail bank, so they complement each other well.”
Meanwhile, Kenya is offering attractive acquisition opportunities for banks from across the region. In the first half of 2017, SBM Group, the second largest financial services group in Mauritius, completed the acquisition of Fidelity Bank of Kenya, one of the country’s smallest lenders. This was followed by the 2018 acquisition of the assets and specific liabilities of Chase Bank, another Kenyan lender that was placed into receivership in 2016. These moves have positioned SBM well with respect to its wider ambitions to connect markets in Asia and Africa.
“[SBM Group’s acquisitions in Kenya] have given us a [footprint of] 60 branches, 700 staff and 200,000 customers across the country,” says Andrew Bainbridge, chief executive of SBM Group. “That’s really exciting because it’s a platform that we can build on and can grow from. Kenya has a vibrant business community and educated workforce. It’s the logical entry point for east Africa.”
Building strength
Cumulatively, all of this bodes well for sub-Saharan Africa’s banking markets. With many of the region’s jurisdictions somewhat overbanked (Angola and Ghana being good examples), there is significant scope for the optimisation of banking systems across the continent. The experience of Nigeria is instructive. The weaknesses that were appearing in the country’s banking sector in the mid-2000s were dealt with decisively, leading to a stronger and more resilient suite of banks that were relatively better able absorb the shocks of the oil price fall a decade later.
Indeed, this trend has added benefits for regulators across the region. “Consolidation is favourable from a regulatory perspective because it means the central bank can focus on the oversight of a smaller number of strong institutions. It takes a lot of regulatory resources to oversee a large number of banks,” says Mr Majekodunmi.
While the past 18 months have seen a flurry of activity from Nigeria to Kenya, the outlook for further deals is less certain. In markets where regulators are driving the agenda by raising minimum capital requirements, among other measures, there remains scope for further M&A activity over the next 12 months. This is particularly true among smaller banks.
But beyond this, the likelihood of large market-driven transactions, of the sort characterised by the tie-up between NIC Bank and CBA in Kenya, could diminish as most markets still have ample growth opportunities. “Despite this trend of consolidation, there is still space for banks to grow organically, given that in most sub-Saharan African markets banks are small relative to the size of the economies in which they operate,” says Mr Majekodunmi.
