An excellent year for African banks.

2006 has been a good year for Africa with the economy growing at around 5% and the prices of export commodities including softs at virtually an all-time high. Consumer spending has shown a sharp spike. All this has been good news to banks which in some cases have seen dramatic increases both in assets, profits and the growth of robust capital markets will for the first time in Africa's history, be able to underwrite major development projects.

The old perceptions of African bansks as state-run inefficient loss-making institutions are no longer valid. On the contrary, Africa's banking sector has been transformed in recent years, with high capital-assets ratios reflecting sound financial strength and declining ratios of bad debts, known as non-performing loans (NPLs).

The continental average of bad debts to total loan books fell from 12.8% in 2001 to 8.5% in 2005, according to the International Monetary Fund (IMF) in its 2007 Global Financial Stability Report

Banks around the continent continued to record healthy pre-tax profits and increased earnings in 2006, which proved to be a good year for retail/corporate banking services and trade financing, particularly in key markets such as South Africa, Nigeria, Kenya and Egypt.

The buoyant performances of major financial institutions (see Top 100 African Banks listing) also reflect favourable economic fundamentals as the vast majority of African countries strengthen and diversify their economies. This trend has been underpinned by the commodity price boom; lower debt levels thanks to the Heavily Indebted Poor Countries Initiatives (HIPC) and Multilateral Debt Relief Initiatives (MDRI); currency stability; and prudent fiscal management.

Seven of the world's 20 fastest-growing economies today are in Africa and the continent's economic growth has averaged about 5% annually since 2001, outstripping global growth as a whole, according to a recent report from the Paris-based Organisation of Economic Cooperation and Development (OECD).

The OECD projects real GDP growth at more than 6% in 2007, the highest expansion in three decades. Roelof Home, fund manager for Investec's African fund, said: "It [Africa] is one of the fastest growing regions of the world and this period stands out in Africa's history. It is a momentous change."

Africa's powerhouse

Not surprisingly, South Africa, sub-Saharan Africa's financial hub, remains the mainstay of our Top 100 listing. The 'big-Five' South African giants (Standard Bank, ABSA, Nedbank, Investec and FirstRand), plus African Bank Ltd, a micro-credit lender, account for about 50% of the combined Top 100 Tier 1 capital (shareholders' funds and reserves) at $20.18bn and 60% of aggregate assets, at $368.63bn.

In terms of profitability (i.e. return on capital), African Bank leads the way with a stunning 59%, followed by FirstRand and Stanbank at 52% and 40%, respectively.

On 'Tier 1' and 'Tier 2' capital measurement (see Financial Glossary), African Bank is ranked as the world's 17th most heavily capitalised institution with a total Bank for International Settlements (BIS) capital ratio of 37.6%. This compares with an average of 13.2% for Africa's big five.

The Basel Capital Convergence Accord, operated by the national regulatory authorities in over 100 countries, requires commercial banks to hold a minimum ratio of total capital to risk-weighted assets of 8%, with shareholders' equity and reserves comprising half of the capital base.

The strongly capitalised and technically sophisticated South African banks have contributed towards upgrading the continent's financial infrastructure. Stanbic Africa (part of the Standard Bank Group) has extensive operations in over 15 sub-Saharan African countries, with an emphasis on corporate banking, and sub-Saharan Africa is a prime source of revenue for the Standard Bank group as a whole.

Outside South Africa, profitability ratios are also high by global standards, with the return on banking assets ranging from 4.5% in Ghana to 3.5% in Uganda and Namibia.

On the whole, African banks, especially those privately-owned, remain profitable. However, profit margins are dropping thanks to increased competition and the reduced scope for quick returns in Treasury bill markets. That, in turn, reflects lower interest rates in most countries, a trend that benefits the business community generally. Moreover, average NPL ratios are declining mainly due to rapid credit growth.

West Africa led by Nigeria provides the largest grouping of banks [29] in our listing against Southern Africa [22], North Africa [20] and East Africa [19].

The UK Banker's Top 1,000 World Banks ranking for 2007 included 35 African banks, up from 28 in 2006. Standard Bank Group led at number 116, followed by Nedbank (176), Investec (185), FirstRand Banking Group (193), Nigeria's Intercontinental Bank (355) and National Bank of Egypt (374). The Banker expects to add four new banks, notably Banque de Tunisie and Nigerian-based Platinum-Habib Bank, Access Bank and Wema Bank in the 2008 listing.

Emerging power

South Africa's dominance of the rankings it seems, is increasingly being challenged by Nigeria, which boasts the fastest growing financial industry in emerging-market regions. As Charles Soludo, the Central Bank of Nigeria (CBN) governor, explained: "We have 25 strong and reliable banks, without one single unsound or questionable bank. It is the soundest the sector has ever been."

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Four of the 25 Nigerian mega groups (namely Intercontinental Bank, Union Bank, Zenith International Bank and First Bank) are among the Top 20 African banks. The Banker magazine included 12 Nigerian banks in the 2007 listing (none in 2003).

The CBN reported: "Growth in assets, deposits, credit and profitability since 2004 has been astounding. Performance on capital adequacy and liquidity ratios has been good and the size of non-performing loan ratios has declined significantly."

Aggregate total assets surged 105% (in dollar terms) from N3,209bn ($25bn) in June 2004 to N6, 555bn ($51.21bn) by the end of September 2006, whilst Tier 1 capital was up a whopping 208% over the same period at N957bn ($7.4bn), compared with N327bn ($2.4bn). Hence, the capital-adequacy ratio stood at 14.4%--above the statutory 10% minimum.

Perhaps more importantly, the legacy of bad debts is abating as the ratio of NPLs to total credit fell to 9.5%, compared to nearly 20% in June 2004.

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Nigerian banks are poised for robust expansion and should account for much larger share of total capital and assets in our future surveys. Seven or more mega groups are now within striking distance of reaching a threshold of $1bn capitalisation. That will enable the banks to finance big-ticket projects like new power plants, telecommunications networks and upstream oil and gas business.

The revamped sector, however, still retains an 'oligarchic' structure with a concentration of power within a few banks. A report by Agusto & Co, the rating agency, shows that seven banks namely First Bank, Guaranty Trust Bank, Intercontinental Bank, Oceanic Bank, United Bank for Africa, Union Bank and Zenith Bank collectively control 70% of total assets, deposits and earnings. Additionally, 20 major corporate clients account for an average of 45% of total credits in the Nigerian economy.

Commenting on the report, Dr Uju Ogubunka, acting registrar and chief executive of the Chartered Institute of Bankers Nigeria (CIBN) explained: "The post-consolidation is still young and the situation will change in the next two or three years, when the industry will begin to witness a spreading out."

Regulatory reforms

Efforts are ongoing in a number of countries to improve the financial system; to implement a strong regulatory and supervisory framework; to foster a competitive environment; and to ensure the solvency of financial institutions.

In North Africa, Egypt and Morocco are addressing the vulnerabilities of their banking systems, while others have adopted privatisation programmes. Despite these efforts, financial sectors in such places as DRCongo, Chad, Lesotho, Mauritania, and Rwanda largely remain undeveloped and NPL levels persistently high.

The IMF cautioned that progress is sluggish and financial systems are exposed to risks from concentrated lending to state-owned enterprises and credit-risk in countries with poor absorptive capacity, weak credit management capabilities and a creditor-hostile environment. There are also regulatory gaps in consolidated and cross-border supervision, where banks are regionally active.

Nigeria-style mergers and acquisition and consolidation trends could spill over into East Africa's largest market, Kenya. The country is 'over-banked' with 45 banks, plus three non-bank financial institutions and a building society as of end-2006.

According to London-based Fitch Ratings, just 13 banks, led by Barclays Bank of Kenya, Kenya Commercial Bank and Standard Chartered Bank (Kenya), accounted for 87% and 81%, respectively, of earnings and total assets in 2006 financial year.

More recently, the government has raised the minimum capital requirement from Ksh250m ($3.7m) to Ksh1bn ($14.9bn), which all existing banks must meet within three years. This should compel mergers of small and medium sized banks.

CFC Bank (ranked 75 in our listing) is at advanced stages of merging with Stanbic Bank Kenya. The latter will hold 60% of the merged entity while CFC shareholders will own two-fifths. Fitch recommends consolidation because high cost/income ratios and margin pressures reflect the lack of economies of scale within most Kenyan banks.

Foreign participation

Seventeen of the Top 100 are owned by parent companies outside Africa, led by the UK's Barclays Bank and Standard Chartered, France's Societe Generale and Banco Commercial Portuguese.

Barclays, with its acquisition of Absa Group for $5.5bn in 2005, is now the largest foreign player in Africa. Foreign bankers in developing regions pursue a clearly defined strategy by servicing 'niche markets'--for example multinationals, local blue chips, the central government and wealthy individuals, including high-paid expatriates.

Their core activities are project (asset-based) financing and structured trade finance; syndications (mostly offshore); specialist corporate advisory services (cash management and custodian); global asset management for high-net-worth individuals and institutional clients such as pension funds; and the placement of private debt and equity.

Fierce competition between local and foreign players leads to greater financial product innovation and transfer of banking technology into the host countries, thereby benefiting the customers. The World Bank noted: "Foreign banks will help improve the quality, pricing and availability of financial services, both directly as providers of such enhanced services and indirectly through competition with domestic banks which will encourage the latter to introduce similar improvements."