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10 good years for banks in sub-Saharan Africa.

Summary: Banks in sub-Saharan Africa outside South Africa have been able to leverage their activities over much of the last 10 years. One of our judges gives his verdict on their performances.

Banks in sub-Sahara Africa ex South Africa (SSA ex SA) have done well over the past 10 years. Until 2014, they were able to leverage their activities to ris- ing commodity prices, government spending and consumer disposable incomes. Three factors are significant: the sustained profit growth of indig- enous banks, the fact the continent's banks are well capitalised and the scal- ing back of operations by subsidiaries of international banks.

As the table below reveals, the top 15 SSA ex SA banks increased their earnings in dollar terms sixfold over the 10 years to 2015, from less than $0.5bn to $2.8bn. In Nigeria, GTB, Zenith, UBA and Access Bank performed strongly and, in Kenya, Equity Bank, KCB and Co-op Bank have done well. Also commendable is the high level of profitability of most of the banks, with returns on equity above 20% and high levels of capital adequacy (15%--20%).

Investment in Africa is rewarding. GTB has been one of the best performing stocks, up 1,050% in dollar terms over 15 years. KCB Bank in Kenya is up 1,300% and MCB in Mauritius is up 900%.

The following factors have played an important role: the role of governments; electoral transparency; security; fiscal, monetary and exchange rate stability; low inflation and interest rates; corporate disclosure; indigenous private sector development; and the growing independence of central banks and improved bank supervision.

Exchange rate stability until 2014 was good, but since the 2014 oil and commodity price declines, SSA ex SA exchange rates have depreciated.

SSA ex SA governments have exited their shareholdings in many of the continent's banks. This has allowed private sector banks to develop in areas previously "reserved" for government. Thus, indigenous Nigerian, Kenyan, Tanzanian and Botswana banks have prospered and been listed on stock exchanges.

Two areas where SSA ex SA banks have not done so well is cost management and credit evaluation. Cost/income ratios are high, as are NPLs and bad debt charge-offs. This really came to light after 2014.

There is a strong link between cost/income ratios and credit quality. Balance sheet size is not the most important metric. It is a combination of adequate net interest margins, a low cost/income ratio and loan loss charge-offs. GTB in Nigeria and MCB in Mauritius score well on having low cost/income ratios.

Looking ahead, governments could assist dramatically by putting into place robust land registries so that banks can collateralise their loans, especially for residential mortgages.

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Publication:African Banker
Geographic Code:60SUB
Date:Aug 31, 2016
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