Banks eye future profits in Africa

A trader changes dollars for naira at a currency exchange store in Lagos, Nigeria. Photo: Reuters

A trader changes dollars for naira at a currency exchange store in Lagos, Nigeria. Photo: Reuters

Published Mar 8, 2017

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Johannesburg - South African banks would continue to look at Africa to drive future profits despite facing a combination of regulatory and lending constraints in the continent in the year ended December.

Professional services firm EY on Tuesday said African lending last year contracted due to a variety of reasons that prevailed on the continent.

EY Africa leader Andy Bates said in Kenya interest caps introduced by the government restricted lending and in Nigeria the exposure to oil companies and a shrinking economy had stymied the potential earnings of banks in the period.

“Africa also saw a lower contribution to earnings, driven by weak conditions in West Africa and interest rate caps in Kenya,” Bates said.

Last year, the Kenyan government reintroduced interest rate limits it had abandoned in 1991. The amended Banking Act requires lenders to peg credit costs at 400 basis points above benchmark central bank rate.

In addition, the act set a minimum rate for bank deposits at 70 percent of the central bank’s benchmark rate.

The International Monetary Fund warned early this year that the retention of the rate caps could cut the country’s economic growth rate by as much as two percentage points in 2016 and next year.

Bates said the six largest banks recorded a 6.6percent increase in headline earnings for the year, while non-interest revenue grew moderately by 2.5 percent. But he said the banks' asset growth had turned negative for the first time in more than 20 years.

Africa Knowledge leader at EY, Graham Thompson, said despite the continent having faced severe headwinds last year, its growth potential remained a big attraction for local banks. “If you look at the region like East Africa, for example, it has held a growth of above 5percent for the past five years. Nigeria and Angola are both starting to recover on the back of resurgent commodity prices. That talks to the strength of having a diversified portfolio for the banks,” Thompson said.

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All three banks that have reported on their final results this year recorded an uptick trend in headline earnings from the rest of their African operations.

In its results commentary for the year ended December, Barclays Africa said its operations saw a 17percent increase in headline earnings which exceeded South Africa’s 2 percent.

Standard Bank said Africa headline earnings increased by 9 percent to R14 billion for the year ended December, while Nedbank’s rest of Africa headline earnings declined by 3 percent. Nedbank's underperformance in Africa was significantly impacted by the bad-debt

charges of $357 million (R4.64 billion) and a $199 million loss in the fourth quarter of 2015 of its associate Ecobank. Nedbank wrote down $293 million on the value of its 20 percent stake in sub-Saharan lender. Capitec, First Rand and Investec have yet to release their results for the year.

Earlier this year, global ratings agency Standard & Poor’s (S&P) said the outlook for the country’s big banks remained negative, but that pressure was easing. However, S&P said the rest of Africa operations would represent a drain on some banking group’s profitability over the next 12 months.

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