The drive to expand into Africa had to be carefully calculated by South African banks because while it presented a good growth story, it could ruin their credit profiles if they expanded too aggressively, a report by rating agency Fitch suggested on Friday.
Fitch said expanding in Africa could enhance South African banks’ earnings prospects in the longer term as developing a pan-African franchise would compensate for the subdued credit growth locally.
South Africa’s saturated lending market and weakened growth prospects had sent local banks searching for markets to grow in Africa and the global financial crisis meant that the search was mostly limited to Africa rather than overseas.
Standard Bank already has operations in 16 African countries and Absa has exposure in 12. Absa shareholders have approved the bank’s further acquisition of eight operations in Africa owned by its UK majority shareholder, Barclays.
But Fitch said a significant increase in exposures to other African markets created a risk of asset-quality problems and costs.
“The operating environment is often more challenging than in South Africa; and the risks for retail banking can be magnified due to a lack of – or nascent – credit bureaux,” the agency said.
Jean Pierre Verster, an analyst at 36One Asset Management, said that generally in African markets outside South Africa, the legal framework was not as strong in protecting creditors. In many instances banks were not able to offer home loans because occupants could not own properties but were given 99-year lease terms. This meant that the only option was to participate in unsecured lending, which always had a higher risk of bad debt losses.
“If you can’t lend against immovable assets, you don’t have security so you run a higher risk of not getting your money back,” Verster said.
On how much aggression was too much when banks expanded, Verster said there was no objective measure to know the right level of aggression.
Standard Bank’s major risk, for instance, was over-investing while it expanded its branch network. Absa, on the other hand, had the risk of overpaying as it was purchasing existing branch networks from Barclays, he said.
Fitch anticipated that those major banks with relatively lower exposure in markets outside South Africa – namely Nedbank and FirstRand – were most likely to seek further acquisition opportunities.
Nedbank’s alliance with the pan-African banking group, Ecobank, gave it access to 35 countries in Africa, but the bank also had an option to acquire a 20 percent stake in Togo-based Ecobank.
FirstRand was also close to completing its purchase of a 75 percent stake in Merchant Bank Ghana and was actively looking to acquire a small bank in that country.
Verster said that FirstRand was taking a measured approach and was the most cautious of all the big four banks when it came to expanding on the continent.
“Their approach needs less capital as well.
“But FirstRand is also focusing on India so they will be more cautious in Africa because they are expanding on two continents,” he added.