A MAN WAITS his turn to draw money from an ATM outside a Capitec Bank branch in Polokwane. Capitec is a fast-growing consumer lender in South Africa. SIPHIWE SIBEKO Reuters
Moody's Investor Services in its banking report, released yesterday, encouraged sub-Saharan African banks, including South Africa, to consolidate as the best way forward with most countries in the region undergoing tough economic times and “little scope for organic growth“.

South Africa has the highest private sector debt to gross domestic product at 148 percent, compared to other sub-Saharan African countries, indicating the level of activity of local banks in the private sector compared to its neighbours.

In the report released by Sean Marion, Moody’s managing director for financial institutions, South African banks were head above shoulders of its neighbours, with the closest being Kenya at 28 percent, Angola at 15 percent, Ghana at 14 percent, Tanzania at 13 percent, Nigeria at 11 percent and the Democratic Republic of Congo at 6 percent.

“This indicates that in these markets there are significant opportunities for both incumbents and new entrants, especially in the retail and micro, small and medium enterprises space,” the report said. It noted that with most countries in the region undergoing tough economic times, there was little scope for organic growth for banks as consumers were also under pressure, which highlighted the need for banks, particularly small ones, to consider consolidation or mergers as means of controlling costs.

“With economic growth muted in many of Africa's biggest banking markets, including South Africa, the potential for organic growth has declined. In such an environment, banks may seek to support their long-term profitability through acquisitions that can provide synergies such as reduced funding costs, improved operational efficiency and increased revenue,” it noted.

Moody’s cited the example of Capitec and Mercantile in South Africa, where Capitec, a fast-growing consumer lender, had bought a lender focused on small and mid-sized companies, to diversify its revenues streams.

Moody’s expects mergers and acquisitions among banks in sub-Saharan Africa to continue over the next two years, especially in granular banking systems where there was a clear tiering between a few large banks and a large group of smaller banks, for example in Tanzania and Kenya.

But Waldo du Plessis, equity analyst at Nitrogen Fund Managers, said he was uncertain about whether there would be consolidation of banks in the South African banking sector.

Du Plessis conceded that the entrance of digital banks such as Discovery, Tyme Bank and others had exerted additional pressure on the traditional banks to reconsider their fees and fees around transactional banking.

“While transaction and monthly fees may be reduced by digital banks, the consumer will still largely require the services of traditional banks - meaning consumers may need to have more than one banking option for the short to medium term.

“Admittedly, with the increased competition, traditional banks may need to sharpen their fees and abilities around transactional banking, which will serve to give the consumer a better banking experience,” he said.

According to Moody’s, rights issues had become less commonplace in recent years, following the slump in bank share prices and capital was becoming more scarce, especially for lower tier banks in a banking system.

“Bank valuations in sub-Saharan Africa are generally low, with prices less than book values for many banks, especially in Nigeria. Low valuations are a result of lacklustre growth, an uncertain political environment or other idiosyncratic challenges in the operating environment. This makes capital-rich banks attractive M&A partners for small banks where capital is constrained," it said.