Here's why African banking achievements should be cause for global cheer: they are among the world’s most profitable in the frontier market universe.
Yes, the region's financial industry is minuscule. The continent's institutions accounted for 0.72 per cent of total assets and 1.01 per cent of total Tier 1 capital from the overall Top 1000 World Banks ranking, with both figures fractionally down from last year, according to the The Banker's review of the Top 1000 World Banks for 2011. First up, check the regional ranking, which is unsurprisingly led by South African banks:
The modest showing of African banks in global rankings should be a source of disappointment considering the region holds 15 per cent of the world's population and vast natural resources.
But to get granular detail on African banks' relative performance against its peers, The Banker has fleshed out a list of contenders to the Top 1000, which comprises the biggest 267 banks by Tier 1 capital that did not make it into the main list.
Referring to African banks, here's more from The Banker (Emphasis FT Tilt's):
They are still small, with only two featuring in the top 50. But they have punched far above their weight when it comes to profitability. Of the top 10 lenders measured by return on capital (ROC), five are African, while seven of the 10 with the highest returns on assets (ROAs) are too.
Overall, African banks – there are 17 in this survey, compared with 40 in the Top 1000 – made average ROAs of 3.65% (on an unweighted basis) and ROCs of 35%. These levels are far higher than the next most profitable region, South America, where banks made returns of 1.95% on their assets and 19.6% on their capital.
Okay, on Tier 1 measures -- yardstick for common stock, preferred stock and hybrid debt-equity instruments etc. -- African banks resolutely disappoint. But here's the money shot:
Astonishingly, despite accounting for just 5% of the overall Tier 1 capital in the rankings of $38bn, African banks made 38% of the total profits of $1.66bn (a figure that was net of losses of $727m among the 103 North American institutions listed and $150m among the central and eastern European ones).
Perhaps because of pent-up demand and a relative lack of competition the big business of small loans has proven a lucrative trade in recent years then.
Furthermore, these African banks have proven high returning institutions even with strong levels of capitalisation and they boast competitive cost-to-income ratios that many EM banks can only dream of:
African banks have been able to achieve high levels of profitability without taking substantial risks. Their capital adequacy ratios (CARs) average 11.3%, only slightly below those of banks in South America, which have the highest CARs of 12.3%. Also, the data counter arguments that banking in Africa, which often involves building branches in remote, sparsely populated areas, is prohibitively expensive and necessarily inefficient. African lenders have the lowest average cost-to-income ratios (49%) in the survey. Those in the Asia-Pacific and South America have respective ratios of 57% and 64%.
Of course, foreign investors might snub investments in these niche banks given the illiquidity of their respective stocks. But the figures should illustrate that the narrative of Africa's 'unrealised potential' that perennially underscores investment pitches in African banking stocks and debt products is just one side of the story then.
As these figures highlight, investors in African banks can generate strong profits today while banking on tomorrow's growth prospects -- from a currently low base.
And once the Nigerian banking sector -- the only large African banking sector that had a domestically-driven credit crunch -- gets its act together, the number of mainstream investable opportunities for foreign investors will surely grow.
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