African banks are among the world's most profitable

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.

For more details, do visit The Banker. Stories sit behind a pay-wall but you can sign up for a free trial and view five free articles a month.

Source: FMTilt

Banking Via a Cellphone and a Shack

KHAYELITSHA TOWNSHIP, South Africa—Mavis Nonkongozelo walks up to the Five Sisters convenience store here, then pulls a mobile phone from her bag and a few rands from her brassiere. She is ready to bank.

With a few taps on her cellphone, the 34-year old preschool teacher connects to a nascent mobile-banking network aimed at Africa's new consumers. The saleswoman accepts a 20 rand ($2.94) bill through a barred window and then taps back on her cellphone. Soon, the money is credited to a special no-fee account at Standard Bank, South Africa's largest.

Mobile Banking in South Africa

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Per-Anders Pettersson for The Wall Street Journal

Standard Bank employees sign up residents for cellphone banking accounts in Khayelitsha, the largest township in Cape Town, South Africa.

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From this corrugated-metal shack outside Cape Town, Standard is breaking from its main business of drawing customers to its branches and automatic teller machines in favor of a low-cost mobile-phone model that is based on proximity to people, like Ms. Nonkongozelo, who have never banked before. The shift says a lot about where banks are placing bets on Africa's economic growth as a new middle class emerges.

Since an official launch last year, Standard has opened more than 8,300 of these so-called "bank shops" at sites ranging from street-side convenience stores to raucous taverns. By the end of this year, Standard intends to have 10,000 set up around the country, mostly in South Africa's predominantly black townships, and has recruited local sales agents to find customers. The shops aim to tap what executives estimate is a pool of about 15 million people in South Africa, or about 30% of its population, who don't have active bank accounts but now have the means to spend and save.

Standard doesn't charge for this type of account, but the bank earns small commissions on cash transfers and those who stock up on mobile-phone credit. "It's not a golden pot of money," says Thoraya Pandy, one of the managers at Standard spearheading the mobile-banking program. "We need to bring in loads and loads of customers."

The dearth of banks in Africa has long constrained the flow of capital and economic growth. Most banks deemed the costs of expanding branch networks too high and the return from poorer customers too low. Only 20% of African families have bank accounts, according to the African Development Bank. And there are Nearly nine times as many people in developed countries borrowing money as in Africa, according to the World Bank.

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Even in South Africa, the continent's richest economy and the one with the heaviest concentration of banks, rural residents rely on taxi drivers to transfer cash between towns. The drivers typically take 10% of the total. But Africa's banking picture is changing, thanks to rising incomes and spreading use of mobile phones.

In a new report, the African Development Bank estimated that a consumer class—defined as those who have $2 to $10 a day to spend—has grown to about 300 million, a critical mass the size of similar middle classes in China and India.

At the same time, mobile-phone subscriptions in Africa have jumped from 90 million in 2005 to an estimated 333 million in 2010, according to the United Nations. In South Africa alone, cellphone-banking subscriptions—offered by all of the country's big four banks—grew 21% between July 2009 and June 2010, according to the most recent figures from the nation's central bank. As a result, financial firms are deploying mobile-phone services to reach once-unreachable customers.

South Africa's First National Bank is using mobile banking to expand into neighboring African countries. Standard is rolling out its mobile-bank-shop model in Nigeria, the continent's most populous country and one of the fastest-growing economies.

Meanwhile, Western Union Co. has teamed up with M-Pesa, a unit of Kenyan telecommunications firm Safaricom, to conduct money transfers with other parts of the world via text messages. M-Pesa now has 14 million customers, partly because it caters to people banks have neglected, according to Khalid Fellahi, a senior vice president at Western Union.

"Africa is the hot spot for these kinds of services," he says.

Still, managing and expanding a business that relies on high volume and thin profits isn't easy. A study released last month from the Monitor Group, a global consulting firm, identified 439 initiatives selling to African consumers living on less than $2 a day, but it said most of them were struggling to turn a profit. The study's lead author, Michael Kubzansky, said financial firms that found ways to reach poorer customers through retail outlets—and even churches, in the case of one insurance company— improved their odds for success.

But even banks that have aggressively courted Africa's lower-income consumers say mobile phones and retail outlets can't substitute, at least in the short term, for a bank counter. "When a client has a problem, they want to talk to someone," says Carl Fischer, head of marketing and corporate affairs of Capitec Bank Ltd., a South African firm that offers low-cost banking. "Changing that behavior is very tricky."

For Standard, the bank-shop rollout hasn't come without glitches. Some stores have closed abruptly after the proprietors found steady work or returned to their home villages.

But the experiment makes sense from a cost perspective, says Coenraad Jonker, one of the Standard bank executives behind the bank-shop program. ATMs have been targets for armed gangs. So instead of automatic-weapon-wielding guards transferring money, a palm-size machine at a bank shop can do the same with a cellphone signal.

"It used to be our central concern was security. Now it is accessibility," he says.

Standard conducts background checks of potential merchants before it sets them up as cash-transfer points. It screens for criminal records, looks into credit history and makes sure the area where they operate has cellphone coverage as well as electricity. Those selected are then taught how to use the mobile-banking system.

Standard doesn't pay merchants, but many see the benefit of being associated with one of South Africa's most-recognized brands. Five Sisters even painted its store the same color as the blue Standard Bank banner that hangs down the side of its shack.

On a recent Friday afternoon, a butcher who had been cleaving meat from goat carcasses next-door came to the window to make a deposit. She took a mobile phone and money from a smudged apron pocket and completed the transaction in minutes.

Next up: Ms. Nonkongozelo. She was never able to save money before. Now, the preschool teacher and single mother of three has 240 rand in her account. It helps, she adds, that walking to the nearby Five Sisters feels safer than a longer trudge to an ATM, where, in her high-crime neighborhood, she runs the risk of being mugged.

"Somebody may think I'm coming here to buy an egg," she says. "They don't know I'm here to withdraw money."

—Jackie Bischof in Johannesburg contributed to this articleSource: WSJ

Bain: African Banking set for Growth

Africa's $107 billion financial services industry will log impressive growth for the rest of the decade.

AFRICA’S $107 billion financial services industry will log impressive growth for the rest of the decade as more banks target the continent’s emerging middle class, a study by consultancy Bain & Company found.

Retail banking will see the biggest growth, and will account for nearly 40% of the continent’s banking revenue by 2020, helped by rapid adoption of mobile phone banking, Bain said in the study released ahead of next week’s Reuters Africa Investment Summit.

The opportunities and challenges presented by this bourgeoning African market will be addressed by executives, investors and politicians at the summit, being held March 7-10 in Johannesburg, Nairobi and Lagos.

Africa is home to a billion people, vast commodity wealth and rising disposable incomes – as well as poor infrastructure and often shoddy corporate governance – making the continent both a substantial opportunity and challenge for regional and global financial firms.

“The prospects for banking on the African continent are tremendous,” said Sim Tshabalala, deputy CEO of Standard Bank, Africa’s largest bank by assets, on Thursday.

“But to be able to compete in Africa you need people on the ground who know the terrain.”

Bain Partner Andrew Tymms said the continent’s financial services industry will continue to grow at a compound annual rate of 15% to 2020, outpacing gross domestic product growth.

“Retail banking will grow faster than corporate banking ... to make up 38% of banking revenue by 2020, bringing in the previously unbanked population and shifting the experienced to sophisticated products,” Tymms said.

The study, “Financial Services in Africa: A Decade of Opportunities” reckons financial firms will make up 19% of Africa’s gross domestic product by 2020, compared with 11% in 2009.

While big Western financial firms are keen to talk about trade between Africa and Asia, and their desire to win more Africa deals, the study is also a cautionary tale for overly optimistic bankers.

The biggest opportunities will be in the “mass retail segment”, serving customers with low incomes and the rural poor, many of whom did not previously have bank accounts.

That is not a high-margin business, nor an easy one for banks unfamiliar with local markets.

Nevertheless, regional lenders such as South Africa’s Standard and Togo-based pan-African lender Ecobank Transnational are rolling out services such as kiosk banking and community lending programmes to widen their reach.

But the biggest opportunity for retail banking may be via mobile phones. On a continent where Internet access is rare and millions live in rural areas, banks are increasingly turning to mobiles to reach customers.

Africa will add an additional 224m mobile users over the next five years, Bain’s Tymms believes, bringing mobile phones to 68% of the continent’s population.

That will help spread the adoption of banking services among the hundreds of millions of Africans currently without bank accounts.

The M-Pesa mobile money transfer service from Kenya’s Safaricom has helped drive customers to more sophisticated banking products.

“With increased adoption, customers demand broader banking services,” Tymms said in the study.

“M-Pesa launched its service in March 2007 and within 18 months, customers started to demand a broader range of products.”

Source: Reuters

Scrambled in Africa - The Continent's Banking Boom

A piece from The Economist:

"When ICBC, the world’s biggest bank by value, paid $5.5 billion for a 20% stake in Standard Bank in 2007, bankers around the world sat up and took notice. The deal with South Africa’s largest lender suggested Africa was no longer a curiosity but a potentially big source of profits. Some elements of the continent’s vaunted financial blooming have since wilted: Nigeria’s banks, which had briefly seduced Western investors, suffered a crisis (see article). But the main business logic—that Africa’s growing trade links with other emerging markets have raised its strategic importance in banking—is intact.

“Now everyone’s looking at Africa,” says Jacko Maree, Standard Bank’s boss. In January Bank of China, the country’s most international outfit, entered into a pact with Ecobank, which operates in 31 African countries. Chinese staff will drum up business from local branches. In August Brazil’s Bradesco and state-controlled Banco do Brasil announced a new African holding company with Banco Espirito Santo (BES), a Portuguese firm active in Angola. And HSBC is in talks to buy Nedbank, a South African bank. William Mills, who runs Citigroup in Africa, Europe and the Middle East, says the continent is becoming “more and more competitive”.

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A Door to Africa: Standard Bank Reaps the Benefits of Old Thinking

To understand where Standard Bank is today, says its boss, Jacko Maree, you have to go back to South Africa in early 1987, when Standard Chartered, its original parent, sold out completely. Most South African firms were not welcome in the rest of Africa, he says, and “it wasn’t entirely obvious” that Standard Bank’s priority should be there or indeed in emerging markets at all. When South Africa moved to majority rule in the 1990s, plenty of South African firms shifted their domicile to London and tried to diversify into developed markets, but Standard Bank stuck to its guns. Something of this determination is reflected in its choice to keep its headquarters in downtown Johannesburg even though most financial firms moved to Sandton, a safe but dull suburb where adventure is a bar named the Bull Run.

Mr Maree, at the cuddly end of the spectrum of South African bankers, has been pretty astute. He became chief executive in 1999 after a failed takeover bid for his bank, which he says “was a big kick up the backside”. That meant making more of its main activities abroad: an African presence built from branches bought from Australia’s ANZ in 1992; an investment-banking unit in London (originally put there because of foreign-exchange controls in South Africa); and small operations elsewhere, including Russia, where natural-resources banking, an obvious specialism for African firms, is important.

The result has been solid, with compound annual growth in profits per share of 8% since 2003 and only a small dent in earnings from the financial crisis. In 2009 almost a quarter of profits came from abroad, either the rest of Africa or indirectly linked to the continent—for example, currency trades executed in London.

South Africa has had two lending booms since the end of apartheid. The first was driven by the opening of the economy to foreign capital, the second by lending to the rising black elite over the past decade. As a market it is fairly mature. But Africa as a whole is set for a “tectonic shift”, says Goolam Ballim, Standard Bank’s chief economist. The proportion of Africa’s trade with China, Brazil, India and Russia rose from 5% in 1993 to 19% in 2008. Much of this, inevitably, is in resources, but governments are getting better at saving the proceeds of the good times for the less good ones, reckons Mr Ballim.

Old Africa hands who used to roll their eyes at this kind of analysis got a surprise in 2007 when ICBC, now the world’s largest bank, spent $5.5 billion on a 20% stake in Standard Bank in what was then China’s largest ever corporate foreign investment. Mr Maree and Mr Jiang, ICBC’s chairman, stitched the deal together after spending a day in Cape Town together. There is still a wow factor about it, says Mr Maree. Although the revenues generated from working with ICBC are modest—some $78m in 2009—co-operation is being stepped up. Standard Bank has 30 bankers in Beijing now, as well as a main board director in an office close to ICBC’s, who help clients of the Chinese bank interested in expanding in Africa.

For China’s banks the deal is a test case of whether “treading softly” overseas will work. The combination ticks every box, bringing a presence in key markets for Chinese clients and exposure to a sophisticated foreign firm with skills in areas like investment banking and foreign-currency funding. Yet ICBC has limited influence with Standard Bank, with only a couple of directors on its board. A full takeover looks unlikely. ICBC would need permission from Standard Bank’s board to buy more shares, and South Africa’s government would probably not approve.

For Standard Bank the merits of the deal are clear: more capital, and kudos, to build a bigger presence in Africa and elsewhere. It is mulling buying a bank in Nigeria (where the government is opening up more to foreigners). And it is eyeing India, which Mr Maree says is “the missing link”, given that Standard Bank already has an operation in Brazil and a stake in a Russian investment bank, Troika Dialog. With Standard Bank’s complex history and relatively isolated position, explains Mr Maree, “we’ve had to think in a much more out-of-the-box way.”

Link to The Economist article, part of a Special Report on Emerging Financial Institutions