African banks grasp the global retreat

The timing of Barclays’ sale of its Africa businesses, announced in March 2016, was unfortunate to say the least. A year ago, the continent was suffering its sharpest economic slowdown since 2008 as commodity prices slumped and borrowing costs spiked in anticipation of higher US interest rates.

But the execution of that sale – after a stockmarket sell-down took the group below a majority in Barclays Africa in late May – comes just as many in the region’s financial community say the continent has turned a corner. An agreement by Opec and Russia to cut oil production in late 2016 was a boon for oil exporters. Credit costs for African frontier markets also slid in the 12 months to mid-2017, according to the IMF.

Since Barclays chief executive Jes Staley’s announcement, key bank stocks have rebounded in South Africa and elsewhere on the continent, with the exception of Kenya, where the government introduced rate caps in the middle of last year. In Nigeria, asset quality is still under pressure, making capital raisings likely. 

The banks there trade at steep discounts to book value. But the central bank’s new currency window this spring has spurred international investors to return, including to banking stocks.

Meanwhile, Africa’s regional lenders – particularly from the bigger economies of Morocco, Nigeria, and South Africa – are expanding by buying the international banks’ former businesses and growing organically. And rather than focusing on multinationals and their richest employees, these banks say they are surpassing fickle European lenders with business models better suited to the needs of African businesses and the continent’s previously neglected consumers.

British and global regulatory trends that have little to do with Africa are behind the justification for withdrawals by firms such as Barclays and Anglo-South African insurer Old Mutual, which plans to reduce its majority stake in Nedbank.

But it would not be the first time a developed-market bank cited barriers to outright ownership when bailing out of an emerging market at a time of subdued commodities prices and political instability. Citi’s exit from Saudi Arabia in the early 2000s is a case in point.

When Staley announced the decision to exit Africa just 11 years after Barclays bought Absa, the South African Reserve Bank was faced with the reversal of one of the largest-ever foreign direct investments in the country. Within days, Old Mutual said it would sell down its 55% stake in Nedbank, the country’s fourth-biggest lender, to a minority.

Deputy governor Kuben Naidoo tells Euromoney Africa this is why the central bank insisted that Barclays must have a detailed plan in place for the separation before selling: “We were worried about casting a negative light on the South African banking sector.”

Seen from abroad, it appeared that the international banks’ fears might be realized when Fitch and Standard & Poor’s cut their South Africa sovereign rating to junk in April this year, following the sacking of finance minister Pravin Gordhan. For Barclays, after all, South Africa constituted by far the biggest part of its African business, thanks to the Absa acquisition. 

A sovereign downgrade to junk would have further hurt its returns by forcing higher risk weightings, according to Jaap Meijer, head of equity research at Arqaam Capital, based in Dubai. 

Yet Francesco Ceccato, head of corporate development at Barclays PLC in London, insists the sale reflects much wider changes in attitudes to the regulation of international banks, and should be seen in the context of departures from other markets, including Spain and Italy. 

“There is growth in Africa; I believe that deeply,” he says, “but I think we’ve moved to a place where regulation doesn’t underpin the ability to get growth from many different markets.”

As Ceccato’s comments might suggest, Barclays is far from the only bank revising its international universal banking strategy in Africa, and elsewhere.

This has been a growing trend since the 2008 crash, as even Citi and HSBC have pulled back from global retail. Société Générale, BNP Paribas and, most recently, Citi have all sold Egyptian businesses since the Arab Spring.

Some banks toyed with the idea of boosting their African franchises at the beginning of this decade. HSBC staged an abortive bid for Nedbank in 2010. Since then, the international bank exodus has accelerated as the collapse of commodity prices coincided with ever-tougher global compliance requirements, and a certain hostility to such international forays among bank shareholders.

Now bankers say there has been a wider international withdrawal of liquidity and a retreat from activities such as trade finance. Whether in Europe or the US, regulations such as Basle III and tighter anti-money laundering rules have pushed lenders to cut risk, particularly in the smaller, riskier markets.

The view, at least, is that companies and institutions in Africa are less transparent and have weaker governance than more developed markets.

That means more cost to satisfy know-your-client and other compliance rules, and in a smaller or less developed economy the loan size will tend to be smaller, too. 

“Regulatory structures are pulling banks back to their core businesses,” says Charles Enoch, a former IMF official and visiting academic at Oxford University. “It makes it less profitable for them to be in Africa.”

By comparison with Barclays, Rabobank’s pooling of its minority African bank stakes with FMO and Norfund in the Arise venture this year shows a commitment to the continent. Yet this too is a method of dealing with the increased regulatory constraints of holding such investments, if only by hiving them off into a purely Africa-focused joint venture. 

“We didn’t want to take the easy option of risk avoidance and just exit,” Berry Marttin, Rabo’s board member responsible for the rural and international division, tells Euromoney.

Stefan Nalletamby, director in the financial sector development department of the African Development Bank, says multilateral lenders such as the AfDB have had to step in to provide risk cover and credit lines for trade finance transactions as other European lenders have walked away.

Even if the over-optimistic expansion by some pan-African banks means that they are now struggling because of the commodities crash, the departure of a group such as Barclays could be a godsend for truly regional lenders, and not just because of the good acquisition opportunities.

“The focus by the global banks on managing risk-weighted asset growth leads to significant opportunities for African banks to manage credit in their own markets,” says Jean Lafontaine, a financial institutions investment banker covering Africa at Citi.

One home-grown African lender gaining confidence, despite the downturn and international withdrawal, is GTBank, Nigeria’s biggest bank by market capitalization. 

At a different time – and who knows, maybe in the future? – an acquisition of Barclays Africa itself, including South Africa, could have been an attractive proposition, chief executive Segun Agbaje tells Euromoney Africa. 

Barclays was initially open to a strategic acquirer, after all, although until this spring Nigeria was under stricter currency controls than it is now.

Agbaje is not waiting for a single transformative deal like that. He says the proportion of his balance sheet and profit outside Nigeria, 14% and 10% respectively now, could double by the end of the decade, largely without acquisitions. 

In some of the smaller markets such as Gambia, Liberia and Sierra Leone, the bank has built up a share of more than 5%: now it has set its sights on resource-rich countries with populations of 20 million or more, including Ghana, Kenya, and Uganda. 

It has acquired a new licence in Tanzania this year, and sees Mozambique as a possible entry point for southern Africa.

Within five years, Agbaje thinks the business could be sufficiently diversified – more than 30% outside Nigeria – for the ratings agencies to award it a higher rating than the sovereign. The aim, he says, is to create “a one-stop shop” for investors seeking quality exposure to the African financial sector via a bank with operations in 12 to 15 countries, although he emphasises each market must stand on its own. 

“We are on the way to being a pan-African bank,” he says.

Morocco, too, is home to rapidly growing regional banks. This year, Attijariwafa Bank, North Africa’s biggest bank, is venturing outside francophone Africa with the acquisition of Barclays Egypt (advised by UBS) and has studied acquisition targets in Ghana and Nigeria. 

Formed from a big domestic merger in 2005, Attijariwafa increased its international presence in 2008 when it bought Crédit Agricole’s retail network in francophone west Africa.

“After more than 10 years of successful acquisitions and integrations, to avoid being spread too thinly, our board encouraged us to look at larger acquisitions, larger economies,” says Ismail Douiri, co-chief executive. “That led us to countries where French is not the business language.”

The other big Moroccan banks, BCP and especially BMCE, have growing pan-African businesses, which were previously focused on francophone west Africa. BCP started negotiations to acquire a stake in Bank of Kigali this summer. Attijariwafa, similarly, sees a potential acquisition of Cogebanque in Rwanda as a way in to east Africa.

The number of successful domestic African banks expanding and looking beyond their borders continues to proliferate. The board of Egypt’s biggest private-sector lender, Commercial International Bank – which acquired Citi’s Egyptian retail business in 2015 – approved a new Africa-focused international expansion plan this year. State Bank of Mauritius is following the earlier African expansion of Mauritius Commercial Bank with plans for a pan-African network, starting in 2017 with the acquisition of a small and troubled Kenyan lender, Fidelity Commercial Bank.

In South Africa, the Johannesburg-listed entity encompassing Absa and 11 other former Barclays’ businesses has plenty to do with the separation from Barclays for the moment, according to its chief executive Maria Ramos. In the long term, the separation could give her group more freedom to invest. 

“We’re excited about being standalone; we’re excited about being able to build a more pan-African future,” Ramos tells Euromoney Africa. 

All the South Africa banks, hers included, are keen to take advantage of better economic and banking growth north of the border. 

That diversification, and the support it gives to other South African businesses, is something the South African Reserve Bank supports, says Naidoo.

Standard Bank opened a bank in Côte d’Ivoire this summer as a way in to the francophone west Africa monetary union, bringing its African network to about 20 countries.

“This past year has been pretty challenging for Africa, with a lot of volatility in our key markets,” says Sola David-Borha, the Nigerian chief executive for Standard Bank’s rest-of-Africa business. “As Africa becomes more challenging, you’ve seen international banks pull back and lose interest.

Standard Bank has done the opposite – continued its focus on Africa,” she adds. “We’re here in Africa and focused on Africa and we continue to drive Africa’s growth.”

Two newer, Africa-focused banking platforms, Atlas Mara and Arise, have been among the most active acquirers of African banks this year, again showing how separation from international groups can be an opportunity rather than a constraint, even when neither are domiciled in Africa. 

In February, Arise took a 28% stake in Ghana’s third-biggest lender, CAL Bank, before supporting Uganda’s DFCU in its acquisition of parts of Crane Bank, one of Uganda’s biggest banks.

After raising $200 million from the sale of new shares and convertible bonds this summer, London-listed Atlas Mara is increasing its stake in Union Bank of Nigeria and has Ghana in its sights. The withdrawal of international banks from Africa is an opportunity for it too, and is part of the rationale for investing more this year in a Dubai-based markets and treasury business under Mike Christelis to target offshore clients investing in Africa.

“The big banks are moving out; regulation is forcing them to be choosier with their clients,” says Christelis. “The universe of counterparties is diminishing, and we think that there’s a void for us to fill.”

Bob Diamond, Atlas Mara’s chairman and former Barclays group chief executive, is more than cognizant of the constraints on international banks in Africa.

“The best vehicle for doing business in Africa is an African bank,” Diamond tells Euromoney Africa.

That is a message that others repeat, especially when discussing the benefits for intra-regional trade and financial inclusion. 

In a report earlier this year, the IMF noted that pan-African banks were replacing the international lenders as these withdrew, including in the syndicated loan market. 

“There’s a massive withdrawal from Africa by European and American banks, as in Latin America and elsewhere,” says Enoch, who also authored the report. “No outside bank has come in to replace them.”

Enoch points out that these regional banks tend to focus more on local businesses than the international banks did and are less likely than banks based outside Africa to minimize interaction with the rest of the local financial system. The pan-African banks are filling niches that others are leaving, he says.

Although Douiri dislikes the pan-African label – he says each country is different – in his view Egypt, the country with the third-largest population in Africa, matters much more to Attijariwafa than to a developed-market bank such as Barclays.

“Even though we are one of the biggest banks in Africa, our relative size compared to larger international banks means that going after opportunities with different sizes and risk-return profiles is more worthwhile,” he says.

Attijariwafa thinks it can use its Moroccan experience as the banking sector elsewhere in Africa broadens, replicating what Morocco went through for the last 20 years. Taking the old Barclays franchise more to the emerging middle class and small and medium-sized enterprises is part of that plan.

“This is not about collecting pieces that are left without suitable owner,” says Douiri. “We aim at doing better than the former owners by enlarging the product offering or addressing segments that are underserved.”

Standard Bank, likewise, sees the greatest scope for growth outside South Africa in retail, using mobile money products to go below its primary retail focus in the middle class.

“We seek to ensure that we can provide the full range of financial services to clients, compared to international competitors who have a narrow corporate strategy,” says David-Borha, discussing the pan-African expansion. “We’ve led through the corporate and investment bank, but the ultimate intention is to tap into the retail market.”

International universal banks in Africa, including Barclays, have at least paid lip service to financial inclusion or digital banking. Yet Barclays and its peers have had more of a reputation as banks for the upper classes in countries such as Egypt. This is not so dissimilar, indeed, to Barclays’ continental European retail strategy in the 2000s, though Barclays was more important to Africa.

“Most of the African financial sector suffers from a lack of development of the SME sector,” says Arise’s chief executive Deepak Malik. “There’s the multinational and South African corporations, and the informal sector, and very little in the middle compared to Asia, which sees a lot of growth in its SMEs.”

International banks are not the only ones at fault. All the big Nigerian loan books are overwhelmingly corporate in character. Innovative retail approaches, including the use of telecoms networks, rely on good infrastructure and accommodating local regulations, which were sometimes lacking in Nigeria, according to the AfDB’s Nalletamby.

In Kenya – Barclays’ biggest market outside South Africa – one of the most exciting growth stories has been Equity Bank. Its market capitalization is bigger than the local subsidiaries of Barclays and Standard Chartered combined, thanks to its focus on mass-market banking, including in poor rural areas, and a loan book mostly in retail and SMEs. In Tanzania, National Microfinance Bank has a similarly successful agency-based model, distributing basic banking services through village stores and the like.

Arise, the biggest shareholder in both Equity and NMB, in part seeks social returns. But a focus on smaller clients makes financial sense, says Malik. Concentration risks, indeed, are a recurring problem even in a relatively large market such as Nigeria, and have recently dragged down Ghana’s CAL Bank, which is now embarking on more of a retail focus.

Togo-based Orabank, with US private equity backing and a fast-growing francophone sub-Sahara network, is another regional lender focusing more on retail banking and SMEs. 

“Even though we will be present in the finance of infrastructure projects,” says chief executive Binta Touré Ndoye, “our bank has to play a role in spearheading the emergence of the middle class, such as credit to consumers and mortgages.

“Big companies can always find credit, either overseas or locally. For us, as a pan-African bank, it’s very important to be present where we can create local value.” 

Barclays says it is selling because a big British bank became a disadvantaged owner. It had to pay 100% of the compliance needs – including the global systemically important financial institution buffer, and the UK bank levy – and only reaped profit in proportion to its 62% stake in the Johannesburg-listed entity.

For Barclays, this meant a return on equity in the high teens in South Africa translated to low single digits in the group accounts. After cutting its stake to just below 15%, Barclays can achieve regulatory arbitrage offering capital relief and the retention of a chunk of the earnings, says Arqaam Capital analyst Jaap Meijer.

But was there really no other way to hold on to these businesses? Why not, for example, increase the shareholding?

Francesco Ceccato, head of corporate development at Barclays PLC, says African authorities are keen for their banks to have local ownership and local listings. Indeed the PIC, a state investment fund, will hold the biggest chunk of Barclays’ former shares in Barclays Africa, about 14%. The South African Reserve Bank required an agreement to include a new board-based black economic empowerment deal, deputy governor Kuben Naidoo tells Euromoney Africa. Barclays agreed this year to give R2.1 billion ($158 million) to the plan, in addition to a wider settlement to help fund separation costs.

In fact, black ownership rules only capped the stake at 75%. Ceccato says buying more shares in the Johannesburg-listed vehicle would still have cost goodwill in tendering for the remainder at a premium and an additional dilution of earnings. 

Why not, then, remonstrate with some of the regulators?

Ceccato says there was no point in trying to contest specific rules, such as the requirement for British banks to pay the bank levy on global assets even though foreign banks in the UK only pay it for their UK operations: “There was no single factor such that absent that factor all the other factors should have been sufficient.”

European banks are not all using regulatory difficulties as an excuse to abruptly end their African operations. Société Générale, Standard Chartered and, most recently, Rabobank are all counter examples.

SocGen has been the most aggressive of the European banks remaining in Africa, says regional head Alexandre Maymat. In 2015, Mauritius Commercial Bank sold its business in Mozambique to SocGen, which wanted to open an east and southern Africa front to its 18-country Africa network. It opened in Togo the same year. 

“We are still exploring new territories,” says Maymat. “Africa is a differentiating factor for SocGen.”

SocGen has what it considers dominant or leading banks in most of the biggest francophone markets. But it is keen to expand in countries such as Ghana and Tunisia, where its market share is lower. 

“There will be consolidation in the main economies, and we are ready to be part of that,” says Maymat.

The bank has sought greater synergies with group capabilities in structured finance, transaction banking and markets, including a new sub-regional trading floor in Abidjan. But its traditional corporate dominance within its African bank will wither. It is extending its alternative retail platform, Youp, from Côte d’Ivoire to other western African countries, adding microcredits and other products to the mobile wallet service. 

“The time when we repeated the European model in retail is dead,” says Maymat.

For Standard Chartered, the London-based, emerging markets bank, the impact of lower commodities prices on Africa has contributed to problems with asset quality since 2014, while Kenya’s 2016 interest rate cap has taken its toll too.

The arrival of chief executive Bill Winters in 2015 led to new investments in Standard Chartered’s 15-country African business, focusing on technology. 

“We’ve reaffirmed our commitment to Africa,” says Sunil Kaushal, chief executive for Africa and the Middle East. He highlights growth in transaction banking, wealth management and infrastructure and project finance.

Kaushal says Standard Chartered “took its pain” in the 2015 results, putting it in a stronger position than local rivals. He draws attention to the opportunity for further growth in the Nigerian universal bank, which includes a small retail lender.

Rabobank, based in the Netherlands, has taken an entirely different approach with the creation, alongside the Dutch and Norwegian development finance institutions FMO and Norfund, of Arise. 

The $1 billion independently managed African banking platform started operations earlier this year. Arise holds the three investors’ existing stakes in 10 African banks, including Rabobank’s 35% stake in National Microfinance Bank and 46% stake in Zambia’s Zanaco, and is also investing a portion of new money, mostly from FMO and Norfund.

After buying a 28% stake in Ghana’s CAL Bank this year, chief executive Deepak Malik is confident Arise, with $300 million in new capital still to invest, will carry out another two such investments within a year, entering a new market in southern Africa and another in west Africa. It has also explored investments in Africa’s fintech sector (mostly in Cape Town) and could eventually go into insurance.

It seeks banks with big market shares. A $50 million bridge facility this year to Uganda’s DFCU – to convert into equity in a rights issue – will help that portfolio bank take over assets and liabilities from central bank-administered Crane Bank, which was one of the country’s biggest lenders.

As a pan-African venture, Arise’s ambitions are nevertheless quite subdued. Like Rabobank before it, it is not seeking majority and control. Arise has a majority in Uganda’s DFCU, because both Norfund and Rabobank were previously invested, but will later sell down its stake. So it expects relatively few synergies. There will be no common branding. Its back office – in the Netherlands to avoid double taxation without being based in a small tax haven, according to Malik – serves only the accounting, risk and compliance needs of the investment company itself.

Arise will instead try to add value by taking seats on banks’ boards, to ensure they head in its desired direction. It has, furthermore, established a division to transfer knowhow among its investors and investees, whether around the correct composition of a board, or how to deal with technology. That is in Cape Town, where Malik and his investment team are also located.

“Our firm is country-based; each investment has its own focus,” says Malik. “It is very difficult to grow a large multinational regional network.”