Johannesburg - Adding diversification by expanding in Africa
could enhance South African banks' earnings prospects in the longer term‚ Fitch
However, the ratings agency warned that a significant
increase in exposures to other African markets could weaken their credit
The country’s four major universal banks - Absa Group [JSE:ASA]‚ FirstRand [JSE:FSR]‚ Nedbank Group [JSE:NED] and Standard Bank Group [JSE:SBK] - are all geographically concentrated in the domestic
market by assets and earnings.
Developing a pan-African franchise will help compensate for
more subdued domestic growth due to the relatively saturated lending market and
weakened growth prospects in South Africa‚ according to Fitch.
It says the financial crisis and its impact on economic
prospects in many economies means the banks' search for growth will focus on
Africa rather than further abroad.
Nedbank and FirstRand‚ according to Fitch are the most
likely candidates looking for acquisition opportunities‚ as they have
relatively less exposure outside of their home market.
Both banks have increased M&A activity and organic
investment in the rest of Africa.
"Nedbank's alliance with Ecobank‚ the pan-African
banking group‚ provides it with access to 35 countries in Africa. Nedbank has
an option to convert a loan it has made to Ecobank into a 20% equity stake.
"FirstRand is close to completing its purchase of a 75%
stake in Merchant Bank Ghana‚ opened a merchant bank in Nigeria last month‚ and
is also actively looking to acquire a small bank there," Fitch said.
Standard Bank (with operations in 16 African countries) and
Absa (12 countries and majority owned by UK's Barclays) have a greater presence
on the continent‚ especially in the sub-Saharan region.
Their strategy focuses on developing a more cohesive
strategy across the region‚ maximising the combined operations.
Last month‚ shareholders approved Absa's acquisition of
eight Barclays operations in Africa.
The agency also noted that Standard Bank actually pulled
back from some of its international operations in London‚ Brazil and Argentina
to focus on its home continent.
“The banks want to tap into the growth potential of large
African economies‚ and boost their product penetration to a largely
Countries like Nigeria and Ghana have large‚ growing
populations that offer expansion opportunities, added Fitch.
"The banks are also following their corporate clients
into nearby countries‚ such as Angola and Mozambique.”
Fitch noted that if the banks expand too aggressively in
newer markets‚ they risk building up asset-quality problems and costs. This
could lead to diminishing returns‚ or even result in the impairment of
“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," Fitch said.
However, the strong banking regulator in South Africa and
the high corporate governance standards at the banks help to mitigate some of
the expansion risks, the agency.
"The banks are also unlikely to have the appetite for a
pan-African model that requires a significant investment in branch
infrastructure to be credible.
Fitch said that instead‚ they are seeking high-growth
markets with more attractive yields to supplement sluggish domestic growth.
They also want to facilitate transactions with existing
clients and within the trade corridors‚” Fitch added.
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