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Fitch: Africa expansion may boost banks

Mar 15 2013 17:07
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Johannesburg - Adding diversification by expanding in Africa could enhance South African banks' earnings prospects in the longer term‚ Fitch Ratings said.

However, the ratings agency warned that a significant increase in exposures to other African markets could weaken their credit profiles.

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 under-served population."

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 goodwill.

“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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fitch  |  africa  |  banks


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