Are US Banks ‘Sniffing Around Africa’ A Threat To SA Banks?

Avatar
Written by Dana Sanchez

Competition in African banking could heat up as U.S. banks, recovering from the 2008 sub-prime mortgage crisis, consider opportunities on the continent, according to a report on BusinessDayLive.

“The threat of U.S. banks sniffing around Africa is on the horizon, as the banks are now better capitalized post the crisis,” Ernst & Young South Africa Analyst Graham Thompson told BusinessDayLive. “This could mean the competitive space in Africa will start to heat
up.”

Ernst & Young has had inquiries from U.S. banks “wanting to better understand the African market,” said Emilio Pera, EY’s lead financial services director.

JP Morgan and Citigroup are already operating across Africa.

Meanwhile, South African banks are trying to establish profitable operations in key
African markets, including Barclays Africa, Standard Bank, Nedbank and FirstRand.

Collectively, the banks earned just less than 10 percent of their total profit from the rest of Africa in their latest set of results. Standard Bank was well above 10 percent; Nedbank was below at 4 percent.

“Africa’s contribution to group earnings is kicking in … and excitement will really start to build when the contribution hits 30 percent,” Thompson said.

Standard Bank, Africa’s largest bank by assets, earned up to 26 percent of its total income from the rest of Africa after changing to an Africa-focused strategy in 2010, according to the report.

Twenty-six percent is “surprisingly high…and this number may be even higher as some African-related revenues are booked in South Africa,” said Jihad Jhaveri, an investment analyst at Kagiso Asset Management.

Standard Bank’s African business profits were up 44 percent driven by the African
corporate and investment banking business, Jhaveri said.

The bank’s African corporate and investment banking business is now about the same size as its South African operations. Its personal and business banking business in the rest of Africa, however, continues to operate at a loss,the report said.

FirstRand’s rest-of-Africa earnings, which contributed 10 percent to group profit for the six months to December, come mainly from Namibia and Botswana. The group set aside $940 million to expand into Africa.

FirstRand is expected to finalize an acquisition in Nigeria this year, but group CEO Sizwe Nxasana said FirstRand will take a cautious approach to buying businesses in Africa to protect return on equity.

In 2013, Absa bought the African operations from parent Barclays to become the Barclays
Africa Group. The deal created Africa’s largest retail bank by branch networks and customers.

Barclays Africa and Standard Bank are expected to compete across Africa.

Nedbank’s earnings from its rest-of-Africa operations are growing off a small base, contributing 4 percent to the group’s total earnings.

This is expected to increase as Nedbank has approval to buy a 36.4-percent stake
in Banco Unico, Mozambique’s sixth-largest bank.

It also has an alliance with Togo-based Ecobank, giving Nedbank access to Ecobank’s 1,200
branches in 33 countries including Ghana and Nigeria.

“Trading income from the rest-of-Africa subsidiaries is starting to become a significant contributor to the banks’ overall trading results in absolute terms,” according to PwC, BusinessDayLive reports. “We, however, observe that the business models of the individual banks are at varying stages of maturity to capitalize on the increasing pan-African trade flows.”

PwC expects intense competition in African investment banking in the next few years.

The consultancy also warns that the difficulties of doing business across Africa — including
infrastructure constraints and lower commodity prices that will affect growth rates — remain.