DEHAI NEWS MAILING LIST ARCHIVE: [dehai-news] Economist.com: Africa's banking boom-Scrambled in Africa

[dehai-news] Economist.com: Africa's banking boom-Scrambled in Africa

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From: Berhane Habtemariam (Berhane.Habtemariam@gmx.de)
Date: Fri Sep 17 2010 - 12:15:20 EDT

Africa's banking boom-Scrambled in Africa

Chinese and Western banks are flocking to Africa but finding a strategy that
works isn’t easy

Sep 17th 2010

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
<http://www.economist.com/node/17043674> 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”.

Local and Western banks’ profits in sub-Saharan Africa, excluding South
Africa, were about $2.6 billion in 2009, not far off the sum Western firms
made in India or China (see table). But China is active, too. So far,
Export-Import Bank of China, a state entity which promotes trade and
investment, has done all the running. It has perhaps $20 billion of loans in
Africa (including north Africa), reckons Deborah Bräutigam, of American
University in Washington, DC. Western private banks in sub-Saharan Africa
have loans of $50 billion, excluding South Africa and Liberia, whose
shipping industry distorts the data. Bank of China’s loans to Africa and the
Middle East doubled last year to $3 billion. ICBC recently made a $200m loan
to the Nigerian arm of MTN, a South African mobile-phone firm, to buy
equipment from Huawei, a Chinese manufacturer.

There are broadly two sorts of firms operating in the region. First, the
biggish locals, such as Standard Bank, which is active in 16 countries, and
Togo-based Ecobank, which operates mainly in west and central Africa. Then
there are rich-world firms, which tend to operate where there are historical
links: Société Générale in French-speaking west Africa; Barclays and
Standard Chartered in English-speaking countries; and Portugal’s banks in
Angola and Mozambique. Citigroup has run a skeletal network since the
mid-1960s.

Traditionally all used variants of the same basic business model of serving
well-off consumers, state entities, and medium-sized and big businesses. The
banks typically gathered more in deposits than they lent, which meant excess
liquidity was parked with rickety governments and central banks. There were
usually limits on how much profit could be sent home. But with high interest
rates on private loans, the returns on equity were pretty good.

Increasing the scale of this sort of operation is tricky, as the formal
economy is often shallow and the middle class small. Some have expanded too
quickly. Ecobank has 750-odd branches, 40% of which have been built since
2007, a heavy investment which helps explain why its return on equity was a
lowly 6% last year. Its chief executive, Arnold Ekpe, says he has slowed
expansion and is keen to restore profitability. At Standard Bank Mr Maree
acknowledges that “we were a bit too aggressive on branches”. Barclays has
also slightly cut back on sales outlets.

Jean-Louis Mattei, who runs Société Générale’s international retail
activities, still wants more branches but says, “We have to be realistic,
not optimistic.” He plans to add 100 in sub-Saharan Africa to the existing
300, using plain buildings and a regional back-office system to keep a lid
on costs. Mobile banking, meanwhile, is popular but most banks have yet to
find a way to grab a large chunk of the profits.

One lucrative strategy is to take a big bet on a booming economy. Portugal’s
banks re-entered Angola after the civil war and are enjoying its oil
bonanza. BES, Banco BPI and Banco Millennium BCP together have 170-odd
branches in Angola, but made a staggering $440m of profit in 2009. Pedro
Homem, a director of BES, says that although the pool of private-sector
customers is limited, the bank’s loan book is “quite diversified”. The great
risk is the Portuguese banks’ exposure to the state. The government seems
also not to like foreigners taking the spoils. Last year all three had to
ensure that at least 49% of their operations were owned by locals.

Others have chosen to focus on wholesale banking. Chinese firms that are
building airports, roads and power plants are sought-after clients. Standard
Bank has a team of 40 bankers in an office opposite ICBC’s headquarters in
Beijing, who are trying to woo the Chinese bank’s clients. So far the
financial performance of the collaboration has been disappointing. Still,
the love-bomb tactics have created a strong brand recognition in the Middle
Kingdom: Standard Bank is now known as “Africa and Mining Bank”.

Many banks envy the Standard Bank set-up but doubt that bog-standard
alliances with Chinese banks are worth it. “They suck everything out of
you,” says one European bank boss. Yet there are other ways to prosper.
Standard Chartered’s wholesale operation now contributes 80% of its African
profits, up from 60% a decade ago. It got there by bulking up its energy and
commodities teams and using its global network to win African business from
European and Indian clients, says V. Shankar, who runs the bank outside
Asia.

Most firms are likely to use this “network banking” approach to try to
benefit from the wave of infrastructure and natural-resources investment in
Africa. Citigroup looks set to to reinforce its position in trade finance
and investment banking, and if HSBC buys Nedbank, it will use it as a means
to create a lean presence across the continent. (However, Barclays’ purchase
in 2005 of ABSA, another South African bank, has not transformed its
position in the rest of Africa.) In one sense this is disappointing: banks
will not prepare for a consumer-banking boom unless wealth begins to trickle
down. But the hard-headed approach is a sort of compliment too: banks are
taking Africa seriously.

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