Africa a-risingEconomy, Investment | September 22, 2010 at 3:30 am
It seems that Africa is finally here to stay. A few years back, when ICBC shelled out $5.5 billion in order to pick up a 20% stake in Standard Bank, bankers everywhere awoke to the possibility of Africa rising. No longer was Africa merely the stuff of exotica, it was now a serious investment destination. That was 2007, and Africa was moving out of the realm of pure curiosity and into the realm of strong profitability. Since then, Nigerian banks have flattered to deceive and lilted through a crisis (it seems as if Nigerian scammers and their banks are both after your money) but the innate logic that Africa has strong trade links with several other strategic emerging markets are still a strong one.
Africa still runs hot as investment destinations go. With America in financial limbo, Europe strapped by sovereign debt for the most part and China shut off for all serious purposes for investors, Africa is a popular destination for money. The Bank of China signed a pact with Ecobank back in January and come August Brazil’s Bradesco and state-controlled Banco do Brasil too announced an African holding company. And HSBC too wants to buy NedBank, one of the largest South African banking institutions.
The profitability of banks in sub-Saharan Africa, not including South Africa, totaled $2.6 billion in 2009, not that different from the profitability of Western banks in India and China. The Export-Import Bank of China has some $20 billion worth of loans in Africa right now, and that is a reflection of the bullishness surrounding Africa right now. Western privatized banks have gone better than that, putting in loans worth some $50 billion which does not include South Africa and Liberia. That is because their shipping industries will skew the figures tremendously.
Traditionally, all members of the African banking system used the same business model; they catered to well-off consumers, state bodies and business big and of a medium size. Generally, most banks had more money in hand than they lent out and so the excess liquidity ended up at the whims and fancies of lazy governmental bodies and central banks. The loans that did go out though had high interest rates, so all was good. The challenge for African banks now is to expand the scale of their operations if not the scope. By most formal definitions, the economy is still in a nascent stage and shallow and the middle class has not attained a standard of living or the kind of numbers that could see more money being disbursed.
The pan-African Ecobank tried to meet this challenge head on and expanded, but just far too quickly; they have built a large number of branches since 2007, and this heavy investment has hit equity hard (it was just 6% last year) and they will now roll this investment back slowly in a quest for greater profitability. The need of the hour is to be realistic, not optimistic even if there is cause for it. Perhaps one way of cashing in is to put your money on a booming economy; Portugal has re-entered the Angolan market after the civil war and is in the throes of an oil bonanza. BES, Banco BPI and Banco Millennium BCP have jointly built some 170-odd branches in Angola, but their profit in 2009 alone was a sensationally high and obscene $440m.
Some have chosen to instead focus on wholesale banking. The Chinese and Standard Bank collaboration has yet to show dividends or financial results of a promising kind even, but at least Standard Bank now has high visibility and recall in the Middle Kingdom. But many banks are wary of simplistic tie-ups with Chinese banks, knowing they will take the best out of you while offering little by way of benefit. But there is a surfeit of infrastructure investments sweeping across Africa, and leveraging this network will be the key to profitability. But the truth of it all is undeniable; Africa is a serious investment option now.