African Financial Services In 2017: Buying Low For The Upside
Financial services are not a happy topic in Africa in 2017.
The headwinds against many African economies in 2016 left some investors holding bad assets and other firms searching for bargain-priced assets.
Plunging oil prices in 2015 severely hurt oil-producing countries, especially Nigeria and Angola. Neither the oil price nor the countries have fully recovered and 2017 is almost half over. Low metals and mineral prices have also hurt government coffers and battered economies in numerous African countries. Even countries saving on their imports of oil and other minerals in Africa, including Kenya and Tanzania, would argue that anguished economies in neighboring countries are destructive to regional growth.
Financial services, specifically the banking sector, have suffered. But this distress should be an opportune time to buy. Consider the oil sector as an example of betting on the right player. During 2015 and more so in 2016, big investors and companies sold off bad assets and bought assets that played well to long-term trajectories in the sector — those with decreasing production costs and easier operations, creating winners and losers in 2017.
Banking in Africa will have similar winners and losers when the dust settles with some countries likely to be at the center of the spending activity.
Being an oil-producing country, Nigeria remains mired in economic trouble. Some investors are sitting on their hands when it comes to Africa’s most populous country. Challenges include low foreign reserves, a hurting naira, and political uncertainty due to President Muhammadu Buhari’s health. Yet underlying factors point to an opportunity for one or two banks to win in this system.
First, oil and gas investment in Africa has to grow to meet the global supply shortfalls projected by many analysts in 2020 and beyond. Project financing and lending for oil and gas has decreased drastically in the region, including Nigeria. One or two banks will have to fill the pending financing gap. Any uptick in pricing in the next year or two would help the bottom line for the first mover (or most prepared) when the oil and gas companies, especially indigenous players, come calling for capital raises.
A 2016 report by Ericsson showed that 53 percent of Nigeria’s population is banked. About four out of 10 Nigerians still need to come into the system, likely through the bank that best combines traditional banking services with a financial technology (fintech) player who can broaden the consumer base. Nigeria is a cash country. An economic move in the right direction historically and theoretically bodes well for the banking sector.
Kenya has generally been resilient through the challenges of the past two years, with the economy growing about 6 percent in 2016. The growth is expected to decelerate in 2017 to 5.5 percent, according to the International Monetary Fund (IMF). An ongoing drought will hurt agriculture including livestock, push up energy costs — especially in areas most dependent on Kenya’s cheapest power source — and drive up food prices (and consequently, inflation). Throw in a slowdown in credit growth and this sounds like the country to avoid.
But the opportunity is found if you read between the lines, underscored by the changing credit market due to the interest cap of 2016. The interest cap will have its full first year in 2017. Some banks are prepared to address the changes while others will stagger through this year. A few banks will win by adjusting to the current interest rate market and strengthening their ability to lend to the best candidates in the commercial and retail markets, as well as better manage credit books. M&A activity is expected to improve in the sector as certain banks buy up pieces of other banks to achieve bigger, more diversified customer bases. Not surprisingly, backing and funding a winner creates returns.
Emmanuel Macron’s victory in France’s recent election spelled some relief in Cote d’Ivoire and other countries tied to the CFA franc, the currency guaranteed by the French Treasury. Cote d’Ivoire is the West African growth story with 8 percent-plus growth in 2016 and, according to the IMF, an average projected 7.4-percent growth between 2017 and 2020. A strong currency and significant growth are creating opportunities for private investors including private equity firms and banks. The banking sector is seeing significant growth in both retail and commercial banking.
Ivorian bank SGBCI — Société Générale de Banques en Côte d’Ivoire — is building the concept of a regional trading room based in Abidjan to help local cash management. It’s looking at adding a few branches in the next couple of years. Other banks are aggressively building out lending capacities through improved human capital in credit departments and commercial relationships.
Strengthening regional interaction and cross-border capabilities are long term plays with big upside for banks in this country. Potential economic players include Ghana and Togo — home of Ecobank. With economies such as Liberia and Mali hungry for some regional interaction, Cote d’Ivoire could be the centerpiece to the region in the next five to 10 years.
After declaring a state of emergency in 2016, Ethiopia is not the biggest star in 2017 compared to a Cote d’Ivoire. But with an average annual growth of 10 percent-plus during the last decade, Ethiopia’s strength cannot be played down. Drought hit the country hard in 2016 and encumbered the agriculture sector with inflation and price hikes.
Manufacturing, on the other hand, has taken off with Asian and European companies making products in Ethiopia supported by the government’s investment in industrial parks and the backing of large energy projects. Yet, as the big projects push forward, mid-size and small companies (and projects) search for banking support.
Local banking is definitely improving, but credit availability still has some gains to make in Ethiopia. The two-prong opportunity for banks is finding access to commercial lending in the long term and immediately partnering with big investors. Many large projects are still in the pipeline in the near term.
Ethiopia, as one major investor described it, is still the roaring lion in the East Africa region. Even if it took a short nap, it is central to the long-term East Africa growth story. Sub-Saharan Africa’s second most populous country, Ethiopia has a significant unbanked population — an opportunity for investment from all angles.
Democratic Republic of the Congo (DRC)
The story line in 2017 is buying undervalued assets, especially those with massive upside (no surprise). The surprise, however, may be looking for that opportunity in the DRC. President Joseph Kabila is still in power despite his final term ending Dec. 19, 2016. An election is scheduled for the end of 2017. Mineral prices such as copper have been low and have clearly hurt local mining companies. Budget cuts are a big discussion in local politics. The DRC, like one or two other countries on this list, is worrisome on the surface.
But opportunities are to be found in the government’s desire to strengthen private-sector investment and boost privatization in energy, insurance and healthcare. Local banking is small and not a big investment play in dollar terms, but has its upside over the next decade. Yes, it hangs on the politics.
Yet regardless of the current political situation, the banking sector cannot remain in the doldrums, especially if energy, mining, and financial services are seen as the big opportunities for the country’s growth. Representative offices have been present in the country for a while. More can be done to support larger commercial projects and — as is the case in Ethiopia — smaller profitable commercial and retail clients.
Kurt Davis Jr. is an investment banker focusing on the natural resources and energy sectors, with private equity experience in emerging economies. He earned a law degree in tax and commercial law at the University of Virginia’s School of Law and a master’s of business administration in finance, entrepreneurship and operations from the University of Chicago. He can be reached at email@example.com.
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