Amid recent geopolitical tensions and their effect on the global economy, the International Monetary Fund (IMF) has warned of growing financial instability in frontier markets like Africa. While that may sound unsettling, some African banks may not be at risk at all. This week, we explain why.
Capital News Africa: From the Trading Floor – Week 42-2022
Seldom has an analysis of ours sparked such a controversy among our readers. In last Monday’s newsletter, we reported on the IMF’s warning that financial stability risks were rising in frontier markets like Africa and what this could mean for the continent’s banks.
To be clear: We attributed the recent solid performance of several African bank shares to good operational results. But we also wanted to stress that investors, for their benefit, should heed the IMF’s warning. We wrote: “We feel that investors should take the IMF’s concerns seriously. For African banks may also suffer from possible future instability in the global financial system.”
This statement has led to criticism from our readers, which we are happy to address. To do this, we must first pose the question: How are African banks and their shares faring? The answer is: It depends on which banks you mean.
First the good news: Thanks to a clever digital strategy, several banks have provided banking services to many in the population that had lacked such access. South Africa’s Capitec Bank (ISIN: ZAE000035861) is one example, providing digital banking services and installment loans to customers. Indeed, one could consider Capitec more innovative than European banks, in this regard.
With an estimated return on equity of a whopping 26% for this year, Capitec is currently valued at EUR 11.8 billion on the Johannesburg Stock Exchange (JSE). In the first few months of this year, many investors were concerned that Capitec could accelerate customer growth at the expense of credit quality. The half-year figures have not confirmed this fear.
But despite its profitability, Capitec’s share has shed 12% since January to trade at ZAR 1800.37 (EUR 101.07). Does that mean that investors are worried about the IMF’s warning? Not quite. In this past month, when the IMF issued its warning, Capitec’s share bounced bank somewhat, gaining more than 15%.
Another positive example is the microfinance institute Getbucks Microfinance Bank (ISIN: ZW0009012320) in Zimbabwe. Since January, Getbucks’ share price has soared 122% to ZWD 17.55 (EUR 0.0499). The bank specialises in microfinance, including payday loans, student loans as well as small consumer and home renovation loans. All told, consumer lending accounts for 80% of its business, with the remaining 20% going to small and medium-sized enterprises (SMEs).
Kenya-based Equity Bank (ISIN: KE0000000554, market cap: EUR 1.5 billion) has a similar and promising business model to Getbucks, with the big difference that Equity is more involved in the formal part of the economy. Its share, however, is down almost 11% on the year. We think that most of this is due to the weak performance of Nairobi’s stock exchange, which was held down by uncertainty over the presidential election of last August.
We also applaud the retail banking business model for two key reasons. First, it makes banks employing it very competitive, as foreign banks would have difficulty acquiring the same deep knowledge of the local market. Second, such banks rely on customer deposits to re-finance, which makes them less resistant to global shocks.
Now for some not so good news: Apart from a profitable domestic consumer business, Africa’s big commercial banks also have significant capital market operations. This makes them more vulnerable to global shocks than their peers.
One prime example is Egypt’s EFG Hermes (ISIN: EGS69101C011), which derives about one-third of its revenues from mergers & acquisitions advisory and capital market operations. A bit more than half of EFG Hermes’ revenues come from brokerage services and the rest from commercial banking.
Although the Egyptian investment bank has significant international exposure, this has not made investors that wary of its share. Since January, EFG Hermes’ share has been on a roller-coaster ride. But ultimately it is only down 2.8%.
Investor skepticism toward Morocco’s Attijariwafa Bank (ISIN: MA0000012445) may be greater, however. Along with its investment bank, Attijariwafa has a strong presence in retail banking, insurance, real estate loans und corporate lending. The bank is currently active in more than 20 African countries including its home base. Yet while its domestic operations are impressive, investors seem wary of its prospects. Attijariwafa is one of the most internationally active banks in Africa. This makes the bank more vulnerable than others to shocks in the global financial system. Attijariwafa’s share has shed 3.3% in the current month and is down 16% since January.
These examples show how diversified Africa’s banking sector is and how varied the risks are. It is, in any case, imperative that investors do their homework on the viability of a certain bank’s business model before considering an investment in it.