Will 2017 be as challenging for sub-Saharan Africa banks as 2016?

Kenya’s Equity Bank has found success by targeting low-income earners.

As growth remains top of mind for the banking sector, the economic environment in the largest banking markets is challenging, and will likely remain so, at least until commodity prices pick up for the key economies, including Nigeria, South Africa and Angola. Only one major African economy; Kenya, has thus far shrugged off the impact of rapidly diminished global growth prospects.

Not all of sub-Saharan Africa is struggling. The IMF labels the continent’s growth as ‘multispeed’, illustrating that the different regions have different economic drivers, and will therefore not all perform at the same level.

Looking at the east Africa region, where growth remains robust, the banking sector is nevertheless struggling with rising bad debts. This, coupled with interest rate caps (which were introduced in Kenya in the middle of 2016), are likely to restrict profit growth. In addition, interest rates are at the beginning of a downward cycle, and that typically hampers bank margins.

Kenya’s neighbours, Tanzania and Uganda, will see banks continuing to benefit from predicted 5%+ annual GDP growth. Even Kenya’s banking sector continues to benefit from a very strong underlying economy.

There is a risk that Kenya’s rate cap will influence policy in surrounding countries. It will impact banks’ profitability in the short term as banks are forced to lend at lower rates than they could previously. Over the longer-term, banks will likely adjust the supply of credit and reduce lending to consumers that they deem unprofitable, hence the outcome could be the opposite of what the regulator intended (i.e., credit is restricted rather than made more accessible).

Southern Africa, dominated by South Africa, the continent’s largest banking market by a wide but narrowing margin, continues to struggle from anaemic growth. South Africa’s banking profits have shrunk from double to single digits in recent times. The long term relationship indicates that for every 1% rise in GDP, bank profits typically rise 5%. This indicates that headline earnings growth is likely to be in low single digits for the 2017 reporting cycle.

West Africa, where Nigeria’s banking sector is the largest, is also struggling from a weak economy. The country entered recession in the second quarter of 2016 and remained there for the remainder of the year. The impact of low oil prices (averaging $44 for the year) had a serious and immediate knock-on impact on the economy, and banks were no exception. Non-performing loans spiked sharply, reaching a level nearly three times higher than the regulator’s upper benchmark.

Other drivers shaping the sector’s performance

Currency depreciation typically prompts central banks to raise interest rates to attract investors with stronger returns. Whilst higher interest rates typically boost bank margins, they also have the ability to increase the cost of capital for the banking sector, at a time when the need for additional capital is intensifying. Additional pressures arise from increasing impairment levels, as weak growth or negative growth strains consumers’ ability to repay debt.


There is recognition that consumer protection needs to be enhanced. To meet this need, South Africa is migrating to a ‘twin peaks’ regulatory approach, following in the footsteps of other developed markets, and separating prudential regulation from market conduct supervision. For much of the rest of Africa, the focus in the banking sector has been on migrating to Basel III and focusing on the prudential aspects of regulation; however, eventually market conduct will also become a priority outside of South Africa.

Opportunities for growth – it’s all about digital

Banks are well positioned to benefit from technological innovation. While fintech start-ups and mobile companies have, in some instances, disrupted the market, a banking licence and strong expertise are still critical for sustainable growth over time.

There are opportunities both in South Africa and across Africa, including partnerships between banks and fintech companies to enhance client experience. While crowdfunding and other forms of online lending are becoming more prevalent, fintech companies on their own, often lack the credit risk expertise that banks have. In addition, these new players typically offer finance to institutions and people with higher credit risks, making pricing expertise more essential.

In the local consumer market, the pace at which banks are able to add new customers has slowed and will not likely recover until economic growth recovers, and employment levels rise again, stimulating the need for formal banking services.

South Africa’s corporate sector remains more robust; most of the credit demand is from corporates where annualised growth is in double digits, in contrast to the personal banking market where credit growth is in very low single digits.

East Africa’s banks, despite recent fears of bank collapses, remain well positioned to benefit from strong underlying growth but need to build capital levels; many banking institutions are inadequately capitalised, and their ability to compete is thereby hindered.

Nigeria’s banks will need to weather the bad debt storm that has been in process for well over a year already. More recently it appears that higher oil prices are likely to provide uplift, but the need to raise capital levels, driven by the central bank’s requirements, will provide additional challenges. In the longer-term, higher capital levels will provide resistance to economic shocks.

In conclusion, banks will likely benefit from slightly stronger macro variables in 2017. Much will depend on how individual banks exploit these improving conditions. For example, banks that are inadequately capitalised could focus on how best to build capital levels, whether it be through an acquisition or merger or a share float. Banks squeezed by bad debts need to focus on enhancing credit risk skills and reducing their exposure to problem sectors and / or accounts. Overall, sub-Saharan Africa’s growth is very likely to rise from 2016 levels, and that in itself should provide for stronger banking performance as that is inextricably linked to the performance of the economy as a whole.

Andy Bates is EY’s Financial Services Africa Leader