Francophone West Africa: Banking sector offers so much scope for growth

The banking sector within the 8 member WAEMU region (Benin, Burkina Faso, Cote d’Ivoire, Guinea Bissau, Mali, Niger, Senegal and Togo) is a USD 37 billion industry (~25% of Nigeria’s banking assets) and grew at ~15% CAGR between 2008 and 2012. The distribution of the assets as shown in the graph below highlights the significant importance of Cote d’Ivoire and Senegal, which both account for ~50% of assets. Growth is however mixed within the region, with smaller countries registering higher growth rates, albeit from a low base. These countries have a common regulator – The Central Bank of West African States (BCEAO).

Penetration

The region has just over 5 million bank accounts, translating to a penetration of ~5% (lower than Nigeria’s 20%), thus highlighting the significant headroom for growth. Penetration is expected to deepen as economic conditions improve and growth accelerates, especially in Cote d’Ivoire and Mali which had suffered crisis related setbacks. 

Key Performance Indicators 

Banks within the region have been largely funded through deposits, well mirrored in the high deposit to asset ratio of ~68%, broadly in line with trends within West and Central Africa. Given that much of the funding is short term in nature, banks’ lending capacity is limited to short term maturities, and largely channeled towards commodity related trade and manufacturing. 

On a broader note, bank credit has continued to grow at ~6% annually, reaching ~20% of GDP (Nigeria: 20%, Ghana: 25%). The outlook for loan book growth remains strong in this region, on the back of the sustained momentum in trade financing and infrastructure projects. Recent additional oil finds in Cote d’Ivoire, for example, whilst still being evaluated, might translate to expanded loan books, if in commercial quantities. It’s important to note also that a lot of these countries had also commenced broad based privatisations across several sectors, which should ideally require further tranches of financing or refinancing. Furthermore, given the generally smaller size of balance sheets, loans are predominantly syndicated, thus illustrating the significant opportunities for banks with robust capital bases. 

Whilst banks deal with a wide spectrum of depositors and obligors, there still exist significant concentration risks, as 50 corporate obligors account for over 33% of gross loans and advances. Even so, there are similar risks relating to earnings, as lending activity (interest income) accounts for ~90% of earnings. These are risks which should be dimensioned by potential investors during due diligence. Most banks are also significantly exposed to government securities and more generally to the public sectors.

With respect to asset quality, gross NPLs have remained elevated for the past 6 years at over 17%, worsening also on the back of the Ivorian crisis. In the absence of structural mitigants to loan delinquency, including the credit bureaus and collateral registries (which should hopefully commence in 2014), these metrics are expected to stay at these levels in the near future. Notably also, much of these elevated NPLs represent legacy issues, for which banks are generally unwilling to take one time write offs. 

Thus, for potential investors in this sector, it is essential that NPLs are addressed headlong pre investment. During due diligence, it is also important to ensure that the KPIs of the target bank are assessed in IFRS, given the wide variance between the reporting standards these banks adhere to and IFRS. 

Entry and Exit

The industry is a very competitive one, with the Ivorian market being the most intense, as 24 banks grapple for market share in a resurging economy. Interestingly, the WAEMU banking sector is dominated by international banking groups including Nigerian, French and Moroccan. These groups collectively account for over 65% of gross industry assets and enjoy significant advantages with respect to deposits and advances, thanks to parent level relationships.

The minimum capital requirement per country of operation as set by the BCEAO is USD 20 million, which is indeed low when compared with peers – Nigeria: USD 158 million and Ghana: USD 60 million (using exchange rates at announcement). Whilst the minimum capital requirement isn’t necessarily a major hurdle to entry, the international banking groups’ chokehold of the market is. 

The regional banking industry however remains well capitalized, with the prevailing capital adequacy ratio (CAR) of ~13% being above the regulatory minimum of 8%. Some banks (mostly in Cote d’Ivoire) have however not met the minimum capital requirement, more likely as a result of the absence of a firm deadline from the regulator. Thus, some of these “defaulting” banks might actually be interesting targets to consider for recapitalization. That’s a conversation for another day.

In my view, a more plausible entry strategy for an investor with a holding period (a PE investor) is to invest at the subsidiary levels of one of the banking groups. This would indeed entail convincing the international group of the expected value addition of such an investment (and there had better be). It’s an open secret that equity in these subsidiaries is usually well guarded, given the dividend maximization policy of these groups. 

Another advantage of this strategy in my view is that there are minimal concerns about exits, as the Investor could exercise a Put option to management in due time. This is indeed an important consideration in light of the shallowness of the regional capital market (BRVM), and its inability to support the liquidity expectations of an IPO exit. The regional stock market, based in Abidjan, has 37 quoted companies. Only 11 initial public offerings took place between 1998 and 2011. It has a capitalization of ~USD 12 billion, representing ~14% of the WAEMU GDP. Interestingly, Sonatel (a Senegalese telecoms company) and Ecobank are the two largest companies, accounting for ~ 50% of market capitalization.

KELECHI OKORO