EY 2014 Sub-Saharan Africa Banking Review - Summary

Making choices

A review of the major Sub SaharaAfrica banking markets

Reviewing Africa’s major banking marketsBackground

SSA Banking Review June 2015

Our special theme thisyear focuses on MobileBanking, a key enablerto growing financialinclusion.

First annual Africabanking review

Analysis of 3 ofthe largest SSAbanking markets:South Africa,Nigeria and Kenya

► The review is based onanalysis of:

► The five largest tier 1banks in South Africa

► The six largest tier 1banks in Nigeria

► 43 registered banks inKenya

► 49 registered banks inTanzania

► 24 banks in Uganda

► 10 registered banks inRwanda

2014: The highlightsBank profits rise in double digits, despite slowing growth challenges

► South Africa’s tier 1 banksreport low double digitsprofits growth.

► South Africa’s banking markethas characteristics of bothmature and emerging markets.

► These profits are slightlyahead of asset growth, in highsingle digit territory.

► The economic environmentremains challenging.

► Banks are focused on capitaloptimization

Southern AfricaSouth Africa

West AfricaNigeria

► Banks reported strongprofits growth, despiteeconomic headwinds late in2014.

► Liquidity becamechallenging after the centralbank raised interest rates andhiked the cash reserve ratiolate in the year.

► A weakening currency andfalling (oil export revenue) willlikely pressure impairmentsand profits in future reportingperiods.


East Africa

► Banks across all 4 KURTnations report strongerprofits, and all in doubledigit territory.

► Interest margins remainfavourable

► Impaired loans becomes aconcern in some markets.

► Rwanda was the fastestgrowing banking marketacross the region, although offa considerably smaller base.

Africa’s FDI and economic landscape

Actual FDI numbersFDI project numbers fall, but capital investment and jobs surge

Africa became the world’s second-largestdestination for FDI capital inflows in 2014.

FDI projects by world region (% change, 2014 vs. 2013)

-21.3

-17.7

-17.5

-14.8

-8.4

14

17.3

Rest of Europe

Middle East

Latin Americaand the Caribbean

Western Europe

Africa

North America

Asia-PacificCapitalinvestment136%YOY growth in FDIvalue in 2014

FDI jobcreation

68%YOY growth in FDIjobs in 2014

Source: fDi Markets, February 2015.


Financial Services FDIThe bulk of FS FDI flows into the key markets



Between 2010 - 2014 Africa attracted 138 projectsper annum, 83% to SSA

SSA83

North 17

Total3381

N Africa685

SSA 2696

0

1000

2000

3000

4000

5000

2010 2011 2012 2013 2014

Jobs created

SSA also accounts for the largest portion ofjobs

The key banking markets featurestrongly, with Mozambique upsharply in 2014

SSA1.05

NA0.295

54

55

123

143

287

Ghana

Nigeria

South Africa

Kenya

MozambiqueCapital US$m

In 2014, FDI totalled $1.3bn, with SSAaccounting for $1.05bn.

050

100150200250300350

Moz

2010

2011

2012

2013

2014

SA

2010

2011

2012

2013

2014

Ken

ya20

1020

1120

1220

1320

14

Gha

na20

1020

1120

1220

1320

14

Nig

eria

2010

2011

2012

2013

2014

FDI US$m

S Africa has consistent flows, Nigeriareceives little FDI relative to its size

Real estate, hospitality and constructionBanks will gain major financing opportunities from rising FDI

Top two sectors % share Source: fDi Markets, February 2015.

Top 10 sectors by FDI projects (2014)Top sectors FDI projects

(share %)Jobs created(share %)

FDI capital(share %)

Technology, media and telecommunications (TMT) 19.6% ||||||||||||||||||||||||||||| 6.4% ||||||||| 5.5% ||||||||

Financial services 18.1% ||||||||||||||||||||||||||| 2.0% ||| 1.2% |

Retail and consumer products (RCP) 14.1% ||||||||||||||||||||| 31.5% ||||||||||||||||||||||||||||||||||||||||||||||| 4.4% ||||||

Real estate, hospitality and construction (RHC) 8.0% |||||||||||| 33.6% |||||||||||||||||||||||||||||||||||||||||||||||||| 43.8%

|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||

Business services 7.5% ||||||||||| 1.6% || 0.5%

Transport and logistics 6.3% ||||||||| 3.1% |||| 2.2% |||

Diversified industrial products (DIP) 5.3% ||||||| 1.5% || 0.3%

Automotive 4.1% |||||| 5.7% |||||||| 0.9% |

Coal, oil and natural gas 3.5% ||||| 3.7% ||||| 25.4% ||||||||||||||||||||||||||||||||||||||

Chemicals 3.3% |||| 2.4% ||| 5.2% |||||||


GDP drivers differ vastly across the continentReal interest rates are highest in Nigeria and negative in S Africa


Southern AfricaSouth Africa

West AfricaNigeria

East AfricaKenya

Weak economic growth is leading toportfolio outflows, pushing up interestrates

How have Africa’s major banking markets performed?



Banking profits+11.6%

1

South Africa

NigeriaBCM profits

+20.1%

KenyaBCM profits

+15%


Banking profits are up across the key regionsThe less mature markets are growing most rapidly

2

3

12

27

28

34

65

115

Rwanda

Uganda

Nigeria

Tanzania

Kenya

South Africa

Bank assets to GDP %

.2

20.1x

Rwanda South Uganda Tanzania Nigeria KenyaAfrica

6.2x 4.3x 4.1x 3.8x 2.9x

Bank profits growth to GDP growth

Source: EY analysis


Total expenses

0 10 20 60 80 100

ROEs

Total income

CAR

Interest margin

Profits

Loans and advancesNigeria +16.2%

East +260bps

South Africa +11.0%

East +40bps

East +21.5%

Nigeria – 60bps

200

Nigeria +14.9%

30 705040 90 150

NPLs

Change in key banking metrics 2014

ROE’s and NPL’s varied sharply from 2013Nigeria’s banks enjoyed the strongest loans and revenue gains.

Banks were not (yet) impacted by lower oil prices in 2014Angola experienced only mild currency depreciation by year-end

Oil producers faced currency depreciation in 2014

S Africa 91.5

Mozambique 87.5

Nigeria 84.6

Angola 93.2

Uganda 89.9

Kenya 95.2


75

80

85

90

95

100

105

110

12/01/2014 12/02/2014 12/03/2014 12/04/2014 12/05/2014 12/06/2014 12/07/2014 12/08/2014 12/09/2014 12/10/2014 12/11/2014 12/12/2014

Selected basket of currencies based to 01January 2013 = 100

Source: Oanda.com

Banking metrics at a glanceSouth Africa’s size dominates, but by profitability measures, East Africais more favourable

Source: EY analysis


2014 Uganda Kenya Rwanda Tanzania S Africa Nigeria

Exchange rate (US$) 2,740.00 89.70 683.50 1,687.00 11.59 181.00

US$mTotal profits 196 1,132 53 224 5,548 2,365

Total assets 7,066 35,657 2,441 13,045 413,339 142,315

Net interest margin 16.8 12.5 13.2 13.1 4.3 n/a

Capital adequacy ratio 16.7 15.7 17.0 13.7 15.2 18.7

Loan to deposit ratio 47.6 80.3 81.6 74.3 83.2 68.1

ROA 2.9 3.4 2.4 1.8 1.6 2.3

ROE 17.6 21.8 14.3 13.5 17.8 20.3

Loans and advances 3,365 20,986 1,314 7,224 263,158 67,718

Deposits 5,004 27,357 1,671 10,414 288,007 100,331

NPL ratio 5.10 5.00 n/a 3.30 2.50 3.450

2014: The details: South AfricaBank profits rise in double digits, despite weak growth


Cost growth is maintained below revenuegrowth, keeping the operating jaws positive.

Recovering interest margins supportedprofits growth.

Lower impairments also contributed tohigher profits.

Headline earnings rose 11.6%

2.83.8

3.0 3.33.9

4.55.0

5.5

2007 2008 2009 2010 2011 2012 2013 2014

Headline earnings US$bn

7.1 7.8 8.79.8 10.2 11.1 12.0 12.9

2007 2008 2009 2010 2011 2012 2013 2014

Operating Expenses US$bn

198267

310 302 310 336379 414

2007 2008 2009 2010 2011 2012 2013 2014

Total assets US$bn

Income and revenue has outpaced assetgrowth since the GFC

2014: The details: NigeriaSlowing growth in the 2nd half fails to dampen earnings growth


Nonperforming loans to total advances3.3

2.7

2013 2014

Efficiency ratioslargest decline average largest increase

-450 +30 +400

Profits growth +20.9%

2014: The details: KenyaStrong growth provides a strong uplift for banking profits


Large banks attract funds at a lower cost than smaller banks. Large banks share of the market is falling, albeit gradually.

The cost of funding roseLargest banks are the most optimal in operating efficiencyCapital adequacy levels declined

Sustained economic growth was strongly supportive of the banking sector. Sector assets grew 18%, toUS$35.6b, up 16% from 2013 and in line with deposits growth and loans and advances growth. Loans andadvances make up 60% of total assets.Profits growth lagged asset growth, up 15% for the year. This was due to sharply higher bad debts and interestexpenses. All but 5 of the 43 banks reported profits during 2014.

Where to from here?


What this means for the banking sector


The most successful banks in the next decade will be those thatmaster transformation

► Business models will change► New markets, new customers, new products, more

decentralized operations

► More responsive to customers, focused on core businessesand capabilities, buying in non-core capabilities

► Banks face a decade of business-widetransformation► Data transformation – better understand own core

competencies and mine data more effectively

► Technology transformation – to circumvent legacy issuesand embrace digital revolution

► Regulatory-driven transformation – including simplification –to satisfy regulators and make it easier to operate acrossmultiple markets

► Controls and compliance transformation – to mitigate risks

► Cultural transformation – to harness and motivate leadingtalent

Africa’s largest banks will find a more fiercely competed market

► Africa’s banking markets look promising► Growth prospects are amongst the highest globally.

► Regional economic clusters (like the EAC) will stimulate economic growth.

► Strong growth prospects will entice more banks into what is considered ‘the last frontier’.

► A combination of regional players expanding into neighbouring territories and global banks entering Africa will lead to greatercompetition.

► The large banks in the three largest markets (South Africa, Nigeria and Kenya) will be most aggressive in expanding intoneighboring markets.

► First mover advantages are no longer readily available in the larger banking markets. Banks may start looking at smallermarkets with strong growth potential ( and even some of these smaller banking markets are already fiercely competed –Zambia, Ghana, Botswana and Mozambique are good examples).

Sub Saharan Africa Banking Review

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EY 2014 Sub-Saharan Africa Banking Review - Summary

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