African banks are sinking deeper into trouble. Drowning in bad debt and swamped by slowing economies, more and more of the continent’s lenders are starting to fail.
The collapse of a Ugandan bank, said to be an acquisition target of Bob Diamond’s Atlas Mara Ltd., is adding to woes stalking the industry from Mozambique to Nigeria. High interest rates, soaring levels of unpaid loans and low commodity prices are just some of the factors felling banks as growth across the world’s poorest continent stutters.
Ugandan regulators on Thursday suspended the board of Crane Bank Ltd. and took over operations because the lender was under-capitalized, days after trying to ward off a run on deposits. Nigerian regulators in July replaced the management of the country’s eighth-largest bank. Kenya and Zambia both seized some of their smaller banks, Mozambique this month had to stabilize one of its lenders, while Democratic Republic of Congo had to step in for one of its biggest banks.
“We’ve been forecasting an African banking crisis since the beginning of this year,” said Robert Besseling, a Johannesburg-based executive director at business-risk consultancy Exx Africa. “We’re likely to see more banks fail in Nigeria. The Kenyan banking sector will have to consolidate and Ethiopia’s will have to liberalize. Angola is also struggling. Some Ghanaian banks have reported heavy losses. The other one to watch is the DRC, which has also seen some turbulence.”
The mounting issues faced by lenders in sub-Saharan Africa marks a turning point for the continent once lauded as the next big investment destination. That lured the likes of ex-Barclays Plc Chief Executive Officer Diamond to start London-based Atlas Mara, a business focused on buying African financial-services companies. He was following other lenders tapping into the region’s young population, rising wealth and two decades of record growth.
Crane, which has 46 branches, was taken over by the Bank of Uganda because it posed a risk to the country’s financial system and threatened deposits, the central bank said. It comes at a time when growth is slowing, with Uganda expanding at 3.9 percent in the second quarter from 5.4 percent a year earlier.
“These banks were in a pretty high growth phase for about 10 years, so like any banking system in the world, you go through that credit cycle,” said Ronak Gadhia, a research analyst at London-based Exotix Partners LLP. “When you see a slowdown in payments from government ministries and institutions, that has a pretty big knock-on in private sector. In Uganda, they were massively plugged into South Sudan. That might be an element as well.”
The closely held lender Crane, controlled by one of Uganda’s richest men, said in September it was looking for a strategic equity investor with a regional network after making losses in 2015.
Atlas Mara valued the bank at $250 million, while Crane Bank said it’s worth $300 million, the Nairobi-based East African newspaper reported on Oct. 11, without saying where it got the information. Talks are at an early stage, a person familiar with the matter told Bloomberg on Oct. 18, asking not to be identified because the discussions are private.
“It’s still entirely possible for them to buy it,” said Ayodele Salami, who holds Atlas Mara among the $450 million of African equities he oversees as chief investment officer at Duet Asset Management in London. “There’s nothing wrong with buying a bank that has failed. It’s what price did you pay for it and how much money you need to bring it back. Buying a failed bank isn’t the problem. That could actually be a value-accretive deal.”
Atlas Mara’s share price has tumbled more than 73 percent since it’s initial public offering in December 2013, falling to a record intraday low of $2.90 on Friday. The company is just getting started and needs time to build its African business, already spanning seven countries from Rwanda to Zimbabwe, Diamond, 65, said in an interview last month. A spokesman for Atlas Mara declined to comment on Thursday.
Economic growth in sub-Saharan Africa may decelerate to 1.4 percent this year from 3.4 percent in 2015, which was already the slowest pace in 15 years, according to International Monetary Fund data. The economy’s outlook is being clouded by a slowdown in China, Africa’s largest trading partner; a commodity rout; depreciating currencies; widening government budget deficits and an energy shortfall.
South Africa is also caught up in the slump with its economy expected to expand just 0.4 percent this year, according to its central bank. Nonetheless, its lenders remain well-capitalized and while non-performing loans are rising, they averaged only 3.1 percent of advances for the four largest lenders at the end of the first half, according to PricewaterhouseCoopers LLP research. Having tightened credit and lowered their risk appetite, these Basel III-compliant lenders may fare better than peers on the rest of the continent.
“In Kenya and Nigeria, you potentially have the dangerous cocktail of increasing non-performing loans and reducing liquidity,” Gadhia said. “You’re going to see migration from smaller banks to bigger banks. That could present challenges.”
There are still opportunities, especially in Kenya, where regulators and the finance ministry are bolstering regulations and encouraging lenders to combine, Exx Africa’s Besseling said. What happened in the country, where regulators seized three banks over an eight-month period, was an anomaly because those failures were caused mostly by mismanagement, and the economy isn’t as dependent on commodity prices, he said.
The biggest risk may lie in Nigeria, where non-performing loans have surged to their highest levels in six years and the economy is forecast to contract in 2016 for the first time in more than two decades. At the same time, interest rates are at their highest level in five years and inflation is accelerating at the fastest pace on record.
“What we’re seeing in Nigeria is far more serious,” Besseling said, adding that it could spill over into Ghana and other surrounding countries. “The Western region really is highly exposed.”