Re-imagining banking in Africa
in a post-COVID world


Timothy Wambu/ Khayelihle Mthembu

Head of Equity Research, Absa Kenya
Equity Analyst, South Africa Banks Research, Absa Corporate and Investment Banking


In September, we hosted our inaugural Africa Banking Conference, themed: “Re-imagining banking in Africa in a post-COVID world” We were delighted to have the keynote address delivered by the Central Bank of Kenya Governor, robust panel discussions graced by eminent and distinguished speakers and last but not least, a strong representation of corporates and institutional investors.

COVID-19 brought substantial disruption in bank operational and financial performance. Under strict lockdown restrictions, banks had to close branches and send employees to work from home. Earnings reduced significantly as banks raised forward-looking impairment provision under IFRS 9 and regulators advised banks to halt dividend payments to conserve capital in the face of uncertainty.

However, the message from the banks, regulators and experts who presented at the conference is that banks across the continent remained profitable and capital ratios stayed comfortably above minimum regulatory requirements. Furthermore, bank financial performance in the first six months of 2021 points to a recovery as economies re-open and vaccination rates pick up.

Key to the recovery are two factors:

  1. Loan accommodations and other borrower relief measures carried out by the regulators and governments.
  2. Enhanced levels of digitization: with movement restrictions and social distancing measures in place, alternative channels of accessing banking services became even more prominent, notably mobile and internet banking.

Provision unwind is driving earnings recovery in Kenyan banks

The pandemic hurt Kenyan banks in 2020, with a notable surge in Non-Performing Loans (NPLs) and Cost of Risk. The NPL ratio peaked at 14.5% in December 2020 and would have been much higher were it not for the flexibility afforded by the Kenyan Central Bank, in the classification of loans affected by the pandemic. The Kenyan banking industry had restructured 57% of gross loans in December 2020 and the banks prudently raised their loan loss provisioning. We estimate the average cost of risk increased by 2.5ppts y/y to c.3%-4%. This led to earnings declining across all Kenyan banks in 2020.

2021 is a year of recovery with Kenyan banks reporting significant earnings growth so far (1H21A), primarily from the release of credit loss reserves. The restructured loans affected by the pandemic had eased to 16% in July 2021, with 92% of the restructured loans performing as per the terms of the restructuring. The industry NPL ratio has also improved to 13.8% in July 2021.

Impairments in Nigeria surprised on the upside

Drawing parallels with the oil slump of 2016-2017, we expected Nigerian banks to experience a similar deterioration in asset quality in FY20A, and possibly worse, given the added impact of the COVID-19 pandemic. Asset quality however improved in 2020 despite the concerns, with the industry NPL ratio improving marginally by 9bps to 6.01%. Regulatory forbearance seems to be the primary factor behind the stable asset quality, as acknowledged in several Nigeria MPC communiques.

The percentage of restructured loans to total loans was last reported as 43%, at about N7.7tn in September 2020. Deposit Money Banks, however, argue that the figure is lower when you exclude microfinance institutions.

Cost of risk (CoR) for Nigerian banks increased marginally in 2020 relative to other jurisdictions. This underpinned the earnings growth reported in 2020 across all Nigerian banks, unlike the steep earnings declines in other markets due to a strong surge in CoR. We expect asset quality to remain stable and Cost of Risk to remain range-bound in 2021, going by management guidance. We however contend that we could see upside risk to both metrics when the regulatory forbearance period comes to an end.

The year 2020 was a tough operating environment for Nigerian banks. The Naira was devalued twice, depreciating by c.25% to the US Dollar. In addition, interest rate plunged to record lows, with the 364-day Treasury bill touching a low of 1.15% in November 2020. The banks however made the most of the volatility to report strong fixed income trading gains and foreign currency revaluations on their foreign denominated assets. With relative Naira stability and a rebound in interest rates expected in 2021, we expect a reversal and should see trading losses materialize.

Nigerian banks are also grappling with a tough regulatory environment. The loan to funds ratio (LFR) directive remains in place, requiring banks to maintain their loans at 65% of their total funding. This has been especially tough to comply with in a risk-off environment. The banks have therefore been penalized by having to cede customer deposits to the Central Bank of Nigeria (CBN), resulting in Cash Reserve Ratios (CRR) way above the minimum requirement of 27.5%. Additionally, steep regulatory fee cuts on transactions and bank charges enacted in December 2019 hurt bank revenues in 2020. We are seeing a rebound in transactional fees in 2021, but largely due to base effect.

The digital banking revolution is gaining traction

For several years, banks have had to reinvent themselves to keep up with the changing competitive landscape and customer behaviors. For example, between 2000 and 2010, banks had an internal bias, making huge investments on system changes in support of product-focused innovation. Over the last decade, we saw banks transition to an external bias, focusing on client experience and undertaking huge investments on large-scale transformation in support of digitization.

The digital banking revolution has attracted non-traditional players such as telcos, fintech and big-tech. This has meant that for banks to stay relevant and compete effectively, they must become platform organizations and embrace strategic partnerships with these non-traditional players.

Digital banking trends accelerated substantially during the COVID-19 pandemic. For example, the CBK reported that 94% of transactions were conducted outside bank branches in Kenya, an improvement from 90% before the pandemic. About 61% of Nedbank’s main-banked clients are now digital clients and the bank’s digital sales account for 54% of total sales. Mpesa posted a 50% increase in value of transactions and a 35% increase in the number of transactions. Meanwhile, Absa Bank Kenya saw a 40% reduction in branch transactions.

These trends are allowing banks to rationalize their physical infrastructure and optimize cost-to-serve.

Regulators across the continent are responding with measures to level the playing field, while promoting innovation. Laws are being amended to enhance security and resilience of these digital systems, as well as ensuring that lenders (including non-traditional) have the required liquidity.

Digital banking has the ability to accelerate financial inclusion across the continent and it was encouraging to hear our speakers mention solutions that are being implemented against infrastructure constraints.

As Africa’s leading Pan-African bank, we look forward to taking our learnings from this conference and continuing to innovate to the benefit of our clients.

Timothy Wambu/ Khayelihle Mthembu

Head of Equity Research, Absa Kenya and Equity Analyst, South Africa Banks Research, Absa Corporate & Investment Banking

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