Over the past three weeks or so, street chatter has been dominated by unga (flour mill), sugar, milk and cows for loans, for obvious reasons. In today’s installment, let me take you off that by flying you a little northward to South Sudan.
So, a while back I had an argument with one of the Tier one banks on the long-term viability of their business in South Sudan.
At that time, they had just reported a huge loss in the subsidiary. I first wrote about this sometime in mid 2015, when I cautioned that South Sudan was no longer a goldmine.
Today I want to fully discount the original appeal of South Sudan as a growth story for banks.
Consequently, in my view, all the major local banks with significant presence in the country should scale down their operations as soon as practicable. And KCB Group #ticker:KCB has already kicked the ball rolling.
There are just too many oscillating variables that are beyond any bank’s control.
First, the complex political tiki-taka around resource sharing will continue to grind more proverbial powder keg—which often only takes a single gunshot to light.
This has and will fail to deliver the requisite infrastructure for on-balance sheet activities—which is the mainstay of any commercial bank.
Consequently, it will take some time before it eventually fully transforms into a lending market.
Second, local banks often cite the fact that South Sudan is a transactional market. Not anymore. Volumisation of transactions have been dependent on availability of hard currencies, especially the US dollar.
Oil sales, which were the main source of hard currency, have continued to wobble. With global oil prices set to continue floating just marginally above the floor, the outlook on hard currency availability isn’t rosy; that is, even if production was to be ramped up.
In 2016, South Sudan earned around $225 million (or approximately 13 billion South Sudanese pounds (Sh23.4 billion) from oil sales. That’s a massive haircut for a country that at some point earned in excess of $1 billion in oil sales.
The focus of transactions now shift to the humanitarian activities of the many non-governmental organisations operating in South Sudan.
These include payment disbursements to local field staff, often in local currency, as well as offering account-balance warehousing services.
Additionally, global relationships will also ensure that local banks are not able to domicile the entire mandate—and instead the business mandates have to be shared with some other cross-border names operating in South Sudan.
This fragmentation of mandates does not require a monster of branch network to effectively discharge.
Occasionally, the bank would offer documentary credit for purposes of importation of basic commodities—but this is often far in between and dependent on pre-allocation of US dollars by authorities (which goes back to hard currency availability).
Effectively, these are services that, in my view, do not require a bank to have 10, 15 or 20 branches. One or two can dispense such services.
Then there are the adverse macro-factors rearing an ugly head: first is the issue of hyperinflation, which, although temporary, will still shred 2017 earnings.
Second, the continued depreciation of the local currency has impaired capital in dollar terms—which means a capital top-up maybe required at some point. No shareholder should pass this.
Instead, local banks should be seriously looking into scaling down their South Sudan businesses.