Mergers hold the next growth story for many banks in Africa

After nearly a decade of business boom for sub-Saharan Africa (SSA) banks characterised by double-digit annual balance sheet growth, the boom cycle appears to have run its course, largely courtesy of pass-through effects of undesired economic events across the region.

Commercial banks have opted for a more risk-averse approach to asset allocation since 2016; largely choosing to reduce the pace at which they fund the private sector, and the economy at large.

Data from the International Monetary Fund (IMF) shows that between 2004 and 2015, annual private sector credit growth in SSA averaged strongly at 15 percent. In 2017, that pace slumped to just 3.5 percent. Instead, banks have ramped up the pace at which they funded central governments, largely considered risk-free in many quarters.

This risk-aversion can also be seen through penetration. While banking sector total assets to gross domestic product (GDP), an implied indicator of banking penetration, rose from 41 percent in 2004 to 58 in 2015, it has since plateaued at 57 percent. Broadly, this calls for a new growth story. And as SSA banks struggle to wrap their heads on the next growth story, the answer may lie in building fresh critical mass through mergers.

Fully cognisant of this, a number of banks in the region have warmed up to, and even consummated, the idea of mergers.

The latest being in Kenya where NIC Bank and Commercial Bank of Africa (CBA) recently announced merger talks. It is a merger that, while baked with patches of synergies, could help the two financial heavyweights build critical mass in their balance sheets.

But there are even more merger stories further across in West Africa. In Nigeria, Access Bank, the country’s third largest lender by assets, this week announced merger talks with Diamond Bank, the seventh largest financier.

Upon fruition, the merger will create the largest bank by assets in both Nigeria and SSA excluding South Africa, with total assets in excess of $14 billion (or Sh1.4 trillion).

This will surpass Zenith Bank and First Bank, the current largest banks.

In Ghana, there are currently merger talks involving some three banks (and some others still in the pipeline).

However, while these merger talks are largely a compliance race to meet the new minimum core capital requirement, effective January 2019, of the equivalent of $89 million (based on this year’s average exchange rate between US dollar and Ghanaian Cedi), it will also help build a fresh critical mass and create a new balance sheet growth story. This is a directive that was issued back in September 2017 by the Bank of Ghana.

In Tanzania, the country’s financial regulator, the Bank of Tanzania, while approving a relatively less high profile merger between TBP Bank and Twiga Bancorp early this year, explicitly stated an openness to more mergers in the sector.

In the French-speaking West Africa economic zone (commonly referred to by its French acronym of UEMOA), there was a merger involving Bank of Africa’s Benin operations and a local name, a transaction which was consummated in February 2018.

Typically, in the absence of a tangible growth story, mergers can, in the long term, help banks strengthen deposit franchise and achieve efficient funding, strengthen balance sheets for both business and regulatory purposes, tweak asset allocation by opening up a new pool of customers, build efficient distribution and even bring down cost of risk.

As 2019 draws closer, mergers and acquisitions will be a key theme to watch out for in SSA’s banking scene.

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