Zombies roam Sub-Saharan Africa. They shuffle onwards, not quite living and not quite dead, suspended in an unnatural half-life by meddling governments and central banks. But the growing horde is becoming a serious threat to the already-constrained availability of trade finance across the continent, writes Michael Turner.
The sharp decline in commodity prices, most notably oil’s plunge from above US$110 a barrel in 2014 to about half that today, has pushed swathes of lenders in Africa’s vastly over-banked markets towards becoming “zombie” banks; that is, banks that manage to shamble on almost entirely thanks to government support.
“Zombie banks are definitely a growing concern across Sub-Saharan Africa,” Kevin Holmes, head of trade, product management, transactional products and services at Standard Bank, tells GTR. “As recently as last year we’ve seen banks in Uganda and Kenya go into receivership.”
Kenya, which has upwards of 40 banks for a population of around 44 million people, saw mid-sized lender Chase Bank put into receivership in April 2016 – the third such event in the country since Patrick Njoroge became governor of the Central Bank of Kenya in July 2016.
In Uganda, the assets and liabilities of Crane Bank have been transferred to mid-tier lender dfcu Bank, the country’s central bank said on January 27. The Bank of Uganda assumed control of Crane Bank in October last year, with the central bank citing a lack of capital as a key reason.
History shows that banks trying to operate in a faltering economy have got a much higher chance of either failing completely or becoming zombies if the state steps in with aid.
The creation of zombie banks was seen in Japan in the early 1990s, when the country’s economic bubble burst. More recently, the problem is being played out in Italy, where the state has stepped in with billions of euros of support for its banking system, though the European Banking Authority still reckons that the country’s banks have a €15.4bn shortfall in core tier 1 capital.
As in Africa, non-performing loans (NPLs) are a major factor in sucking capital away from Italian banks, with bad debt totalling €202bn in January, according to the Bank of Italy.
It happens because in a falling economy banks tend to hoard cash rather than lend it as a way of preserving their capital, meaning that banks are not getting the returns on their capital they are accustomed to through things like interest payments on trade finance loans.
This in turn further hurts the bank’s financial standing and increases the likelihood of the state aiding the bank, which by then would have reduced its lending to such an extent that it does not have a robust enough business model to survive by itself, and a zombie is born unto the world.
Trade hit hard
The impact that Africa’s shaky banking systems will have on trade finance in the region is difficult to understate, as failed banks create a chain reaction of bad sentiment that affects all parts of the export/import relationship.
“African governments have insisted on international banks using local banks on deals,” says Robert Besseling, executive director of specialist intelligence company Exx Africa. “This was all well and good when the local banks were doing well, but now there is a far higher counterparty risk.”
This hints at a major problem with domestic banks failing – a collapse in customer confidence, which undermines the inherent trust that comes with trade finance instruments.
“The knock-on effect may result in international exporters no longer willing to accept transfer and convertibility risk for those import markets that may have enjoyed relaxed credit tenors in the past,” says Holmes at Standard Bank.
This could lead to exporters looking at ways to mitigate country or bank risk, such as insisting that an institution from another more stable system act as the confirmation bank in trade documentation. It is possible that an importer in Angola, for example, may have to find a bank in South Africa willing to take on the counterparty risk that an exporter will not – which will add more cost to the trade process at a time of constrained liquidity in domestic banking systems.
“Exporters, not willing to absorb this cost, may even require pre-payment from their African importer,” says Holmes.
A banker who did not want to be named in this article says that they have already anecdotally heard of this happening in East Africa. An importer with more than 20 years of history in dealing with an international multinational is now having to radically change the way it finances imports, from an open account to a discounted open account model. This means that, through no fault of its own, the importer has to pay upfront because of the multinational’s rapidly diminishing faith in the local banking system.
The terrible three
Sub-Saharan Africa is no stranger to banking crises. The African Development Bank estimates that between 1970 and 2012, the region suffered, on average, one systemic banking crisis a year. The rest of the world combined went through an average of 2.4 a year during the same period.
But it’s the banking systems in Angola, Mozambique and Nigeria that are of particular concern now, according to Besseling at Exx Africa. It is not a coincidence that NPLs are rampant in each of these jurisdictions.
“In Angola, at least five of the largest banks are nearing collapse due to NPLs,” he says.
Angola’s biggest public bank, Banco de Poupança e Crédito (BPC), needs an “urgent” US$1.25bn cash injection by the state to cover some of its “fraudulent or non-performing loans worth US$1.18bn”, says Exx Africa in a research note, which also puts the country’s Banco de Desenvolvimento de Angola “on the verge of collapse, with around US$400mn in irretrievable loans”.
With around 98% of Angola’s exports linked to the oil sector, the country has been one of the hardest hit on the continent by the plunge in oil prices. This means that Angola’s strife runs deeper than just the banking sector, with many areas of the economy in desperate need of financial aid.
“National oil company Sonangol is in serious distress because it cannot access foreign funds so it needs to rely on local banks, which are unable to lend,” says Besseling. “The president will likely step in.”
Angola’s President José Eduardo dos Santos said in July 2016 that the country had barely enough revenue to cover its sovereign and Sonangol debt, which includes a US$1.5bn Eurobond from the state and billions of syndicated and bilateral loans for the oil company.
The state bond, due in November 2025, was trading at a yield of 10.27% on January 30, according to a bond trader who declined to be named as they are not authorised to speak to the press. The yield on the bond is up 77 basis points from where it was priced in 2015, an indicator that international finance has become more expensive and tougher to get for Angola, as debt investors grow increasingly wary around the sovereign.
To compound problems, corruption in Angola is rife. Transparency International ranks the state at 164 out of 176 countries in 2016’s Corruption Perception Index, which measures countries by their perceived levels of corruption, as determined by expert assessments and opinion surveys.
“Angola still has the worst rank among the African countries we look at,” said Charlie Robertson, global chief economist at Renaissance Capital, on January 25.
Mozambique defaults
Mozambique, like Angola, is suffering from severe debt repayment issues that are having a knock-on effect on its banking system. The sovereign defaulted on a US$60mn coupon payment of a Eurobond due to mature in January 2023, and acrimoniously fell out of an International Monetary Fund (IMF) financing programme last year – a key stamp of approval that helps give other lenders the confidence to invest money into the country – after the country admitted to US$1.4bn of undisclosed loans. Mozambique ranks at 142 on the 2016 Corruption Perception Index.
In December last year, Mozambique was forced to bail out its fourth-largest commercial lender Moza Banco to the tune of US$111mn-equivalent after the bank’s solvency ratio fell below the 8% minimum regulatory requirement. The Mozambique Central Bank played down the effect NPLs had on Moza Banco’s balance sheet, but they made up 8% of its entire loan portfolio, while the rest of the country’s banking system have NPL ratios averaging a little above 5%, according to official government statistics.
The problems in Mozambique’s banking system have been intensified by the IMF and foreign financiers cutting off their funding to the state.
When the party stops
Meanwhile, banks in oil exporter Nigeria are finding it tough to keep up with the loss-absorbing balance sheets of international banks.
“In Nigeria, the problem is that international majors left the country and the local banks stepped in to provide financing,” says Besseling. “But now those loans are due and are not being repaid.”
The non-performing loan rate in Nigeria was 5.19% in 2015, according to the latest figures available from data company Bluenomics. In 2016, the World Bank said that this ratio of failed loans had soared to a whopping 11.7%.
Nigeria’s First Bank, the country’s largest by assets, recorded an NPL ratio of 18% in 2015, up from just 3% the year before.
The situation in these countries has grown so dire that analysts are speaking of a potential “death spiral”, where lines of funding for the banking system vanish – largely on the back of good sentiment collapsing as other lines of funding are withheld, creating a vicious circle of financial calamity.
Besseling says: “Angola and Mozambique are definitely headed towards a death spiral and Nigeria could be too.”
As a way of combatting the reduced options for funding, zombie banks often find themselves paying unsustainably high interest rates to depositors while accepting low rates on high-risk loans, as these are the only ways the failing bank can lure fresh cash to its crumbling balance sheet.
To compound matters, corporate clients get a whiff of how bad the situation is and shift money away from less stable tier two and three banks and place them with larger lenders, which generally means international names.
This heaps pressure on the ability of regional and local banks to raise local funding, says Holmes at Standard Bank.
“This flight to quality is having a detrimental impact on domestic banks generating trade financing opportunities,” he explains.
And that appears to be the rub – corporates, understandably, do not want to leave their money with bad banks, and bad banks are going to become far worse without the funding and liquidity provided by corporate business.
“It’s early days to label this as a ‘death spiral’,” says Holmes. “But indicators do suggest that 2017 is going to be another tough year.”
Those who dare
While international banks increasingly withdraw from Sub-Saharan Africa – most notably Barclays, which is performing an almost complete U-turn after a previous chief executive Bob Diamond began aggressively building the African franchise from 2011 – there is plenty of opportunity for banks willing and able to stick it out.
“With a number of banks choosing to exit the continent for either regulatory or commercial reasons we believe that those banks able to weather the storm will benefit in the medium to long term,” adds Holmes at Standard Bank.
Meanwhile, pan-African banks could use the opportunity to acquire some distressed assets in local markets, broadening their reach at fire-sale prices, with Nedbank last year linking itself to potential purchases in Kenya.
And regional supranational banks are poised to take up a sizeable portion of the slack. The African Export-Import Bank promised at the end of January to provide “no less than” US$90bn of support for Africa trade over the next five years, with US$25bn of that earmarked for intra-African business.
Whatever happens, Africa will need to move away from creating more zombie banks if it wants to maintain its trade business with the rest of the world.
