*This content is sponsored by RMB, a diversified financial services brand encompassing investment banking, fund management, private wealth management and advisory services.
By Onke Mkiva and Inal Henry*
Banks in sub-Saharan Africa (SSA) are looking for good quality assets vis-a-vis adequate returns. The international banking landscape is vastly different from the SSA landscape. In SSA, local banks face challenging economic and political conditions, high costs of hard currency borrowings, currency transfer and inconvertibility constraints, single obligor limits and limited depth of local currency markets, to name just a few.
The SSA banking power base balance has shifted over the last 12 months – particularly in the traditional banking space where investors are hungry for good credits, notwithstanding a host of other factors. Bankers have to think innovatively on how to structure transactions and mitigate risk in order to deliver results.
This is mostly due to the limited returns on assets being achieved. This trend has been more prevalent in the US$ syndicated loan space, with a few Sovereign borrowers in East Africa now borrowing at five to seven years, as opposed to the usually two- or three-year bullet facilities. Coupled with this is the lower margin rate being accepted by some investors which may lead to a distortion of the market and an inaccurate risk assessment by international yield seekers.
Another interesting fact is that local real money investors looking for good quality credits are pushing borrowing rates lower, particularly in the South African, Namibian and Botswana markets. Borrowers therefore see no value in expensively priced vanilla banking facilities and would rather take the upside of thinly priced equity instruments.
What contributes to this current landscape? Firstly, there are limited, and a reducing pool of, good quality assets across SSA. While generally the sentiment is that the improving commodity prices, stable currency rates, positive political outlook and improving investor sentiment would improve growth and investment in SSA, there is a substantial gap between investor liquidity and good SSA assets. Sovereigns have stretched their loan tenors between five to seven years, and recent SSA Eurobond issuances such as Nigeria, Senegal and Ivory Coast were five to eight times oversubscribed, achieving significant pricing deductions.
Secondly, local markets and borrowers are taking advantage of deep liquidity and asset scarcity. South African corporates have held back on capital expenditure, while subdued growth in markets such as Botswana and Namibia has limited asset growth for lenders – shifting the capital supply and demand dynamics. Borrowers are taking full advantage of this when they come to market. A sustained improvement in commodity prices (oil price now above US$60/barrel, copper price above US$6,000/ton), and a positive political outlook in some parts of SSA, will also increase asset supply into the market.
Lastly, commercial banks need to find better ways to collaborate with Development Financial Institutions to avoid crowding out, and ensure value-add. Joint pitches, blended funding structures and appropriate risk sharing are some of the ways in which the institutions collaborate to achieve a common purpose and goal.
The significant and positive changes in the South African landscape have given rise to renewed market and investor optimism and confidence in South Africa. However, this does not necessarily translate into immediate increased lending activities. Banks are still constrained by economic and other factors including the recent SA downgrades. The overall improvement will result in increased lending activities, but this will take time.
As SSA borrowers are becoming regular issuers in both the local and international markets, more is needed from local commercial banks to meet the needs of their clients. As trusted advisers with deep knowledge of clients’ businesses, commercial banks should be more amenable to borrower’s needs, which requires a shift in thinking from the traditional vanilla offering approach to a more individualistic and innovative approach. Client centricity is hard to achieve, particularly in SSA where each jurisdiction is so diverse. Commercial banks need to have extensive service platforms across jurisdictions, using seamless advisory and funding processes with minimal red tape.
It is indeed interesting times for banks and borrowers in SSA, with both parties seeking out the best possible terms and conditions to lending. With the generally improving political and macroeconomic conditions, it will no doubt lead to increased lending capacity and borrowing cycles in the near future. Exciting times await us.
- Onke Mkiva is loan solutions transactor (rest of Africa), and Inal Henry is head of export finance at Rand Merchant Bank.