African banks are waking up to a new reality following the global financial crisis as firms downsize their budding investment banking divisions, scale back regional businesses and focus on core products and services.
Loan defaults, falling stock prices and increased funding costs have brought the industrys bull run to a screeching halt while the ongoing western financial meltdown has triggered a wider debate on the resiliency of the regions business models.
Banks are now going to be focusing on the core of the business, and the marginal businesses such as investment banking will not be that active now, Arnold Ekpe, group chief executive of the pan-African bank Ecobank Transnational told Emerging Markets.
Despite their limited exposure to toxic assets and relatively robust capital levels, many banks across the region before the crisis had begun dipping their toes into less conservative models. Banks, particularly in West Africa, had started to diversify treasury investments out of government bonds into higher-returning securities while flirting with investment banking to service corporate activities during the recent run of credit growth.
But Ekpe noted that lower demand from companies for debt and equity operations as well as mergers and acquisition advice would drive banks to concentrate on traditional commercial banking activities and maintain conservative balance sheets. As a result, banks are likely to concentrate on vanilla products such as lending, cash management and trade finance, he said.
But others warned of the dangers of a regulatory backlash. Yassine Benjelloun, head of treasury and capital markets at London-based investment bank MediCapital said: There is a risk that financial supervisors will overshoot and investment banking-related products will be relegated, just when Africa needs to develop its financial system.
Ekpe said African banks must learn the mistakes of their western counterparts. The basic rules of banking having basic risk management, not growing too fast, having a clear business model, strategic discipline and good cost controls apply whether you are in Africa or in the West.
Benjelloun predicted scarce funding sources would lead to banking consolidation across the continent as firms look to boost their financial firepower and efficiency. In addition, banks who just expanded to develop a pan-African band for the sake of it rather than due to any meaningful business sense in the previous bull run will now have to retreat to their home markets, he said.
The Nigerian market has been the most impacted by the financial crisis and banks have incurred losses of around $5.3 billion in bad loans related to margin loans for purchases of stocks, according to the central bank.
The country has been hit by reduced liquidity as foreign banks reduce lines of credit, said Onche Ugbabe, chief strategy officer at First Bank of Nigeria.
Benjelloun said risk-averse and liquidity-starved foreign institutions may pull out of the region entirely, a scenario which would hike trade finance and borrowing costs, while reducing the investor base for primary market investment banking deals in Africa.