Africa is one of the fastest growing regions in terms of banking revenues
McKinsey has just published its annual report on the state of the banking sector. The report, Banking on a Sustainable Path, offers insight and perspective on a sector that is currently evolving in a highly volatile environment.
This year saw major changes in the global banking industry. So banks certainly have the opportunity to experience higher margins and benefit from the rise of fintech), on the other hand, they have to contend with macroeconomic volatility. Banks must manage to overcome a double challenge: to maintain the logic of short-term sustainability, while at the same time accelerating the transformation of their models.
At the same time, the performance gap between leading banks and others continues to widen. Despite higher margins due to higher interest rates and a stronger capital position, more than half of the world’s banks continue to maintain profitability and return on equity below cost of equity. The report takes an in-depth look at the strategies that enable certain players to rise above the fray and outperform.
The report also returns to the importance of sustainable finance. Banks today find themselves at the start of a “new era”: they are being asked to finance not only clean energy, but a wide range of transformational low-carbon projects across all industrial sectors. Investments in the transition to carbon neutrality alone could represent future revenue potential for banks estimated at at least $100 billion per year by 2030.
What do such changes mean for African banks?
Like other international banks, African banks have experienced a strong recovery: they have returned to profitability and average profitability has increased from 12% in 2020 to 15% in 2022. While this is possible, it could mean a relatively stable ROE for African banks over the next 5 years. the continuation of global macroeconomic shocks. But there are also significant differences across the continent, with some banks in Nigeria and Kenya in particular using price-to-book ratios (price to book value) well below 1. Morocco’s price-to-book ratio is in the high range, trading between 1.3 and 1.6, while South Africa’s is among the highest in the world (well above 2 for the bank average).
“This rise in yields gives African financial institutions the breathing space they need to improve their resilience in the short term, while continuing to invest in technology and support growth.” This was stated by Francois Jurd de Girancourt, deputy director of McKinsey’s office in Casablanca and head of the firm’s center of competence for financial institutions in Africa.
Africa could be one of the fastest growing regions in terms of global banking revenues (6-7% in local currency) in 2022, with growth led by Egypt (20%) and West Africa (7%) in particular. ~$100 billion. The picture is a little bleak but still very positive considering the depreciating currencies. This growth is supported by the strong penetration of banking services and the advent of transaction banking, with the addition of new payment options and increased interest rates. Innovation is being fueled by banks’ investments in technology and a notable explosion of fintech activity across the continent.
“As the penetration of fintech on the African continent accelerates, Morocco is one of the countries that will catch it. The Kingdom has a mature traditional banking system, but mobile money penetration is relatively low. On the other hand, the country is experiencing fintech growth unlike other African countries. In Morocco, fintechs are increasingly looking for opportunities within specific areas, including payments, SME services and business services, in collaboration with banks. Added Jurd de Girancourt.
Like the rest of Africa and the world, sustainable finance in Morocco is entering its “next era” – shifting from a focus on renewables to a broader energy transition.
Africa’s efforts to navigate the energy transition and adapt to climate change are likely to be supported by investor demand for sustainability-related bonds, which increased from 2% in 2017 to ~8% in 2022 (>$1.7 billion in sustainability-related bonds issued ).
Finally, it should not be forgotten that financing climate efforts will require clearer definitions and better measurement. A range of opportunities are available in corporate and investment banking, SME banking, retail banking, wealth and asset management.