Productivity, tech key to profit among Africa’s battle-scarred banks
Despite tough economic conditions, banks in Africa have demonstrated resilience and now have an opportunity to not only grow, but sustain growth - helped by sustained volume increases, higher interest rates, and stable risk costs.
This is according to McKinsey research regarding the productivity opportunity, which shows that revenues have recovered and are now higher than pre-pandemic levels.
However, overall banking return on equity (ROE) still remains low.
In a statement released mid-December 2022, the research firm said ROE in all African geographies (except Kenya), still remains one to two percentage points (pp) below pre-COVID-19 levels, despite a strong rebound in 2021.
“Part of the reason for this is that many of the downward pressures on ROE in African banking predate the pandemic. To return to profitability, banks may therefore need to look deeper to address productivity blocks within the sector,” it added.
McKinsey provides a synopsis of what they believe to be the current state of affairs within each of the continent’s five biggest banking markets, being Egypt, Kenya, Morocco, Nigeria, and South Africa.
“Egypt has experienced the steepest decline (–9.5 pp), followed by South Africa (–2.7 pp). Coming off of a low base, Nigeria is the only major African economy that has seen an increase in banking ROE since 2016 (3.6 pp), driven by a decline in risk costs following Nigeria’s economic reforms post the 2015–16 recession, a partial recovery of oil prices, early easing of COVID-19 restrictions and Central Bank of Nigeria (CBN) forbearance measures,” it stated.
Francois Jurd de Girancourt, a partner in McKinsey’s Casablanca office and leader of the firm’s Financial Institutions Group in Africa, said: “African banks are costly to run, with an average cost-to-asset ratio of between 4 and 5 percent, almost twice as high as the global average. At the same time, the economic environment within which many African banks operate, often characterised by lower bancarisation rates and loan-to-deposit ratios, means that the domestic revenue pools offer fewer scale benefits. This suggests that banks may need to review their cost base and operating models, especially if they want to keep investing into technology and increase access to the banking system.”
McKinsey analysis suggests that African banks may need to achieve productivity gains of between 25% and 30% if they are to restore pre-pandemic profitability.
In many respects, the pandemic and a tightening global economy have already prompted most banks to begin this journey.
To help accelerate progress, the firm is suggesting six productivity streams that could be considered as part of a holistic response to the productivity opportunity.