Why bank stocks are a nightmare to many investors in African markets

Opinion and Analysis

 

A staff of the Nairobi Securities Exchange (NSE) take notes at the bourse. PHOTO | SALATON NJAU 

 

By GEORGE BODO

This week in our continuing series on banks, I want to paint a picture of the struggles banks outside Kenya are likely to go through in the second half of the year.

Just like Kenya, banks in some of middle Africa’s key markets will also have to deal with high balance sheet funding costs.

In Nigeria, the Central Bank of Nigeria (CBN) directive issued early August — requiring banks to pay for their foreign exchange (FX) purchases on behalf of clients 48 hours in advance — together with the operationalisation of the Treasury Single Account (TSA) system continue to create a roller-coaster in local currency liquidity levels, hence pricings.

In August, average rates in Nigeria’s overnight interbank cash market rose to 32 per cent, compared to just 10 per cent in July (and 17 per cent in the first half of the year).

On the foreign currency front, the staggered withdrawal of liquidity of a total of $5.8 billion from the banking system by the country’s state petroleum company, the Nigerian National Petroleum Company (NNPC) has exacerbated the foreign currency liquidity problems.

The first withdrawal in June amounted to $2.5 billion and the state oil company is expected to withdraw the balance of $3.3 billion between August and September.

In Ghana, banks will have to deal with a continuation of the high cost of deposits because of the crowding out of private sector by the government.

As a result, banks in Ghana will have to keep funding themselves at rates above 25 per cent on the local currency front while on the foreign currency front, rates will continue above 10 per cent. These are very high rates to deal with.

In East Africa, excluding Kenya, tightening policy responses by central banks in Uganda and Tanzania has created agitation in liquidity markets.
In Tanzania, average Repo rates in August rose to 10 per cent from six per cent for the first seven months of the year.

In Uganda, where borrowing rates tend to edge up as election-related spending dries up liquidity, interbank rates peaked at 20 per cent in August.
The problem in Uganda is rates tend to remain elevated several months after election.

For instance, in the run-up to the 2011 elections, which were held in February, both the overnight interbank lending rates and 91-day Treasury bill yields rose steeply, a trend that persisted and only peaked in January 2012, almost a year after the elections.

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Further down south in Zimbabwe and Zambia, it’s the same case.

The two governments are dealing with falling global commodity prices, which have brought some serious foreign currency shortages.
So why is cost of funds and liquidity so important?

Banks borrow to lend, and in the process pocket the spread between their borrowing and lending costs. Borrowing at premium levels, which has a direct correlation with liquidity concentration levels in the market, is not good for the length of the spread.