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Nigeria's Access Bank faces tough competition in South Africa venture


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Nigeria's Access Bank faces tough competition in South Africa venture

Nigeria's Access Bank PLC faces tough competition from incumbents as it ramps up operations in South Africa, but it could find success in niche markets.

On May 27, Access renamed its recently acquired unit Grobank Ltd. as Access Bank South Africa Ltd. At a press conference to mark the rebranding, the unit's managing director, Bennie van Rooy, said the bank would launch a "full retail banking suite" and highlighted opportunities to provide trade finance, treasury services, loans and international payments to corporations.

Access Bank has long had subsidiaries scattered across sub-Saharan Africa, but they have not been key priorities. Such was the scale of the opportunity in Nigeria that it made little sense for the country's banks to invest much in their foreign subsidiaries when they could make more money on a single domestic deal, said Ronak Gadhia, director of research on sub-Saharan African Banks at EFG Hermes.

In the first quarter, Access' operating income from Nigeria totaled 180 billion Nigerian naira, or $437 million, compared to 26 billion naira from the rest of Africa, S&P Global Market Intelligence data shows.

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But unfavorable regulatory changes have spurred Nigeria's major banks to again focus on boosting their foreign operations. The central bank has increased cash reserve ratio requirements, meaning a large chunk of banks' balance sheets are sitting in cash earning nothing, while other reforms have limited certain bank fees, Gadhia said.

Access Bank, which aims to expand its customer base to 100 million by 2022, has recently bought banks in Mozambique and South Africa; including the latter, its African footprint now spans 10 countries. It also aims to launch operations in Guinea in 2021 and is acquiring a bank in Botswana.

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Aside from Access' Ghana unit, whose 2020 pretax profit rose 58% year over year to 23.4 billion naira, its other African subsidiaries made a combined annual pretax profit of 5.11 billion naira — 4% of the group total, according to Market Intelligence calculations.

About a decade ago, rivals Ecobank Transnational Inc., headquartered in Togo, and Nigeria-based United Bank for Africa PLC followed a similar strategy of buying units across Africa to expand their footprint. But, Gadhia said, they did not commit sufficient capital to achieve a workable size of operations.

"If you don't commit capital, it's hard to achieve scale," said Gadhia. "Subscale operations typically aren't profitable, which is what we saw with UBA and Ecobank's subsidiaries. It's taken them the best part of 10 to 12 years to start generating substantial profits from some of their subsidiaries."

Gadhia said the amount Access is committing to its foreign operations is "way too low."

South Africa

Access will compete against South Africa's big four banks — Standard Bank Group Ltd., FirstRand Ltd., Absa Group Ltd. and Nedbank Group Ltd. This quartet dominate the sector in terms of earnings and assets, although smaller rival Capitec Bank Holdings Ltd. has the most customers.

"The South African banking sector is highly competitive, and it has proved difficult for challengers to grab market share from the big four," said Adrian Saville, professor and director of the Centre for African Management and Markets at Johannesburg's Gordon Institute of Business Science.

"The exception has been Capitec, but broadly major banks' market share is contested and defended fiercely."

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Capitec, which has focused on low-income South Africans since launching services 20 years ago, expanded its retail customer market share by 4.0 percentage points in 2020 versus a year earlier, according to a survey by Consulta, while that of Standard Bank, Absa and FirstRand all contracted.

"The headline customer numbers are fairly stable, but within particular product lines there can be quite large swings such as in home financing," said Saville.

Despite its retail customer base, Capitec's retail loan book was worth just 52 billion rand at 2020-end, Market Intelligence data shows. The big four's combined retail loans totaled 1.87 trillion rand.

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Capitec benefitted from launching during a period of prolonged economic growth and currency and inflationary stability that lasted until shortly after South Africa hosted the 2010 World Cup, although now unemployment has hit all-time highs and power cuts are widespread.

Other competitors

Other banks have launched recently, too. Insurance company Discovery introduced a banking subsidiary in 2018 to target wealthy South Africans. By mid-September 2020, Discovery Bank had 489,000 accounts and around 2.4 billion rand in deposits.

"Discovery has put strong behavioral elements into its model and has been a very astute, so I've no reason to suspect its banking arm won't succeed in the long term," said Saville.

Commonwealth Bank of Australia sold TymeDigital in November 2018, a year after the unit received a banking license, losing $113 million on its investment. Now known as TymeBank, it has 3 million, mostly low-income, customers and made a loss of 1.3 billion rand in the 12 months to June 30, 2020.

Industry veterans Michael Jordaan and Yatin Narsai lead digital-only, business-focused Bank Zero, which had planned to launch full operations in 2019 but has yet to do so.

Nevertheless, Saville highlights three opportunities Access could target.

These include South Africa's immigrant population, which he described as unbanked or served by the banking sector in inefficient and ineffective ways; the country's agriculture sector, which Grobank was focused upon prior to Access' acquisition and which is less competitive in terms of banking services; and new trade financing requirements arising from the African Continental Free Trade Area, which came into force on Jan. 1.

"All South Africa's major banks are very active in trade finance, but Access' pan-African footprint and cross-border activities might give it a chance to build market share in particular banking channels," Saville said.

As of June 28, US$1 was equivalent to 410.66 Nigerian naira.