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Banks to Experience Severe Credit Losses in Late 2021 – Mckinsey & Company

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First Bank

The crisis of 2008 came from within the financial services industry. Today, in this crisis of the real economy, banks are economically afflicted alongside other sectors in society. But banks are also playing an important role in helping society through the crisis: as the conduit for state support, supporting small businesses, companies and individual citizens.

The crisis is delivering, in effect, the biggest stress test to banks, a test which the industry is withstanding to-date, whilst demonstrating resilience and purpose. The impact of the last year without the role the industry has played is likely much deeper.

Going forward, McKinsey anticipates the test presented for banks by the pandemic will evolve in two stages in the months and years ahead. First will come severe credit losses, likely through late 2021; almost all banks and banking systems are expected to survive. Then, amid a muted global recovery, banks will face a profound challenge to ongoing operations that may persist beyond 2024.

  • Depending on scenario, average return on equity globally would continue its decline, from 8.9 percent in 2019 to 4.9 percent in 2020 to 1.5 percent in 2021. At the trough in 2021, ROE would fall to −1.1 percent in North America, −1.8 percent in Europe, and −0.2 percent in developed Asia. ROE would fall from higher starting levels and bottom out higher in emerging Asia (2.6 percent), the Middle East and Africa (MEA; 3.7 percent), and Latin America (5.2 percent); and it would take a smaller dip to 8.6 percent in China.
  • African banks enjoyed one of the highest ROEs in the world, however the overall ROE is expected to half at 7.6 percent in next 2 years, while revenues after risk may decline by 15 percent in a muted recovery scenario. In the short term, banks will be affected by cascading credit losses resulting in 50 percent impact on revenues while in the long term, continued pressure on margins and moderate volume growth might dwarf the revenue growth to half of pre-COVID-19 levels.
  • The onset of recovery is likely to vary by country as level of provisioning done by banks in 2020 will be a deciding factor if they will see V- or U-shaped recovery. In SA and Kenya, banks have already provisioned highly for potential bad debts while Morocco and Nigeria may continue to increase provisions in 2021 as well.

Francois Jurd de Girancourt, Head of the Banking Practice in Africa said: “The ROE recovery post COVID-19 is projected to be lower compared to pre-crisis levels, unless banks further improve their cost efficiency. African banks cost to asset ratio is 2.3 times higher than the global average and based on our estimates, banks would need to increase their operating efficiency by at least 25-30 percent to converge back to 2019 ROEs.”

Marie-Claude Nadeau, San Francisco-based McKinsey partner and report author said: “Banks will need to act quickly to return to precrisis ROE levels, in a far more challenging environment than the decade just past. The period of zero percent interest rates is being prolonged by the economic crisis and will reduce net interest margins, pushing incumbents to rethink their risk-intermediation-based business models. The trade-off between rebuilding capital and paying dividends will be stark, and deteriorating ratings of borrowers will lead to inflation of risk-weighted assets, which will tighten the squeeze.”

Mayowa Kuyoro,  a partner at McKinsey & Company in Lagos, Nigeria said: “In Nigeria, our analysis is that ROE levels are likely to recover by 2024, although they will remain low compared to pre-crisis levels. To proactively manage this, Nigerian banks will need to revisit and interrogate matters of efficiency and productivity to deliver services to more people at lower cost. The rapid shift to digital is clearing the way for banks to ramp up their use of data and analytics to enhance services and reduce costs. For banks that are existing market leaders, now is the time to consider investing in technology infrastructure and talent to expand beyond current customers and products. Equipping employees with the right skills and digital tools, doubling down on digital marketing, and establishing robust digital infrastructure are likely to be key enablers for success in the next normal.” 

For the long term, banks need to reset their agenda in ways that few expected nine months ago. McKinsey sets out three imperatives that will position banks well against the trends now taking shape.

  1. They must embed newfound speed and agility, identifying what worked well in their response to the crisis and finding ways to preserve those practices.
  2. They must fundamentally reinvent their business model to sustain a long winter of zero percent interest rates and economic challenges, while also adopting the best new ideas from digital challengers.
  3. And they must bring their broader purpose to the fore, especially environmental, social, and governance issues, and collaborate with the communities they serve to recast their contract with society.

CEO/Founder Investors King Ltd, a foreign exchange research analyst, contributing author on New York-based Talk Markets and Investing.com, with over a decade experience in the global financial markets.

Finance

Global Credit Rating Affirms Sovereign Trust Insurance A Rating

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insurance

Global Credit Rating Affirms Sovereign Trust Insurance A Rating

Global Credit Rating, an international rating agency based in South Africa, has affirmed Sovereign Trust Insurance Plc A rating in its latest report released for the month of December 2020.

In a statement released through the Nigerian Stock Exchange (NSE), Global Credit Rating noted “that the Company has shown a great deal of consistency in her claims paying obligations to her numerous customers spread all over the country.

The Report further stated that “the listing of the Rights Issue in 2019 helped in increasing the Shareholders’ funds of the Company by 33.8%, to N7.8b by the end of the Financial year in 2019 as against the figure of N5.8b in 2018.

“Subsequently, by the third quarter of 2020, the Shareholders’ funds had increased to N8.2b which also translated to a 31% increase in the corresponding period of 2019 with a figure of N6.3b. In the Rating Agency’s opinion, Sovereign Trust Insurance Plc is strong in liquidity with more than adequate claims coverage that compares well to industry averages.

“The capital adequacy of the Underwriting Firm is considered strong according to the rating report and this is underpinned by the sizeable capital base catering for the quantum of insurance and market risks assumed. In this regard, the ratio of Shareholders’ funds to NEP, (Net Earned Premium) improved to 189.2% in the Q3 of 2020 as against 130.9% in the corresponding quarter of 2019.

In terms of peer-to-peer performance comparison, “Sovereign Trust Insurance Plc did very well when compared with other selected insurers in terms of Capital, Total Assets, Gross Premium Income (GPI) and Net Premium Income (NPI).”

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Banking Sector

Sub Saharan Africa Mergers and Acquisition Transactions Totalled US$ 25.7 Billion in 2020

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Sub Saharan Africa Mergers and Acquisition Transactions Totalled US$ 25.7 Billion in 2020

South Africa – Refinitiv today released the 2020 investment banking analysis for the Sub-Saharan African. According to the report, an estimated US$523.7 million worth of investment banking fees were earned in Sub-Saharan Africa during 2020, down 15% from 2019 and the lowest annual total in six years.

Fee declines were recorded across M&A advisory, debt capital markets underwriting, and syndicated lending.  Advisory fees earned from completed M&A transactions generated US$108.3 million, down 55% year-on-year to the lowest level since 2013.  Debt capital markets underwriting fees declined 13% to US$64.9 million, a four-year low, while syndicated lending fees fell 3% to US$263.0 million. Equity capital markets underwriting fees totalled US$87.5 million, almost three-times the value recorded during 2019.

Fees generated in the energy & power sector account for 26% of total investment banking fees earned in the region during 2020, up from 10% during the same period last year, while the financial and technology sectors account for 17% and 13% respectively.  South Africa generated the most fees in the region, a total of US$279.9 million accounting for 53%, followed by Mozambique with 14%. Boosted by lending fees, Sumitomo Mitsui Financial Group earned the most investment banking fees in the region during 2020, a total of US$57.3 million or an 11% share of the total fee pool.

MERGERS & ACQUISITIONS

The value of announced M&A transactions with any Sub-Saharan African involvement reached US$25.7 billion during 2020, 62% less than the value recorded during 2019 when Naspers’ US$35.9 billion internet assets spin-off boosted merger activity to an all-time high.  The value of deals recorded during 2020 is the lowest annually since 2012.  The number of deals declined 5% from last year to a seven-year low.

The value of deals with a Sub-Saharan African target declined 39% to a sixteen-year low of US$12.5 billion as domestic M&A within the region declined 44% from last year and the combined value of inbound deals reached just US$7.1 billion, the lowest annual total since 2009.

Chemicals company Sasol agreed to sell a US$2.0 billion stake in LyondellBasell in October, the largest deal in the region during 2020.  Boosted by this deal, materials was the most active sector for deal making during 2020, accounting for 23% of Sub-Saharan African target M&A activity, followed by energy & power (19%) and technology (17%).  South Africa was the most targeted nation, followed by Uganda. Outbound M&A reached a three-year high of US$6.0 billion during 2020, 13% more than the value recorded during 2019.  The value was boosted by Angolan state-owned Sonangol’s purchase of PT Ventures from Africatel Holdings for US$1.0 billion and Templar Investments’ US$1.0 billion offer for Jindal Steel’s Oman unit. With advisory work on twenty deals worth a combined U$4.4 billion, JP Morgan holds to the top spot in the financial advisor ranking for deals with any Sub-Saharan African involvement during 2020.

EQUITY CAPITAL MARKETS

Sub-Saharan African equity and equity-related issuance reached US$2.5 billion during 2020, 54% more than the value recorded during the previous year, but lower than every other annual total since 2005.  The number of deals recorded increased 19% from 2019 but was lower than any other yearly tally since 2012.  One initial public offering was recorded during 2020, compared to three in 2019.  Malawian telecoms company, Airtel Malawi, raised US$28.7 million on the Malawi Stock Exchange in February. JP Morgan took first place in the Sub-Saharan African ECM underwriting league table during 2020.

DEBT CAPITAL MARKETS

The African Development Bank raised $3 billion in a “Fight Covid-19” social bond at the end of March to help alleviate the economic and social impact the Coronavirus pandemic will have on livelihoods and economies in the region.  With this deal, and Ghana’s US$3 billion Eurobond in February, Sub-Saharan African debt issuance totalled US$8.9 billion during the first quarter of 2020, the second-highest first quarter DCM total in the region of all-time.  Only US$1.9 billion was raised during the second quarter, the lowest quarterly total in eight years, followed by US$4.0 billion during the third quarter.  Prosus raised US$2.2 billion in December, boosting fourth quarter bond issuance in the region to US$4.3 billion.  The total proceeds raised during 2020 is US$19.0 billion, down 30% from last year and a four-year low.

Deutsche Bank took the top spot in the Sub-Saharan African bond underwriter ranking during 2020 with US$2.6 billion of related proceeds, or a 13% market share.

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Finance

DF Holdings Limited Purchases 474,603,596 Shares of AIICO

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AIICO insurance

DF Holdings Limited Purchases 474,603,596 Shares of AIICO

A majority shareholder in AIICO Insurance Plc, DF Holdings Limited, has increased its stake in the company by purchasing additional shares of 474,603,596.

In a disclosure statement published through the Nigerian Stock Exchange (NSE) and signed by Donald Kanu, the Company Secretary, AIICO, DF Holdings Limited purchased the shares on 31, December 2020 from the Nigerian Stock Exchange in Lagos Nigeria.

The 474,603,596 shares were purchased at N1.17k per share. Meaning, DF Holdings Limited invested N555.286 million in AIICO Insurance. See the details below.

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