Central bank talks the talk on Angolan bank reform

Two Angolan banks had their licences revoked on 2 January after missing the 31 December deadline to meet new capital requirements imposed by the National Bank of Angola (BNA). The regulations were introduced to strengthen the country’s banks and make them better suited to supporting badly needed economic diversification.

The two banks to have their licences withdrawn are Banco Mais and Banco Postal. In a statement published on 4 January, the BNA said: “The National Bank of Angola decided to withdraw the licences of the said banking financial institutions, which cease, as of this date, their respective activities.” Their assets will now be managed by liquidators appointed by the BNA, who will seek to return deposits to customers and pay bank employees. Banco Postal shareholders denied that the bank was “bankrupt” {link to Macauhub piece}.

Angola needs a more responsive banking sector with the ability to offer finance to the private sector companies that the government hopes will underpin the transformation of the economy from one dependent on oil and dominated by the state, to one with much greater diversity and entrepreneurial spirit.

In March 2018, the BNA announced that all Angolan banks had to have minimum share capital of 7.5 billion kwanza ($24.1 million) by the end of the year to boost liquidity and solvency levels. Some banks were quick to comply with the new rules. For instance, Banco BIC Angola shareholders decided at a meeting in April to increase their share capital from 3.3 billion kwanzas to 20 billion kwanzas.

However, BNA governor José de Lima Massano warned that banks failing to meet the new capital requirements would be forced to merge, offer themselves up as takeover targets, or cease trading. It is therefore possible that other banks may be allowed to take over the two bankrupt banks. Speaking on 4 January, Massano announced that the BNA had signed a memorandum with the IMF to assess the quality of the assets held by Angolan banks, as well as their size. This process could result in further licence suspensions.

Additional share capital can be increased through the “issuance and subscription of new shares” or by “incorporation into the share capital of legal reserves, free reserves or results for the financial year, provided they have been audited”, under Notice 2/2018 on the Adequacy of Minimum Capital Stock and Regulatory Equity of Banking Financial Institutions.

In June, the BNA dismissed Banco Angolano de Negócios e Comércio’s (BANC) directors, after its shareholders said that they were unable to increase the bank’s capital levels. BANC, which appears to be controlled by the governor of Cunene Province, Kundi Paihama, was founded in 2007 and had assets of $186 million at the end of 2017.

Administrators have been appointed to identify assets that can be disposed of and debts that can be restructured. Theywill remain in place until late March at the earliest to “restore adequate levels of regulatory liquidity and solvency”. BANC’s licence was not revoked on 2 January along with the other two insufficiently capitalised banks, but it remains to be seen what will happen to the bank if its capital cannot be increased to the required level.

There are currently 30 banks in Angola, including the two for which licences have been revoked, which could be regarded as too many for the size of the economy, particularly given the small size of some of those banks. Five banks:Banco Angolano de Investimentos, Banco Economico, Banco de Fomento Angola, Banco BIC Angola (BIC) and Banco de Poupança e Crédito (BPC) control more than 80% of total banking assets, deposits and loans, leaving the remaining banks with a small pool within which to compete.

Why did the BNA act?

The BNA really had to act after the government was forced to bail out the country’s biggest bank, BPC, on two occasions, to the tune of $3.186 billion. In addition, some of its other reforms had already begun to pay off. For instance, the Financial Action Task Force, an international body that seeks to combat money laundering, has decided to remove Angola from its monitoring process.

BNA officials also seem to have been emboldened in their determination to push through the reforms by their own research that revealed that bad debt, defined as loans on which repayments are at least three months overdue, accounted for a massive 31.3% of all debt held by Angolan banks in February 2018, or 1.5 billion kwanzas ($6.88 billion) out of 4.8 billion kwanzas ($22 billion).

This contrasts sharply with figures from the IMF’s Global Financial Stability Report, which indicate that the ratio of bank non-performing loans to total gross loans worldwide in 2017 was 3.7%, slightly down from an average of 4% since 2010.

Three months overdue is generally considered to be the threshold for bad debts by international banking regulators. Such figures are a factor of the severe economic downturn experienced in the country over the past four years but are not sustainable in the long term. The BNA had already increased capital adequacy ratios to comply with the Basel II regulations, a set of international recommendations on sound banking practice, and may now be seeking to comply with the tougher demands of Basel III.

There has already been one significant merger, although in response to the economic downturn rather than the new capital requirements. In 2016, Banco Millennium Angola and Banco Privado Atlântico, which were the fifth and sixth biggest banks by lending, combined to create Banco Millennium Atlântico. However, high levels of non-performing loans will deter potential suitors for other acquisitions.

Market health

Angolan banks have several options when it comes to reducing the level of their non-performing loans. They can obviously be more careful in who they offer credit too, although the government is keen to ensure that small and medium sized enterprises (SMEs) gain access to credit to drive economic diversification and job creation.

They can also renegotiate the terms of their loans with borrowers who can still be viable customers; or sell bad loans to investors at a loss. The latter is more difficult in Angola than in some more developed financial markets because of the lack of potential buyers with knowledge of the market. However, state owned Recredit has been set up as a ‘bad bank’ to buy the bad debts of state owned banks.

Foreign investment is likely to be key in creating a more diverse and responsive banking industry relatively quickly but the involvement of some existing investors seems uncertain. Macauhub reported in late November {link to Macauhub story published on 29.11.18} that CaixaBank wants to cut its 48.1% stake in Banco de Fomento Angola (BFA), which it holds through its control of Portugal’s Banco BPI, as part of its three year strategic plan.

Chief executive Gonzalo Gortázar conceded that the Spanish bank had no involvement in managing BFA and so the size of its stake was inappropriate, although he praised the way in which the Angolan bank was being managed.

There was another sign of investor uncertainty in July, when the BNA revoked Ecobank Transnational’s banking license because it had failed to launch its Angolan operations within 18 months of being awarded the license. It is not the decision to withdraw the license that is troubling, rather that the bank with the widest geographical reach in Africa decided to repeatedly delay the launch of its Angolan subsidiary.Ecobank has managed to set up operations in 36 other African states but was not convinced that the time was right to begin operating in the third biggest economy in Sub-Saharan Africa. Although it has faced difficulties of its own over the past year, including the launch of an investigation by Nigerian regulators, Angola is now the only Lusophone state in Africa in which Ecobank does not operate.

What more can be done?

Lower interest rates would certainly improve access to credit but rates are only likely to fall slowly. The BNA cut its benchmark lending rate from 18% to 16.5% in July after it had been at the former level for four years. However, 16.5% is still high by Angolan historical standards. Rates have been kept high to reduce inflation, which stood at 18.34% in November, the latest month for which figures are available, but this is a lot lower than the average rate of 35.95% between 2001 and 2018.

Luanda is set to introduce legislation this year to encourage mobile finance. Mobile payments and other financial services have become increasingly popular in many parts of Africa over the past few years, and Kenya now has the world’s highest mobile banking penetration rate.

The technology is popular among higher earners who are used to using their smartphones for many transactions but has been particularly effective in spreading banking services to millions of unbanked people across the continent, including in rural areas where physical bank networks are limited. The lack of a regulatory framework, bank innovation, competition and state support has seen Angola lag behind in adopting the technology but Luanda is set to pass the required legislation that has been drawn up with World Bank support.

The entry of new players into the Angolan banking sector should encourage the uptake of mobile banking. In November, Standard Bank Angola launched a Chinese language website to target the many Chinese people now working in the country. Standard Bank Angola is 51% owned by South Africa’s Standard Bank and 49% by Angolan insurer and fund manager AAA Activos.

Angola is being used to trial the technology but the bank plans to roll it out in other African countries, including some where it has already begun to employ Chinese speaking staff. Standard Bank previously only offered digital access to its services in English or Portuguese across the continent but it is pleased with the number of Chinese customers who have begun to use the new service.

Banks operating in Angola should benefit from the growth of the Angolan Debt and Securities Exchange, which has previously relied on government bonds. Standard Bank Angola was the first company to list, with its 4.7 billion kwanza ($15 billion) bond issue paying 17% a year, but more should follow. Issues must be approved by the Capital Markets Commission.

There is a long way to go but those connected to the Angolan banking system seem positive about the banking and general economic reforms that are underway. CaixaBank’s CEO Gortázar said that the changes were “going in the right direction”. It is to be hoped that regulators ensure that stronger banks – coupled with greater transparency and accountability – a will engender more confidence in the sector.

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