Africa has proved a challenging landscape for major European banks. What does the future hold for the market, as some of the big players close their offices on the continent? Jamie Crawley investigates.

Last year a number of high-profile European banks closed or downsized their operations in Africa, including Swiss giants Credit Suisse and UBS.

For many though, the African outlook is positive. Wealth data business Wealth-X’s 2019 High Net Worth Handbook for 2019 forecasts that Nigeria will see the world’s highest growth in its high-net-worth population to 2023, with a compound annual growth rate of 16.9%.

“The number of new millionaires is growing steadily,” Demir Avigdor, head of Africa and Europe for Standard Chartered Private Banking tells PBI. “We expect that the growth in ultra-wealthy populations in Africa will outpace that of Europe and North America over the next decade, with the number of ultra-high net worth individuals growing by 30% in Africa.”

“With increasing affluence, our clients will also often require private wealth management. Our network and offering in Africa enables us, uniquely, to deliver a complete one-stop solution to our African client base,” he adds.

Julius Baer is another one with an optimistic view of the continent. The bank opened an advisory office in Johannesburg in November – the same day that Credit Suisse said it was closing theirs.

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By GlobalData

It is true South Africa did have a trying 2018, slipping into recession in September (albeit clambering out in December), but Julius Baer has a bullish outlook for the years ahead.

“We believe the next five years offer great potential for stronger GDP growth, increasing foreign direct investments, lower inflation and lower unemployment rates due to the change of policies,” head of Southern Africa, Raoul Korn, says.

Why then are the likes of Credit Suisse, UBS and HSBC deeming the market surplus to requirements?

Sandton in Johannesburg, where Julius Baer opened an office the same day Credit Suisse closed theirs last year


Political battlegrounds

It was also during November last year that the Central Bank of Nigeria (CBN) announced the departure of HSBC and UBS, reporting a sharp fall in foreign investment from the year previously.

No reasons were provided by the two banks for their departure. However, Reuters reported that an HSBC research note from July had said a second term for President Muhammadu Buhari “raises the risk of limited economic progress and further fiscal deterioration, prolonging the stagnation of his first term, particularly if there is no move towards completing reform of the exchange rate system or fiscal adjustments that diversify government revenues away from oil.”

The memorandum noted sluggish economic growth, the contraction of service sectors and unemployment almost trebling between 2014 and 2017.

Buhari retaliated to this, accusing HSBC of money laundering for former president, General Sani Abacha, widely accused of corruption and human rights abuses during his five-year term in office. According to the corruption watchdog Transparency International, Abacha stole as much as $5bn between 1993 and his death in 1998.

The departure coincided with Nigeria’s dispute with South African telecommunications company MTN, after the government ordered it to pay the $8.1 billion sent abroad, accusing it of violating currency regulations.

These are examples of the fraught political landscape that banks must handle in maintaining an active presence in Africa.

UBS for their part offered fighting talk of their ongoing interest in the market, stating “Although we have closed our representative office, Nigeria – and Africa overall – remain growth markets for UBS. We will continue to invest and are fully committed to our clients,” but declined to comment further.

“As regulatory requirements and the complexity of cross border private banking increases, it has become more challenging to operate in some markets, including Africa,” Demir Avigdor sums up.

The Central Bank of Nigeria announced the departure of HSBC and UBS in November last year


Rules and regs

One incumbent African bank that will seek to profit from the exodus of European firms is the South African Nedbank. Their head of strategy, Rufaro Mucheka speaks of the regulations on, for example, anti-money laundering and exchange control, which make it a complex market to navigate.

“Private banking has been traditionally the domain of offshore banks, but increased regulation and compliance has led such banks to focus elsewhere and withdraw from the continent which, as an emerging market, is viewed as riskier as compared with developed markets,” she tells PBI.

“There is a gap in the African markets as what is currently provided is predominantly tiered banking service and not the tailored and bespoke service and solutions private banks in developed markets provide.

“European banks withdrawing has more to do with increased compliance and the regulatory environment. This has led a number of banks to technically de-risking by shutting down or selling their operations on the continent which carry a higher risk weight and capital allocation.”

Mucheka notes as well that the majority of the HNWIs in South Africa are entrepreneurs holding a substantial portion of their wealth in South and southern Africa. “Diversification from the local political, currency and economical risks is a major concern.”

For Standard Chartered though, the bank’s 150-year presence in the region is worth standing up for. “Africa is a key market for the bank and one that we remain committed to. Having a deep understanding of our clients, their needs, their businesses and their specific market conditions enables us to navigate the landscape and better support our clients,” Avigdor states.

Firms that are embedded in the region are likely to have knowledge of the complex environments is hardwired into their DNA.

Rufaro Mucheka says: “For institutions like Nedbank, the continent is our home market and we are here to stay. We understand the regulatory landscape and compliance challenge and we can fill the gap left by these banks whilst providing best in class private banking and wealth management solutions.

“We are seeing an increasing number of diaspora or repatriates of African descent returning to the continent and starting new ventures. The fact that these individuals have worked and invested in, sometimes, more than one overseas jurisdiction does create complexity in their financial profiles.”

Specialist knowledge

This is where the likes of Credit Suisse, for example, may have decided deemed a presence in the African market an unnecessary expenditure.

The Swiss bank has been on a cost-cutting streak under Tidjane Thiam’s stewardship since 2015. The French-Ivorian CEO spoke in January of the need for caution and flexibility in an uncertain world, and the South African office, it seems, was one of the obvious sacrifices. Operations were also downsized in Canada, Brazil and Russia.

The bank’s focus has been increasingly towards wealth management and ultra-net-worth individuals, reflecting a trend in the industry of banks specialising rather than generalising.

What does this say for the future of European banks in Africa? Rufaro Mucheka believes those that retain presence there in any capacity will see the benefits of the private banking space, as the market continues to attract investment and wealth continues to rise.

“European banks will still be active on the continent especially in the corporate and institutional space. Some will focus on trade which is lower risk, less capital intensive. Others will provide advisory capital raising activities giving borrowers access to the international debt capital markets,” she says.

“European banks with operations on the ground, who are better placed to manage the compliance responsibilities through their African vehicles may decide eventually to enter the private banking space and leverage their relationships but that remains to be seen.”