29 African Banks: Off-Balance Sheet Transactions & Leverage Interplay (Update)

Dear Africa interested individuals:

                                                       Banks have been encouraged over the years to reveal more of their liabilities and potential liabilities on the balance sheet instead of off it.  This act helps improve transparency and gives investors a better chance to predict the likelihood of sudden and extreme deterioration across key financial performance indicators.  

Potential risks to the balance sheet that are not on it,are usually found in the notes as contingent liabilities.  Guarantees, letters of credit, performance bonds and bankers' acceptances are usually listed off the balance sheet.  Some banks (like First Rand) have decided to put their bankers acceptances on the balance sheet.  The Central Bank of Nigeria under Sanusi issued a directive for all banks in Nigeria to move their bankers' acceptances onto the balance sheet.  Not all banks have complied with this directive and I am not aware of any reversal through a circular.  

Over the years, some banks have taken some transactions off the balance sheet (that should be on it) to better manage their size and risk exposure.  I have determined that any bank that has 'open' contingent liabilities that exceed twenty percent (20%)  of the bank's total assets, is at a heightened risk of  a sudden decline in performance.  The bank with the excess contingent liabilities will be unwieldy and inflexible to deal quickly with sudden changes in its operating environment.  

I reviewed the most recent fiscal year-end for twenty-nine (29) banks located in fifteen African countries.  Only five (5) banks had off-balance sheet contingent liabilities in excess of 20% of their total assets.  In terms of financial leverage, thirteen (13) banks exceeded my threshold of 7.5X.  Out of these thirteen banks, only one of them was able to achieve a RoA in excess of 3.00%.   The bank is First National Bank, Namibia.  I believe this feat was achieved because FNB Namibia had a contingent liability to total assets for FY 2015 of only 3.58%.  I & M Holdings, Kenya was also able to achieve a RoA of 3.73% because its financial leverage was 5.69X though its contingent liabilities relative to assets was 27.4%.  Kindly note that the lesser negative is having a higher leverage in comparison to carrying an excess of contingent liabilities off the balance sheet.     

The ranking of the twenty-nine banks was based on how all the banks stack up against each other from an off-balance sheet and financial leverage standpoint.  The ranking:

1. Capitec Bank, South Africa

2. National Bank Malawi

3. Ghana Commercial Bank 

4. Bank of Baroda, Uganda

5. Bank of Kigali

6. Barclays Kenya

7. Cal Bank Ghana

8. CBZ Holdings Zimbabawe

9. Equity Bank Kenya

10. First National  Bank Namibia

11.  FBN Holdings Nigeria

12. FNB Botswana 

13. Zambia National Commercial Bank

14. First Rand Group South Africa

15. Standard Bank Group South Africa 

16. UBA Group

17. Kenya Commercial Bank (KCB)

18. Stanbic Uganda

19. I & M Holdings Kenya (The equivalent of 27% of assets in contingent liabilities)

20. GT Bank

21. CRDB Tanzania

22. MCB Group Mauritius

23. Zenith Bank (The equivalent of 29% of assets in contingent liabilities)

24. Societe Generale Ghana

25. Access Bank Nigeria (The equivalent of 32% of assets in contingent liabilities as at Q1 2016)

26. Commercial International Bank Egypt

27. ETI (Ecobank) (The equivalent of 21% of assets in contingent liabilities) 

28. Barclays Africa

29. National Bank of Egypt (The equivalent of 33% of assets in contingent liabilities)

Update

ETI and National Bank of Egypt are in grave danger based on this analysis.  Both banks exceeded my leverage and contingent liabilities limit.  

Other banks cutting it close are: Commercial International Bank Egypt, Societe Generale Bank Ghana, Barclays Africa, Zenith Bank and Access Bank.  

The top eleven (11) are worthy of a closer look.  It is interesting to note that Barclays Kenya (discussed in an article in February on this blog) and FBN Holdings (discussed a few weeks ago on this blog) made the top 40% of the twenty-nine dispersed African banks.   

Be wary of banks with too much baggage not kept on the bus.  This may be convenient but should definitely be unsettling for the bank's financial position and for discerning investors.  

Different unrelated analyses properly applied, will work together to reveal viable companies.  

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