Africa's banking sector the second most profitable in the world, says McKinsey

As the global banking sector continues to see sluggish growth since the financial crisis a decade ago, the prospects are much brighter for the banking sector in Africa, according to a new report from management consultancy McKinsey & Company. The firm predicts annual growth of 8.5% in banking revenues between now and 2022.

Despite a current slump in correspondence with the global economy due to a dip in commodity prices, economies across the African continent are endowed with promising economic indicators. On average, Africa has the youngest population in the world, a large majority of which will enter the workforce over the next few years, set to boost overall productivity.

The continent appears to be gradually overcoming fundamental challenges such as attaining food security, and tackling unemployment. A highly promising factor for the region’s economic growth is that nearly a billion people on the continent now have mobile internet connectivity, which creates a large, untapped market with limitless potential.

As a result, economies in Africa appear to be going in the opposite direction of the rest of the globe. A lucrative market for investment, combined with increasing economic prosperity are contributing to growth in a number of industries where other economies appear to be struggling; one example of which is the banking sector.

According to a new study from global management consultancy McKinsey & Company, the African banking sector is significantly outperforming the global banking industry. The return on equity (ROE) for the global banking industry has been fluctuating between 8% and 10% over the last seven years.

Moreover, a decade after the financial crisis, the situation appears to be further on the decline. Growth in the revenues of the global banking sector has slowed to 3% since 2016, having remained at 6% for five years before that. In Africa, revenues have grown at a compound annual growth rate (CAGR) of 11% over the last five years, outpacing growth rates in the developed world.

The same goes for profits in the African banking sector. While the global average ROE stands at 8.6%, ROEs in the developed world are even lower, at 6%, while ROEs in Africa are more than twice that amount at 14.9%. The substantial profitability puts it in second place when compared to other regions, behind only Latin America, and ahead of emerging Asia and the Middle East.

The future of the sector is just as bright. According to the consulting firm, Africa’s banking sector currently generates $86 billion in revenues, not accounting for risk costs.  Over the next five years, this number is expected to jump to $129 billion, growing at an average of 8.5% annually. In addition, the share of retail banking in these revenues will go up, from its current levels of $35 billion to $53 billion in 2022.

Consistent with the overall increase in economic prosperity, a sizeable increase in the number of banked individuals is one of the primary drivers of this growth. Between 2012 and 2017, the number of banked Africans increased from 170 million to 300 million. By 2022, this figure is expected to reach 450 million.

Differentiated growth

When examined by country, the primary drivers of this growth can be clearly identified. Certain economies, such as South Africa and Morocco, which are among the largest countries in Africa by GDP, have a relatively high level of penetration in the banking sector, and have thus stabilised in terms of growth. For these countries, the CAGR for banking assets has remained lower than 8% over the last five years.

Meanwhile, countries with economic potential but relatively low banking penetration are expected to accelerate growth for the whole region, described by the report as ‘sleeping giants.’ Nigeria, for instance, has the largest population on the continent, but is financially underserved, which indicates enormous potential for the country. Countries in this category, which include Angola and Algeria as well, have broadly achieved a CAGR in banking assets of between 8% and 13% in recent years.

Lastly, the countries with the lowest levels of penetration, categorised as nascent and transition markets based on varying degrees of maturity, have achieved asset CAGRs of more than 13% in some cases. These categories include Kenya, Ethiopia, Zimbabwe, Tanzania, and a number of other rapidly developing countries.