The economic growth across Africa has recovered further in 2018, supported by higher average oil and commodity prices and fiscal consolidation, as well as better agricultural conditions and increased consumer spending and public investment in nonresource-intensive countries. Plenty of reforms have been implemented in the region, which resulted in the strengthened regional business climate. In addition, the improvement in tourism also helped bolster growth in North Africa. 

However, the growth was slower than expected, partially due to the weakness in countries like Nigeria, Angola and South Africa. Despite the higher oil prices, capacity constraints led to lower oil production in Nigeria and Angola. Meanwhile, non-oil activity in Nigeria was dampened by sluggish private demand and the conflicts which hampered food production. South African’s growth remained subdued, mainly owning to continued political and policy uncertainty and contractions in agriculture, mining, and construction.

Overall, African countries’ fiscal deficit shrank thanks to the increase in commodity revenues and cuts in capital spending, but there has been little progress in raising domestic revenues. Meanwhile, public debt remains high and continues to rise in some countries, as well as mounting concerns over debt sustainability. The governments need to adopt innovative and strategic approaches in mobilising revenue domestically, as it will help reduce debt vulnerabilities and create fiscal space for investment and development spending. In addition, more efforts are needed to implement a regional integration to help achieve a sustained and inclusive growth.

A slight acceleration in economic growth is expected in the region in 2019. The oil and commodity prices are anticipated to be relatively stable, and the economic outlook for the non-resource intensive countries will remain positive on the back of robust public investment and strong agricultural output. However, elevated political uncertainties, escalating trade tensions, tightening global financial conditions, weaker than expected oil and commodity price prospects and domestic currency pressures will pose downside risks to regional economic outlook, as well as regional banking industry outlook.

Most banking sectors in the region are set to enjoy a resilient financial performance in 2019. The income growth of African banks are expected to accelerate slightly in 2019, as the expectations of a mild acceleration in Africa’s economic growth will support credit growth. Despite a rise in loan-loss provisioning coverage under International Financial Reporting Standard 9 (IFRS 9), the profitability of African banks will remain broadly stable.

Overall, African banks maintain ample capital buffers, which enables them to absorb some unexpected losses. Due to the implementation of Basel II and Basel III capital standards and the increased minimum capital requirements in countries such as Ghana and Angola, some banks have been shoring up their capital base. Tighter capital requirements is expected to fuel banking sector consolidation in some countries, as some relatively smaller banks will find it difficult to meet the new requirement.

The asset quality of African banks will remain under pressure in 2019. During the past few years, their asset quality have deteriorated, mainly due to lower oil prices, weak risk management practices, currency depreciation and banks’ large holdings of government securities. Meanwhile, rising US interest rates also had a negative impact on banks’ asset quality, as it led to capital outflows across emerging markets. Banks have been gradually tackling the non-performing loan (NPL) problems. On average, the NPL ratios of banks in Ghana and Angola are among the highest on the continent, while banks in Egypt and South Africa have relatively lower NPL ratios.

Banks will face a more challenging regulatory environment. The stricter regulations and improved supervision, including the implementation of IFRS 9 and Basel II and Basel III banking rules, will help support the financial stability. Some African banks have faced solvency problems in recent years, largely because of volatile operating conditions, corporate governance issues, foreign currency liquidity challenges, lower loan losses provisions and lack of an effective internal assessment of capital needs. In 2018, East Africa region’s central banks have been implementing regulations requiring banks to increase their core capital to build a strong regional banking sector that can withstand financial shocks amid rising non-performing loans. With tighter regulations, bank failures are expected to be reduced.

Egyptian banks are expected to maintain stable asset quality and strong funding and liquidity. The capital adequacy ratios of most banks are well above the regulatory minimum capital requirement, and their capital position will be strengthened slightly in 2019. The profitability of Egyptian banks will be supported by the higher credit demand and broadly stable loanloss provisioning. However, if the proposed change to the way Egypt taxes treasury bill holdings is approved, it will raise the cost of buying government securities and encourage banks to lend more to private sector. Their profitability will be affected, as they are highly exposed to government securities.

Nigeria’s banking sector delivered better financial performance in 2018, which can be largely attributed to the increased average oil prices. However, operating environment for Nigerian banks remain tough in 2019.
Their performance is closely tied to oil prices, due to their huge exposure to the the oil and gas industry. They face the challenge of escalating bad loans, and the asset quality concerns persist. Banks’ capital adequacy ratios will increase, as they need to raise additional capital to comply with Basel III requirement. In December 2018, Diamond Bank was acquired by Access Bank, partially because it suffered heavy loan losses. The merger is expected to be finalised in the fist half of 2019, which will create Africa’s largest bank by customers.

South Africa’s banking sector will continue to deliver healthy financial performance, although the country’s economic growth will remain weak. The traditional South African banks will continue with the transformation to compete with digital-only challenger banks and financial technology firms. Their asset quality and capital positions are expected to remain broadly stable, but subdued credit growth and increased technology investments will have some impact on their profitability in 2019.

To conclude, the economic outlook for Africa will continue to strengthen, and African banks will benefit from the acceleration in economic growth. The longterm prospects of Africa’ banking sector remain strong, although the challenging operating environment will place pressure on banks in 2019.