Finance

McKinsey suggests actions to improve African banks’ ROE

Tuesday, 20 December 2022 12:45
McKinsey suggests actions to improve African banks’ ROE

(Ecofin Agency) - The return on equity of banks operating in the continent's five largest markets has declined by 2.6% since 2016, driven by a combination of declining margins and continually high operating costs. 

Despite their rising profits since 2021,  African banks are struggling to reverse the dropping profitability that started long before Covid-19 partly because of a very high cost-to-income ratio, strategy consulting firm McKinsey said in an article released Dec. 6.

According to the article, despite macroeconomic uncertainties, African banks’ revenues have exceeded pre-pandemic levels this year thanks to sustained volume increases, higher interest rates, and stable risk costs. “However, in all African geographies except Kenya, banking return on equity (ROE) still remains one to two percentage points (pp) below pre-COVID-19 levels, despite a strong rebound in 2021,” it reads. 

Part of the reason for this is that many of the downward pressures on ROE in African banking predate the pandemic,” it adds. McKinsey reveals in this context that banks' ROE has been steadily declining since 2016 in the continent's five largest banking markets (Egypt, Kenya, Morocco, Nigeria, and South Africa). The ROE has declined by an average of 2.6 percentage points over the past six years across the five markets. This figure masks disparities among the different countries. Egypt experienced the largest decline (-9.5 percentage points), followed by South Africa (-2.7 points) and Morocco (-2.1 points). 

According to the article, “coming off of a low base, Nigeria is the only major African economy that has seen an increase in banking ROE since 2016 (3.6 pp), driven by a decline in risk costs following Nigeria’s economic reforms following the 2016 recession, a partial recovery of oil prices, early easing of COVID-19 restrictions and Central Bank of Nigeria (CBN) forbearance measures.”

It attributes the downward “drift”  profitability to a decline in net interest income, a predominantly declining interest rate environment, and a decline in fee and commission margins due to increased competition and the rapid digitization of banking services.

Some suggestions to reduce operating costs

At the same time, operating costs have remained constant. For example, in Morocco, average operating costs from 2016 to 2021 remained stable at around 2.3 percent, while net interest income declined from 2.0 percent to 1.8 percent. This contributed to a decline in average return on equity from 9.2 percent in 2016 to 7.1 percent in 2021.

McKinsey's analysis shows that banks operating in most African markets have very high cost-income ratios (CIR), estimated to be between 4 and 5 percent (twice the global average.)

To improve their profitability, African banks should therefore address the various productivity bottlenecks by revising their cost structure and reinventing their operating models.

To this end, McKinsey has identified six priority areas where better resource allocation could help improve productivity while adding value to clients and helping governments advance financial inclusion.

The first key action is to expand digital channels in the retail banking business to reduce the cost of banking services. Currently, the adoption of digital distribution channels is between 25 and 30% in Africa compared to 50% in Asia and Latin America. End-to-end digitization of processes could result in a 30% reduction “in journey cost to serve across branches, contact centers, and vendors and operations and enable the redistribution of activities to prioritize customer-facing sales and care.” 

The second suggestion is to streamline central and back office processes. For the consulting firm,  automated operations driven by artificial intelligence (AI) could result in “ 40 to 60 percent cost-savings.”

In addition, African banks should step up their investments in the most advanced technologies to automate manual tasks and accelerate the migration of applications and IT infrastructures to the cloud, McKinsey believes. 

For support functions, (risk analysts, tax experts, controllers, lawyers, human resources managers, etc.), McKinsey recommends that African banks should outsource their operations to a shared services center or automate them completely using bots and machine learning software.

It also believes that banks would benefit from introducing more flexibility in the management of their real estate assets (premises and branches) by offering their employees the possibility to work from home with the migration to cloud computing platforms or by renegotiating branch leases.

And last but not least, McKinsey urges African banks to use artificial intelligence techniques in their procurement departments, noting that they can, for example, use optical character recognition (OCR) and natural language processing (NLP) to pay suppliers or machine learning tools to improve the cost of cash management in branches and ATMs.  



 
Telecom


 
Public Management


Ecofin Agency covers the news from 9 business sectors in Africa: Public management, Finance, ICT, Agribusiness, Electricity, Mining, Oil and Gas, Comms and Laws. Ecofin Agency is also creating and management specialized medias, in paper and on the web/social networks, for institutions or African publishers.

AGENCE ECOFIN

Mediamania Sarl
Rue du Léman, 6
1201 Genève
Tél: +41 22 301 96 11

REDACTION
redaction@agenceecofin.com

Public management
Aaron AKINOCHO
Borgia KOBRI
Moutiou ADJIBI

Finance
Idriss LINGE
Walid KEFI
Chamberline MOKO

Agribusiness
Espoir OLODO

Electricity
Gwladys JOHNSON

Oil and Gas
Olivier DE SOUZA

Mining
Louis-Nino KANSOUN

ITC 
Muriel EDJO

Comms
Servan AHOUGNON

Cameroon
Brice R. MBODIAM
Sylvain ANDZONGO
Monique MAY
Julienne Rose SENDE

Togo
Fiacre E. KAKPO
Waliyullah TAJUDEEN
Séna AKODA

Niger
Sandrine GAINGNE

Gabon
Stephane BILLE
Pierre-Celestin ATANGANA

Desk
Stéphane ALIDJINOU
Souha TOURE
Vahid CODJIA
Diane ZODEHOUGAN
Hikmatu BILALI

Translation
Schadrac AKINOCHO
Mouka MEZONLIN
Firmine AÏZAN



Digital
Omar SOKHNA
Mamadou DIOP
Bacary MANE
Abdel Razak MOULIOM

Digital Marketing
Jérémie FLAUX
Geraud ACHI
Jean Christian BERNARD
Franck FOUTE

Web publishing
Bakoly RAHARISOA
Rina RAMANANDRAISOA
Hasina RAJEMISON

Development
Dominique FLAUX

 


 
REGIE COMMERCIALE
AGENCE ECOFIN
Rue du Léman, 6
1201 Genève
Tél: +41 22 301 96 11
Fax: +41 22 301 96 10

Benjamin FLAUX
bf@agenceecofin.com 
Tél: +41 22 301 96 11 
Mob: +41 78 699 13 72

Voir page 
Nos services
 

 










 



Ecofin Agency is a news agency for economic and sectorial information. It was created in 2010 and it website was launched in June 2011.

Please publish modules in offcanvas position.