The sovereign debt crisis in African countries triggered by rising global interest rates, weak local growth, and the prospect of more losses from restructuring are the biggest risks for lenders on the continent, according to outgoing Nedbank CEO Mike Brown.
“We’ve seen that play out in Ghana and Zambia, as those have very strong knock-on effects into the banking system, in particular, the nexus created by Basel, where banks have no choice but to hold very high volumes of domestic bonds,” Brown said in an interview with Haslinda Amin on the sidelines of the World Economic Forum in Davos Switzerland.
“When those are hair-cut, that puts a lot of pressure into the banking system.”
“That concern about sovereign health and, what it means for the banks, is still the No. 1 risk,” he said.
Ethiopia became the latest Africa to default on its debt after it failed to make an interest payment in December, joining Ghana and Zambia.
The Eurobond-repayment burden of African countries is set to peak in the next two years, with big maturities due for Angola and Kenya.
In Ghana, a plan to restructure the West African nation’s local currency and overseas debt forced banks to set aside about $1.1 billion for the losses after they impaired as much as 57% of local and onshore dollar-denominated debt holdings, according to Bloomberg calculations.
Despite the challenges, banks have remained profitable, thanks to rising interest rates and loan growth rates that are above the pace of economic expansion.
According to Fitch Ratings, the capitalization, funding and liquidity in African banks will remain sufficient, underpinning their creditworthiness.
“Most of the larger banks in Africa have had very good real-life experience navigating those risks over many years,” Brown said.
Johannesburg-based Nedbank already has operations in Eswatini, Lesotho, Mozambique, Namibia, and Zimbabwe and maintains representative offices in Ghana and Kenya.
It holds a 21% stake in the pan-African lender Ecobank Transnational, giving it exposure to more markets in East and West Africa.
Nedbank is looking to expand in East Africa, a focus area for incoming CEO Jason Quinn, who takes over from Brown on 31 May.
“We are not sure whether we should do that through acquisitions, or now that we have built our tech stack, whether we can make a digital entry into those markets,” Brown said.