Thinking long term: The sector will have to offer lasting solutions to reduce over-liquidity

While Gabon’s banking sector is one of the more developed in the Economic Community of Central African States (Communauté Économique et Moné- taire de l’Afrique Centrale, CEMAC), penetration lags behind its sub-Saharan African peers. Banking assets accounted for a mere 21% of GDP in 2012, according to the IMF, while the private sector’s ratio of credit to GDP stood at only 11% (19% of non-oil GDP). Greater competition amongst more banks – the number has grown from seven to 10 since 2009 – put downward pressure on lending rates for corporates in particular and is encouraging greater penetration at the retail level as newcomers build out their branch networks. Pushed by a broader drive to reduce the country’s dependency on commodities, the foreign-dominated Gabonese banking sector is having to innovate in terms of products and channels to broaden financial inclusion and reduce growth barriers for small and medium-sized enterprises (SMEs).

The share of banked Gabonese was measured at 21% in 2011, up from 16% in 2010. As of April 2013 there were just over 266,000 accounts for 1.5m people. Yet as banks’ over-liquidity continues to grow the sector will need to expand its intermediation to the real economy. “This is a moment of truth for the Gabonese banking sector as the government requires oil companies to repatriate onshore capital held to provision for winding down oil operations,” Alain Fazili Bula, the vice-president of global markets at Citibank Gabon, told OBG. “Banks will need to deploy more capital and the private sector will need to structure more bankable projects to absorb this liquidity.”

PERFORMANCE: Banks are coming off significant growth in both loans and deposits, particularly short term, stimulated by a growing government staff wages – with the public sector accounting for 62% of the formal working segment in 2010 – and higher expenditure and investments linked to the African Cup of Nations football tournament in January 2012. While growth in total credit is slowing from a high of 42% in 2011 to a projected 26% in 2013, due to a comparative drawdown in short-term spending on public infrastructure, according to the IMF, credit to the private sector is expected to grow from 17% of non-oil GDP in 2011 to 21.2% in 2013.

Aggregate deposits grew 17.2% in 2012 to CFA1.93trn (€2.90bn), and a further 19.9% in the first quarter of 2013 to CFA2.31trn (€3.46bn), according to data from the Professional Association of Credit Institutions of Gabon (Association Professionnelle des Etablissements de Crédits du Gabon, APEC). As in many emerging markets, short-term deposits dominate, and their share of total deposits reached 60.64% in April 2013, up from 60.03% a year prior, reflecting the lack of attractiveness of term deposit interest rates of around 3.5% (in June 2013).

KEEPING UP: Meanwhile, total net lending doubled from CFA787bn (€1.18bn) at year-end 2010 to CFA1.41trn (€2.12bn) at year-end 2012, growing 26.7% year-on-year (y-o-y) in 2012. Fuelled by its high structural liquidity, and with conservative lending practices, banks’ credit growth accompanied wider economic expansion. Growth in lending to state enterprises and the private sector, at 30.1% y-o-y to CFA40.9bn (€61.35m) and 29.7% to CFA1.05trn (€1.58bn), respectively, in 2012, outstripped lending to government, which grew 14.2% to CFA309.4bn (€464.1m). In 2012 total assets grew 17.7% y-o-y to CFA2.23trn (€3.34bn), even as the quality of credit also improved, with the non-performing loan (NPL) ratio decreasing from 4.1% to 3.8% in the year to December 2012, according to data from Gabon’s National Credit Council.

The sector is heavily concentrated, and the three largest banks – BGFI, Banque Internationale pour le Commerce et l’Industrie du Gabon (BICIG) and Union Gabonaise de Banque (UGB) – continued to dominate the sector, accounting for about 79.66% of deposits and 76.73% of loans in April 2013, according to APEC. Yet relative newcomers to the sector, namely Morocco-based Attijariwafa’s UGB and Ecobank’s Gabon subsidiary, have driven new account creations over the past year (see analysis).

Heightened competition has had the largest impact on blue-chip corporate borrowing rates. While competition has put upward pressure on deposit rates, long-term savers through term deposits still face negative real interest rates. “Increasing competition has pushed up deposit rates to an average of 3.5% for term deposits, while it has significantly reduced corporate lending rates to as low as 6.5-7%,” Jean-Baptiste Siate, Ecobank Gabon’s managing director, told OBG. “Lending rates to SMEs and individuals have trended downwards, but by less, and average 9-12% and 13%, respectively.” While elevated compared to many OECD countries, lending rates remain far below many other markets in West and Central Africa, where they can regularly exceed 20%. Meanwhile, commissions on transactions, such as ATM use and transfers, have remained high by international standards.

RESTRUCTURING: Whilst the banking market has become more competitive in the past five years with the entry of new foreign players, the state is in the process of restructuring its majority participation in the sector (see analysis). Although the state maintains significant stakes in the top three lenders either through Banque Gabonaise de Développement (BGD) or directly – including 7% in BGFI, 26% in BICIG and 30% in UGB – it has long intervened directly through the BGD, created in 1960.

In April 2010 the government restructured its intervention in the sector, folding two SME credit guarantee funds into the restructured BGD. Management was changed following high NPLs and mismanagement, while the bank was refocused on its key market segments, under the supervision of the Central African Banking Commission (Commission Bancaire de l'Afrique Centrale, COBAC). “BGD has undergone a restructuring process to focus on its core functions of catering to individuals, SMEs and local administrations,” Roger Owono Mba, the administrative director-general of BGD, told OBG. “In a number of secondary cities, like Lambaréné, Tchibanga and Koulamoutou, we have been the only bank present.”

BIG PLAYER: By April 2013 BGD controlled about 6.5% of loans, at CFA104.5bn (€156.75m), and 4.18% of deposits, at CFA96.5bn (€1.44bn), mostly consisting of short-term deposits by the state’s Deposit and Consignments Fund, which acts as the government’s financial arm. Despite being a state bank, BGD is bound by the same COBAC regulations as commercial banks. BGD aims to raise CFA10bn (€15m) in seven-year bonds on the regional Central African Stock Exchange (Bourse Régionale des Valeurs Mobilières d'Afrique Centrale, BVMAC) in 2013, while an early 2013 audit of the bank by COBAC is due to be published by the end of the year. Meanwhile, the newly created Banque de l'Habitat du Gabon (BHG) was split from BGD and established as a subsidiary in 2010 to handle mortgages, although its total lending reached only CFA5.8bn (€8.7m) by March 2013. With a mere CFA1.5bn (€2.25m) in deposits, BHG remains vulnerable; it will have to raise its shareholder equity from the current CFA8bn (€12m) to above the new CFA10bn (€15m) mandatory floor in 2013. “Growth in mortgages has remained marginal, due to delays in real estate development,” Bruno Otha Ondounda, the director-general of BHG, told OBG. “Once we recapitalise BHG, we expect to expand our mortgage lending beyond the less than CFA1bn (€1.5m) we extended in 2012.”

OVER-LIQUIDITY: Banks’ traditionally conservative lending practices, with a focus on risk-free lending to government, state fixed-income securities and low-interest deposits at the central bank (over twice the mandatory minimum), have caused the challenge of over-liquidity in the banking system to become structural. Whilst the value of all loans was 62.5% of deposits in 2010, the ratio had improved to 73.5% by year-end 2012; banks have also eagerly welcomed the restarting of Treasury bill and bond issues by the government on the regional exchange in 2013.

Given this over-liquidity, the inter-bank market in Gabon remains inactive, with no reference rate on short-term borrowing. The development of a money market, with Gabon issuing CFA240bn (€360m) in Tbills in 2013 alone, will deepen the financial system for banks. Most of this over-liquidity is in the form of short-term deposits, yet banks rely on a relatively stable funding profile given that short-term funds are also kept long term. “Banks’ lending is constrained by the short-term nature of their deposits, but they could do more to extend the tenor of funding by developing more long-term savings instruments,” Pascal Yembiline, the African Development Bank’s (AfDB) country economist for Gabon, told OBG.

The pressure to deploy capital is only set to grow for banks. The government announced in 2013 its intention to require all oil and gas operators to transfer their provisioning and contingency funds to banks in Gabon. These are the funds operators hold to eventually unwind their projects in Gabon – the costs of dismantling an oil installation average 0.25% of asset value, according to professional services firm Ernst & Young, and provisioning is an annual 5% of unwinding costs over the period of a (renewable) 10-year permit – and could total over €500m, according to Citi’s Bula. As banks prepared to handle this influx of foreign currency in mid-2013, oil firms were expected to favour foreign banks like Citi and BNP Paribas (through BICIG), given their preference for offshore guarantees. Other foreign-affiliated banks like UGB and Ecobank could also take a share, as could market leader BGFI. State-owned banks are also jostling for a share of inflows. “The state could require oil companies or banks holding their funds to place a certain share of funds in state banks,” Owono Mba told OBG. “There is no excuse for big oil companies not to place some of their funds with us.”

OVERSIGHT: While Gabon’s banking sector remains sound, despite ongoing restructuring of two partially state-owned banks, regional banking supervision has become stricter over the past two years. Gabon’s monetary policy and banking supervision are handled by the regional central bank, the Bank of Central African States (Banque des États de l'Afrique Centrale, BEAC), and the regional banking commission, COBAC. Regulatory changes in 2003-04 brought CEMAC’s banking regulations in line with international standards. Although Basel II provisioning and risk management rules remain ambitious given the lack of depth in the region’s financial markets, COBAC has tightened prudential regulations. Since 2010 it has gradually raised banks’ capital requirements from CFA5bn (€7.5m) in June 2010 to CFA7.5bn (€11.25m) by year-end 2012, with plans to increase it to CFA10bn (€1.5m) by July 2014. It has also established a deposit guarantee scheme – the Central African Deposit Guarantee Fund, active as of March 2011 – funded by annual contributions of CFA30m (€45,000) from banks and CFA5m (€7500) from non-bank financial institutions.

COBAC has also reinforced its own controls of banks’ balance sheets, with the aim of strictly enforcing limits on lending to single borrowers and shareholders, capped at 40% of overall loans. Given the concentration of economic activity amongst a few private firms and the government throughout the CEMAC region, this rule has “routinely been violated”, according to the IMF’s latest Article IV consultation published in March 2013. The regulator has also more strictly enforced provisioning standards for loan arrears, requiring 25% provisioning for arrears of three months to 100% provisioning for a year.

TAKING ACTION: Despite the strong presence of eurozone banks in the CEMAC area, the IMF sees the potential for contagion as low given local subsidiaries’ ample liquidity. The fund has called for a strengthening of COBAC’s staffing and oversight capacity, however, with the aim of further strengthening site inspections, for instance. COBAC was in the process of moving its headquarters to Libreville from Yaoundé in 2013, although this represents only a technical change. The main regulatory action seen in the past year has been the audit of Gabon’s state banks.

Meanwhile, the top three banks’ lending to Gabon’s government has fallen from 24.9% of all loans in 2010 to 21.9% by year-end 2012 and 13.6% as of April 2013, according to figures from APEC, as the government switched borrowing away from bank loans towards short-term T-bills and government bonds on the regional stock market. Given the economy’s exposure to government investment, however, delays in government payments over the past year have started to increase contractors’ demand for working capital and extended repayment periods. “One of the biggest concerns this year are the arrears built up by the state towards its contractors,” Faissal Chahrour, the director-general of Alios Finance Gabon, told OBG. “This is causing delays in loan repayments, particularly in the first quarter of 2013.”

The BEAC is also in the process of unifying the regional payment system, creating the Interbank Monetary Group of Central Africa in June 2012. The migration to this new system is now under discussion.

DEVELOPMENT: Beyond regulation regional governments are eager for the central bank to promote the flow of credit to the real economy, with a regional conference on financing CEMAC economies organised in June 2013. In particular, refinancing (discount) windows offered by the BEAC’s West African counterpart, the Central Bank of the West African States (Banque Centrale des Etats de l'Afrique de l'Ouest, BCEAO), are seen as a potential means to encourage more consumer credit and mortgage lending.

“While the BCEAO proposes refinancing on consumer finance at 3%, there is no such process in Central Africa,” Chahrour told OBG. “Establishing this would allow us to reduce interest rates on such loans.” The BEAC used to operate a “Guichet B” for discount refinancing of mortgages (covering 50-80% of the value of a loan at 4-6%), although it has remained inactive for the past five years. The IMF has called for the formulation of a clear strategy to further enhance access to mortgage credit and microfinance.

SMES: As in nearly all emerging markets, banks face major challenges in lending to SMEs, including their lack of collateral and poor reporting processes in spite of the significant role such firms play in driving activity and employment. Mamadou Sanon, managing director of United Bank of Africa, told OBG, “While financing SMEs remains a challenge, due to a lack of transparency, banks are still trying to help businesses by rolling out products like contracts financing, invoice discounting overdraft and investments facilities.” With the two former SME support funds folded into a restructured BGD in 2010 following mismanagement, the BGD has emerged as the largest single lender to SMEs, tripling its lending to them from CFA3bn (€4.5m) to CFA10bn (€15m) in 2010 alone.

In June 2013 the BGD partnered with the African Solidarity Fund (ASF), an African multilateral credit guarantee fund. The state lender, which extends three-to four-year loans starting at 12% annual interest, argues that banks should establish advisory services for SMEs rather than seek risk guarantee funds. “SME credit guarantee funds run the risk of creating complacency on the side of banks and clients,” Owono Mba told OBG. “What seems more important is to provide advisory services alongside loans.”

Since 2009, however, the French Development Agency has rolled out the ARIZ project through five lenders (BGFI, BICIG, UGB, Alios and Orabank). Covering 50% of defaulting risk for SMEs (according to each bank’s definition, but usually for larger SMEs), ARIZ has covered total financing of CFA12.5bn (€18.75m) for 70 SMEs as of May 2013. Other pan-African funds have been launched, such as the AfDB’s $50m African Guarantee Fund in June 2012, although it has not yet covered any Gabonese SMEs.

The establishment of a national order of accountants in June 2013 could help further professionalise local audit processes as well as improve the transparency of accounts. The BEAC runs a dedicated risk department that provides credit information on active borrowers, but the information is usually a quarter old, with no information on which financial institution the funds are owed to.

“The BEAC’s existing risk department does not provide very granular data on outstanding loans: it only provides the value of loans and the quality of repayment,” Christian Gondjout, the BICIG’s director of strategy, development and projects, told OBG. “This is not sufficient to truly differentiate lending rates according to a borrower’s track record.” While the idea of a private sector credit bureau has been floated, bankers would like more active support for lending to both individuals and SMEs.

CORPORATE: Structural over-liquidity and competition between more banking institutions has pushed blue-chip corporate borrowing costs down from above 9% to 6.5-7% in mid-2013. “Competition amongst the growing number of banks has significantly heated up in the past three years, placing downward pressure on interest margins,” Gondjout told OBG. “They just couldn’t drop much further, so they have stabilised.”

While growth in lending to the government fell from 37.9% y-o-y in 2011 to 14.2% in 2012, growth in private sector lending remained resilient at 29.7% y-o-y in 2012, albeit down from a heady 42.5% in 2011 when the country was in the midst of its building spree for the Africa Cup of Nations. While many corporate loans remain short term and are rolled over, the maturity of lending has started to lengthen somewhat. “Bank credit in Gabon tends to go towards financing consumption and leasing rather than investment,” Dominique Grancher, economic advisor at the French Embassy in Gabon, told OBG.

BUILDING DEMAND: The need for more funds in sectors such as construction, real estate, distribution, forestry and utilities has contributed to private sector credit growth. In August 2012 Singapore’s Olam structured a $228m loan syndicated by four banks, including two onshore, BGFI and Ecobank’s local subsidiary, a large deal the likes of which local bankers hope to see more of in sectors like mining, agro-industry, timber and low-cost housing. Although banks are constrained by the short tenor of deposits, institutions like Alios and BGFI tapping public bond markets in 2013 for maturities of seven years will enhance some lenders’ ability to extend project finance. Meanwhile, although leasing from the three non-bank financial institutions has grown, it remains short of its potential. Yet banks and even some larger construction companies have started leasing activities alongside the three largest institutions. “Leasing accounted for a mere 5% of outstanding credit in 2012, compared to roughly 20% in Morocco,” Chahrour told OBG. “There is significant growth potential, although leasing is poorly understood and corporates tend to prefer to take ownership of assets.”

RETAIL: While a consumer finance industry and payments systems have developed to cater to Gabon’s formally employed workforce of some 200,000, the availability of mortgages has remained constrained (see analysis). Yet extending the maturity, reducing interest rates and expanding access to mortgages, particularly for lower-income earners and informal workers, is key to reaching the government’s goal of affordable housing for all Gabonese, an integral part of the Emerging Gabon strategy. The state aims to build some 32,000 new social housing units in the next five years, starting with between 2000 and 5000 in 2013. “The second great challenge for Gabonese banks is to create a liquid and dynamic mortgage market,” Citibank’s Bula told OBG.

Mortgages typically cover 70-80% of property values and average upwards of 12.5%, although only BHG extends to maturities of up to 20 years (but in very limited numbers) – average maturities are between seven and 10 years. While non-bank financial institutions have launched property leasing offerings, with Finatra writing CFA20bn (€30m) in property leases in 2012 and Alios entering this segment in 2013, their financing constraints are greater than for most banks, although Alios is planning a seven-year bond issue to support its property leasing later in 2013. The government would like these to fall to single digits, although in the absence of a refinancing mechanism through the BEAC it will need to roll out a mortgage subsidy scheme to attain this. As construction is completed on new houses, mortgage demand and pressure on banks to deploy longer-maturity capital will grow. “Growth in mortgage lending has always been determined by the government’s big real estate programmes,” Gondjout told OBG. “While there was a lull in the past few years, we expect a pick-up with the new social housing policy.”

OUTLOOK: The government’s ambitious CFA17trn (€25.5bn) investment policy underpinning the Emerging Gabon strategy will generate significant demand for more long-term funding. While a growing share of this is being funded by foreign direct investment, Gabonese banks also have a role to play, helped in part by regulations aiming to increase local content in capital-intensive sectors. The challenge will be to handle abundant short-term liquidity and develop instruments for longer-term savings and financing.