A survey of the most efficient banks among the largest banks in Africa showed that only Guaranty Trust Bank and Zenith Bank made the list of ten most efficient banks in Africa.
BusinessDay conducted an analysis which looked at the tier 1 banks in the largest regional economies in Africa including Nigeria, South Africa, Kenya and Egypt. Five of the largest publicly listed banks were analysed in each country, bringing the total number of surveyed banks to 20.
Egyptian Banks were the most efficient, recording the lowest cost to income ratio (the main measure of efficiency) among the surveyed banks.
Out of the five largest publicly listed banks in Egypt, four were among the top 5 most efficient banks with an average cost to income ratio of 25.3 percent in 2017.
South Africa’s Capitec Bank Holdings was the fifth most efficient tier 1 bank in Africa with an efficiency ratio of 35.8 percent.
Other South African Banks that made the top 20 were First Rand (14th), Standard Bank (16th), Nedbank (18th) and Investec (20th), while the bottom three Nigerian tier 1 banks were First Bank (15th), UBA (17th) and Access Bank (19th).
“The more efficient a bank is, the more profitable the bank is expected to be and investors are well aware of it,” said Robert Omotunde, head of research, Afrinvest Securities Ltd.
Capitec which was the 5th most efficient bank in Africa behind the Egyptian banks had the highest price to book ratio among the African banks as investors flocked towards the efficient lender.
Bank stocks with the lowest efficiency ratio recorded the highest price to book (P/B) ratio. Two out of the five banks with the highest P/B ratio were the South African Banks with the best efficiency ratio. Investors shrugged off political and monetary concerns in Egypt as two Egyptian banks also made up the top 5 mostly highly valued banks in terms of P/B ratio.
GTBank which is the largest bank in Nigeria by market capitalization had the sixth best efficiency ratio in Africa and the fifth highest P/B ratio among the 20 surveyed banks. The other four Nigerian banks which included Zenith, First Bank, Access and UBA ranked among the five banks with the lowest P/B ratio.
The three least efficient Nigerian Banks which includes First Bank, UBA and Access all had a P/B ratios less than 1 as investors appeared to be concerned about their efficiency level.
Omotunde explained that GTB business model is focused on curtailing cost which is why they have a very low cost to income ratio compared with the other banks in Nigeria. “GTB has the least number of branches compared to the other tier 1 banks and their internet banking platform has helped to reduce operational expenses and cost of running branches,” he added.
Omotunde told BusinessDay by phone that notwithstanding the fact that GTBank is the fifth largest bank in Nigeria in terms of asset base, the bank remains the largest bank in Nigeria by market capitalization because investors view owning a stock like GTB as an opportunity to earn high returns on investment on account of their cost efficient nature.
Wale Okurinboye, head of research at Sigma Pension stated that the interest rate environment in the different countries did not play a significant role in the efficiency ratio of the African Banks. He explained that the cost-income ratio is a function of how the bank manages their cost in relation to their income. If cost of funds is well managed, the bank will generate a wide interest rate spread which boosts profitability.
“High interest rate affects everybody. If your balance sheet is funded by expensive deposits, high interest rate means that you’ll make less money than banks with balance sheet funded by cheap deposits,” Okurinboye added.
