African banking after the crisis

30 Jul, 2020 - 00:07 0 Views
African banking after the crisis

eBusiness Weekly

New analysis by McKinsey suggests that the COVID-19 crisis could result in African banking revenues falling by 23 to 33 percent between 2019 and 2021. Over the same period, African banks’ return on equity (ROE) could fall by between 5 and 15 percentage points, driven by rising risk costs and reduced margins. Banking revenues might only return to pre-crisis levels in 2022–24, depending on whether a rapid or slow recovery scenario prevails.

This comes at a time when Africa needs its banks more than ever. Already they have been the primary conduit of aid during the crisis, and will play a central role in the recovery—for example, in enabling the credit programs announced by several African governments.

There are bold actions that African banking leaders can take to weather the immediate storm, prepare for the recovery, and address several long-term trends that are now accelerating. For many banks, the crisis will also be a prompt to reimagine their business models and role in society, and in some cases conduct overdue reforms. Drawing on McKinsey’s global research,along with real-world examples from across Africa’s banking sector, this article provides analysis and ideas for banks’ response strategies. It seeks to answer three key questions:

  • How can banks best manage risk and capital?
  • How can banks best manage cost and streamline resources?
  • How can banks adapt to recent shifts in consumer behavior, especially accelerated digital adoption?

Under each of these themes, we suggest both short-term actions to help banks “restart”and longer-term initiatives to drive structural reforms in the sector and secure banks’ competitiveness and sustainability in the post-COVID-19 “next normal.”

These actions will also be imperative in bolstering African banks’ role in the continent’s resilience and recovery.

Africa needs its banks more than ever—and banking leaders can take bold action to drive recovery

As they chart their paths to recovery, African banks should be cognizant not only of their returns to shareholders but also of their broader responsibility to society. Indeed, banks will face increasing expectations from regulators and customers in the months ahead, in two main areas.

First, banks are fundamental to the large-scale relief that needs to be distributed to corporates, SMEs and individuals. As conduits of stimulus packages introduced by governments, banks will have to channel aid and enable loans for the economy. African countries are employing a range of measures, including extending state-sponsored loans and making relief payments to individuals through bank channels. In Morocco, for example, laid-off workers have received compensation for salaries and benefits of $200 a month for those in the formal sector and $100 a month for those in the informal economy. Similarly, South African banks are the primary enabler of a $30 billion stimulus-package injection into the economy, including a $12 billion SME lending program. In Nigeria, a $2.5 billion lending program has been established to support local manufacturing and other key sectors.

Second, both consumers and regulators expect banks to be able to keep lending, and at scale. In a recent McKinsey survey of African consumers, Moroccan and Kenyan customers ranked facilitated access to credit as their top expectation from banks during and beyond the COVID-19 crisis.

Banks’ central role in African economies can provide impetus to intensify their short-term response to the crisis—and to reimagine their business models for the long term. Furthermore, the crisis may prompt many African banks to think beyond necessary crisis-management measures and about potential growth levers in the medium term: the COVID-19 crisis has accelerated some existing trends and is likely to drive structural reforms that in many cases are overdue to enable future growth. In all these respects, banks will benefit from answering three key questions:

How can African banks best manage risk and capital—both to face short-term challenges and to grasp the longer-term opportunities on the continent?

How can African banks best handle costs and streamline resources—both to navigate the crisis and to optimize cost-to-serve?

How can African banks adapt to recent shifts in consumer behavior, especially accelerated digital adoption—to serve customers effectively, and expand financial inclusion?

How African banks can manage risk and optimize capital
For most banks, the risk function is at the heart of COVID-19 crisis response. There are immediate actions that banks can take to minimize risk, but the crisis also allows an opportunity to revamp the credit process for greater efficiency and effectiveness. Banks can leverage digital and analytics to improve both lending journeys and credit decision making.

Restarting: short-term actions
There are five key areas where banks can take short-term action to help manage the crisis-related spike in risk—and create capacity to face the likely surge in irregular and non performing clients. These are as follows:

Offer emergency support. Many banks have already made headway and taken action on this front, for example by adapting credit analysis and underwriting to verify recipient eligibility for government support schemes. This enables them to offer support while simultaneously handling the initial defaults and pre-defaults emerging in the most vulnerable client segments.

Assess damage. African banks have already taken steps to assess the damage wrought by the crisis on their businesses, in many cases by translating global COVID-19 impact outlooks into an assessment of impact on portfolios. But this crisis is affecting different sectors of the economy in quite different ways. Banks would do well to define their new credit risk appetite at the sub sector level.

Adapt the credit-risk framework. In contrast with previous crises, a deterioration in creditworthiness has occurred suddenly and with little prior notice; early-warning systems are “drunk on new data”, which generates distortion and noise in identification and monitoring. In response, banks can adapt their underwriting criteria, monitoring practices, and the overall credit value chain to reflect damage-assessment results and the perceived resilience of borrowers through the COVID-19 cycle. This could translate into an expert overlay that gives more weight to customers’ “ability to pay” (for example, their surplus income) over their “willingness to pay” (for example, their credit history).

Adjust the operating model. Given the significant volume of loans that will require credit actions, it will be important for banks to create the right flexibility in their workforce. Resources and technology support need to be flexible and easy to relocate between underwriting, monitoring, delinquency management, and collections workout. In addition, banks can prepare by reflecting strategically on their target set-up. Banks could create virtual or formal structures, or both, to carve out NPLs; options to consider include setting up bad banks or partnering with specialized restructuring operators and services.

Neutralize the impact on risk models. Banks can adapt input ratings, risk parameters, migration matrices and delinquency triggers to isolate the COVID-19 impact and neutralize its effect on regulatory models and management information systems.

To mobilize on these five fronts, some banks are moving fast to establish a risk nerve center made up of multidisciplinary teams. These teams can work iteratively, across the five areas above, using the logic of minimum viable product (MVP). The nerve center can constantly coordinate with other areas of the bank—such as economics, finance, and strategy—to develop scenarios and the appropriate responses.

Reimagining: Long-term transformation
Beyond this immediate response, banks could leverage digital and analytics to reform lending processes, revamping and reimagining both customer journeys and risk-scoring frameworks.

First, banks can digitize and automate credit processes. Credit distribution is typically one of the most time-consuming processes in African banking, for both customers and for the banks themselves. The waiting time for approval of a consumer loan is typically in weeks; business loans can take even longer. Banks have started digitizing this process but for many of them there is still a long way to go. In our benchmark conducted in developing markets, including South Africa, we found that penetration of digital sales for personal loans was slightly above 9 percent. This is way below the 53 percent of digital sales in lending reached by a peer group of digital leaders in developed markets.2

Even taking into account the economic impact of the COVID-19 crisis, Africa is in the midst of a long-term trend toward greater consumer spending power. By 2025, more than two-thirds of African households could have discretionary income, and more than a quarter could be “global consumers” earning more than $20,000 a year.3 This is likely to drive growth in consumer lending—and create opportunities for banks to build effective credit-delivery processes as a core element of their competitive advantage.

Three approaches could help banks in the process of digitizing consumer and wholesale lending. First, banks could transition the interim digital SME loan processes created during the crisis—primarily to manage government-supported credit lines—to more permanent customer-centric journeys. A second action would be for banks to implement “digital credit” using high-performing credit engines whose risk models have a GINI coefficient exceeding 70 percent.4 This will help minimize cost-to-serve to help banks manage higher loan volumes. A third action would be for banks to deploy next-generation “time-to-yes” processes, by adopting processes that are automated, leaner and simpler—for example they could simplify know-your-customer (KYC) processes and client documentation requirements within the limits of regulation. Banks could set ambitious goals for their credit processes, especially for commercial loans. In developed markets, for example, best practices require straight-through processing for loans up to $1 million, and a maximum time-to-yes of  five days for companies.-Mckinsey (Online)

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