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Angola’s Financial Sector
The growth opportunityAngola Day
US-Angola Chamber of Commerce
Washington, May 9, 2007.
2
Topics
1. Macroeconomic outlook
2. Overview of the Financial Sector
3. Major challenges for the near future
3
Strong macroeconomic outlook
Non-oil sectors
Accelerating growth: well above 10% for five years in a row and rising;
Non-oil sectors are expanding at buoyant pace;
Government’s inflation goal is set at 10% for 2007, remaining stable afterwards.
REAL GDP
3.0%
15.0%
4.0%
31.2%
19.5%20.6%
3.0%
11.2%
28%
9%
14%
17%
0%
5%
10%
15%
20%
25%
30%
35%
2000 2001 2002 2003 2004 2005 2006 2007
Source: Ministry of Finance, IMF.
INFLATION
268.3%
76.6%
12.2%18.5%
105.6%
116.1%
31.0%
0%
50%
100%
150%
200%
250%
300%
2000 2002 2004 2006 2008 2010
Source:INE Angola, IMF
4
Increasing oil production => Higher reserves
TRADE BALANCE(% of GDP)
34
40.8
29.1
38.7
48
41.937.6
0
10
20
30
40
50
60
2001 2002 2003 2004 2005 2006 2007 F
Source: BNA, IMF.
%
0.3 0.6 1.3 3.2 8.5
OVERALL FISCAL BALANCE(% of GDP)
6.28.1
-7.8
0.6
8.5
3.2
-3.3
-12
-8
-4
0
4
8
12
2001 2002 2003 2004 2005 2006 2007 F
Source: BNA, Ministry of Finance.
%
Net Reserves
Bln USD
OIL PRODUCTIONMillion barrels per day
741894 875
996
1,2461,365
2,018
0
500
1,000
1,500
2,000
2,500
2001 2002 2003 2004 2005 2006 2007
Source: Ministry of Finance, World Bank.
CARG:18%
AVERAGE ANGOLAN OIL PRICEUSD
22.7 24.228.2
36.9
50
56
45
0
10
20
30
40
50
60
2001 2002 2003 2004 2005 2006 2007
CARG:20%
Source: Ministry of Finance, BNA.
5
Recently, inflation is resisting deceleration
Recently, consumer prices are showing resistance to deceleration. After staying at negative real levels for most of 2005, real interest rates have now
returned to positive grounds as a result of recent Central Bank’s effort to absorb excess liquidity, in order to try to put a lid on inflation.
0
10
20
30
40
50
60
70
80
90
2003 2004 2005 2006
CBB 91d Inflation yoy
INTEREST RATESvs INFLATION
Source: BNA, INE Angola.
11.8
11.9
12.0
12.1
12.2
12.3
12.4
Set-06 Nov-06 Jan-07 Mar-07
INFLATIONyoy, %
Source: INE.
CENTRAL BANK BILLSINTEREST RATE
(91 DAYS)
5
10
15
Dec-06 Mar-07
May 07: 14.97%
(%)
Source: BNA, Bloomberg.
6
USD / KWANZA
25
50
75
100
2002 2003 2004 2005 2006 2007
Source: BNA, Bloomberg.
07 May 2007: 76.26
Strong currency
On the back of an external surplus, a stable Kwanza induces hoarding of reserves. There is room for some appreciation, which is another tool to help bringing inflation down.
USD / KWANZA
70
75
80
85
Dec-06 Feb-07 Apr-07
07 May 2007: 76.26
Source: BNA,
5% appreciation
7
Increasing efforts to absorb liquidity
Treasury financing needs reduced severely; TBills outstanding at present is null.
Meanwhile, in order to absorb liquidity, Central Bank has increased its reliance on open market short term CB Bills.
TBILLS & CB BILLS(Outstanding amount)
387
129
728
330
0
1,432
0
500
1,000
1,500
2,000
TREASURY BILLS CENTRAL BANK BILLS
2004 2005 2006
Source: BNA.
mln USD
9
Topics
1. Macroeconomic outlook
2. Overview of the Financial Sector
3. Major challenges for the near future
10
Banking sector milestones
Insurance and bank nationalization.1975
1991
1993 Opening of foreign banks’ offices: BFE, BTA, and BPA. Later turned into local banks, despite being controlled by foreign capital.
1996 The first two private-owned banks: BAI e BCA initiated their activity.
Banking sector reform: abolition of an one bank only regime with the creation two state-owned banks: BPC and BCI.
New Central Bank Law, restraining the monetary authority from acting as bank of the Treasury and abolishing direct financing of the Treasury.
1997
Abolition of interest rates administrative constraints. First issuance of Central Bank bills. Opening of the insurance sector to private capital. New Financial Sector Law, that aligned the domestic regulation with international best practices.
1999
11
Banking sector milestones
2001 Introduction of debit cards and implementation a retail payment system (creation of EMIS).
2003 Setting a standard reserve requirement at 15% and issuance of Treasury bonds up to 7.5 years in order to settle arrears.
2006 Appointment of the committee in charge for the creation of the stock exchange.
2005New Financial Institutions Law and introduction of a RTGS system. Issue of 200 MUSD TBonds with maturities ranging from 1 to 7 years to finance TAAG’s acquisition of new planes.
2007 Integration to the VISA clearing. 1st issue of TBonds in USD (400 MUSD) with maturities ranging from 7 to 12 years.
12
Key points
Banking sector is small but growing very rapidly.
Financial depth indicators are low, highlighting the early steps of the bancarization and financial intermediation processes.
Institutions are financially sound, presenting strong capital ratios.
Lending to the private sector accounts to 80% of total credit, and the main currency is the USD.
Competition is fierce and rising due to the opening of new banks.
The surge of several new banks resulted from high profitability levels and perceived growth opportunities both in private and public sectors.
The banking sector is rather efficient, though it faces higher operational costs because of the present expansion.
13
Key points (cont’ed)
Credit activity is hampered by legal, institutional and regulatory weaknesses lack of a systematic credit information weak property rights poor enforceability of contracts.
Minimal interbank activity that reflects mainly the present excess of liquidity.
Excess of liquidity is being absorbed by the Central Bank through issue of central bank bills. This liquidity relates to large inflows from oil revenues but also because of limited and risky lending opportunities and asymmetric information (arising moral hazard problems).
Reserve requirements are high (15%) and have recently been further restrained. Its use, as a means to stabilize inflation, is a heavy tax on banks.
Still, it was implemented a state-of-the-art real-time gross settlement and retail payments systems. Angola stands out as a front-runner in what concerns settlement (both retail and gross) systems in the region.
14
Small but growing rapidly: Deposits
Strong increase of deposits as the economy stabilizes, living standards improve and preference for liquidity/cash declines;
USD deposits still prevail, but AKZ is gaining ground.
TOTAL DEPOSITSUSD millions
3,043
4,950
8,740
0
1,0002,000
3,0004,000
5,000
6,0007,000
8,0009,000
10,000
2004 2005 2006Source: BNA
CARG:69%
TOTAL DEPOSITSPRIVATE SECTOR vs STATE OWNED BANKS
USD millions
21.3%18.6%18.1%
81.9%
81.4%
78.7%
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
2004 2005 2006
STATE OWNED PRIVATE SECTORSource: BNA
TOTAL DEPOSITSNATIONAL CURRENCY vs FOREIGN CURRENCY
USD millions
44.4%34.5%
25.7%
74.3%
65.5%
55.6%
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
2004 2005 2006
NATIONAL CURRENCY FOREIGN CURRENCYSource: BNA
15
Small but growing rapidly: Credit
Strong increase of credit mainly to the private sector.
While USD is still the preferred currency, kwanza has been gaining adepts, in part due to its stable evolution. Nevertheless, a significant portion of AKZ credit is still indexed to the USD.
TOTAL CREDITUSD millions
1654
2764
4168
0
1,000
2,000
3,000
4,000
5,000
2004 2005 2006Source: BNA
CARG: 58%
TOTAL CREDITPRIVATE SECTOR vs STATE OWNED BANKS
USD millions
34.1%43.4%45.6%
65.9%
56.6%
54.4%
0
1,000
2,000
3,000
4,000
5,000
2004 2005 2006
STATE OWNED PRIVATE SECTORSource: BNA
TOTAL CREDITNATIONAL CURRENCY vs FOREIGN CURRENCY
USD millions
57.3%53.1%40.7%
59.3%
46.9%
42.8%
0
1,000
2,000
3,000
4,000
5,000
2004 2005 2006
NATIONAL CURRENCY FOREIGN CURRENCYSource: BNA
16
Low transformation of deposits into credit
Low transformation of deposits into credit because of structural constraints and low investment opportunities.
Most deposits are very short term, imposing restrictions on long term credit
47
63
47
81
0
15
30
45
60
75
90
Angola Brazil Nigeria South AfricaSource: FMI, BFA.
DEPOSIT TRANSFORMATION RATIO
17
Still in the early steps of the bancarization
Bank branch networks are still small and physical access to financial services is difficult.
2.8 4.0 5.8
25.3
46.0
1.1 1.7 2.55.6 5.6
0.05.0
10.015.020.025.030.035.040.045.050.0
Angola2004
Angola2005
Angola2006
SSA w/oSAfrica
SouthAfrica
Population w/formal bank accountBranch network per 100,000 inhabitantsSource: BNA, BFA, IMF.
ACCESS TO FINANCIAL SERVICES
Note: SSA w/o South Africa refers to Sub-Saharan middle-income countries such as Botswana, Cape Verde, Equatorial Guinea,Gabon, Mauritius, Seychelles, and Swaziland.
X 2
18
Small financial sector but … not for long!
Poverty limits the demand for savings while on the credit side alternatives are still narrow.
Improved living standards and economic stabilization are driving higher the demand for financial services.
Note: SSA w/o South Africa refers to Sub-Saharan middle-income countries such as Botswana, Cape Verde, Equatorial Guinea,Gabon, Mauritius, Seychelles, and Swaziland.
15.8 16.221.8
29.2
72.0
14.7 14.719.0
32.1
66.5
5.2 5.18.3
21.0
79.9
0.010.0
20.030.040.0
50.060.070.0
80.090.0
Angola2004
Angola2005
Angola2006
SSA w/oS.Africa
SouthAfrica
Bank deposits/GDP M2/GDP Private sector credit/GDPSource: BNA, IMF.
FINANCIAL DEVELOPMENT INDICATORS
X 1.4
19
Financial development into perspective excl. oil
Because oil revenues are not channeled through the domestic banking sector, financial development indicators improve significantly when oil industry is excluded from GDP.
Note: SSA w/o South Africa refers to Sub-Saharan middle-income countries such as Botswana, Cape Verde, Equatorial Guinea,Gabon, Mauritius, Seychelles, and Swaziland.
24.332.0
38.329.2
72.0
32.539.5
44.1
32.1
66.5
11.5 13.619.3 21.0
79.9
0.010.0
20.030.0
40.050.060.070.080.090.0
Angola2004
Angola2005
Angola2006
SSA w/oSAfrica
SouthAfrica
Bank deposits/GDP M2/GDP Private sector credit/GDPSource: BNA, IMF.
FINANCIAL DEVELOPMENT INDICATORS
X 1.6
20
Fast growth of bank’s branch networks …
The bancarization process and high profitability has driven a more aggressive expansion of network from privately owned banks.
117
161140
250
0
50
100
150
200
250
300
State-owned banks Private banks
2005 2006Source: BNA and bank reports.
Nr. OF BANK BRANCHES+ 55%
+ 20%
21
… and some segmentation arises
In order to better serve client needs, some banks are segmenting theirs Client base and specific sites are being created.
59
211
5 3
278
77
298
10 5
390
0
50
100
150
200
250
300
350
400
450
Stands Branches Corporatecenters
PrivateBanking
Total
2005 2006Source: BNA and bank reports.
Nr. OF BANK BRANCHES
22
Fast development of access to electronic banking
State-of-the-art in both retail and gross payment systems induce a very accelerated development of electronic banking.
0
50
100
150
200
250
300
350
400
2004 2005 2006ATMs POS Debit cards per 10,000 inhabitants
ACCESS TO ELECTRONIC BANKING
Source: EMIS.
x 3.6
0
200
400
600
800
1,000
1,200
2004 2005 2006
M AKZ
Source: EMIS.
ATM MONTHLY AVERAGE TRANSACTION VOLUME
x 6.8
23
Efficiency on the rise
Expanding operations and low domestic interest rates hinder profitability. Nevertheless compares favourably with its peers. Competition and growth investment requirements will impose pressure on
profitability.
Note: SSA w/o South Africa refers to Sub-Saharan middle-income countries such as Botswana, Cape Verde, Equatorial Guinea,Gabon, Mauritius, Seychelles, and Swaziland.
6.45.7
6.6
2.7
5.5
3.95.2
3.63.8 4.13.5
1.1
0.0
3.0
6.0
9.0
12.0
15.0
Angola 2004 Angola 2005 SSA w/oS.Africa
South Africa
Interest margin Overhead ProfitsSource: IMF, Deloitte.
EFFICIENCY RATIOS(as percent of assets)
24
Sound banking sector … but still high NPL’s
High capital ratios alongside with high NPL’s. Credit growth to the private sector should induce convergence of Capital
Adequacy Ratio towards peer average.
Note: SSA w/o South Africa refers to Sub-Saharan middle-income countries such as Botswana, Cape Verde, Equatorial Guinea, Gabon, Mauritius, Seychelles, and Swaziland.
23.5 24.2
16.9
8.16.7 7.5
0.0
10.0
20.0
30.0
Angola 2004 Angola 2005 SSA w/o S.Africa
Capital adequacy ratio Non-performing loansSource: IMF, KPMG.
SOUNDNESS RATIOS
25
NPL’s by bank
NPL’s ratios vary significantly amongst banks: from considerably high to very low.
0 5 10 15 20 25
BFA
SOL
BCP
BAI
BPC
BKEVE
BCA
2004 2005Source: KPMG.
NPL RATIO
26
Deposits Market Share
65.2%
TOTAL DEPOSITS Market Share 2006
23.68%
22.12%
19.35%
13.03%
7.45%
14.38%
0% 5% 10% 15% 20% 25%
BAI
BFA
BPC
BIC
BESA
OTHER
PRIVATE SECTOR BANK STATE OWNED BANKSource: BNA
(#7)
27
Credit Market Share by bank
62.9%
TOTAL CREDIT Market Share 2006
25.26%
24.07%
13.54%
12.58%
9.67%
14.88%
0% 5% 10% 15% 20% 25% 30%
BPC
BFA
BIC
BAI
BESA
OTHER
PRIVATE SECTOR BANK STATE-OWNED BANKSource: BNA
28
Topics
1. Macroeconomic outlook
2. Overview of the Financial Sector
3. Major challenges for the near future
29
Major challenges for the near future
Improvements to the operating environment:
changes in business law, including bankruptcy, and better enforceability of contracts
in order to ensure an efficient financial system operation, it is needed better and more rapid registration of property and collateral
information on client creditworthiness
property rights issues are likely to take some time to address, so it should be beneficial to devise alternative instruments (e.g. leasing) or alternatives to collateralization (e.g. group guarantees,…).
Development of the interbank market and improvement of market-based monetary instruments, in order for government or central bank securities to act as benchmark to establish risk-free yield curve, and thus allow adequate pricing of corporate risk.
30
Major challenges for the near future
Even in a situation of fiscal surpluses, Governement should consider issuing other types of Treasury Bonds to help set in place high-quality legal and technical frameworks for debt instruments. Moreover, the relatively lower risk of government debt familiarizes new investors with debt instruments.
Approach accounting standards and criteria to international norms.
Introduction of the regulatory framework for new financial products as: investment funds, leasing and factoring.
Creation of a capital market (stock exchange)
Development of the industry of pension funds and investment funds.
Improvement of the qualification of the workforce.
Angola’s Financial Sector
The growth opportunityAngola Day
US-Angola Chamber of Commerce
Washington, May 9, 2007.