Local banks rush to raise capital in the face of competition
The management of Awash International Bank (AIB) plans to raise 43 billion birr in equity, as they get ready for foreign competition following the full liberalization of the banking industry in less than a year,
The management is proposing a decision to increase the bank’s paid-up capital to 55 billion birr. It is almost a fivefold increase from its current paid-up capital. The management will present the proposal to the shareholders at its annual general assembly today, and if approved, it will be implemented over the next few years.
The move will enable Awash to dwarf all commercial banks, including the Commercial Bank of Ethiopia (CBE), whose capital stood at 40 billion birr in its last report. The state bank is also undertaking a study to request for a capital raise from the Ethiopia Investment Holdings (EIH).
Two years ago, Awash’s shareholders decided to double the bank’s paid-up capital to 12 billion birr by June 2023, which has already been achieved.
The decision to increase the bank’s paid-up capital, according to Tsehay Shiferaw, CEO of Awash, is related to the opening up of Ethiopia’s financial industry to foreign investors.
“When foreign banks come to Ethiopia, one of the major parameters they see is capital. AIB’s authorized capital is currently 12 billion birr, and we are preparing to raise the bank’s capital fivefold,” Tsehay said. “The bank’s management will propose this to shareholders, and the shareholders will decide.”
Other local banks have decided to increase their paid-up capital several times over in recent months. Even third-generation banks, which have less than three billion birr in paid-up capital on average, are deciding to increase their paid-up capital to above 20 billion birr in the next five years.
If realized, all the banks will exceed the National Bank of Ethiopia’s (NBE) minimum paid-up capital threshold, which stands at five billion birr in statutory paid-up capital, by June 2026.
However, Abulmenan Mohammed (PhD), a financial expert with two decades of experience in London, England, says local banks’ latest decisions are just pledges driven by other factors.
“Many banks are pledging to increase their capital manifolds. The new figures and the way local banks are rushing to increase their paid-up capital is ridiculous. Of course, simply deciding to increase paid-up capital does not imply that they will do so,” Abdulmenan said.
Basically, the banks have to issue new shares. But usually, priority is given to existing shareholders. External buyers may access it only after existing shareholders pay their fares.
But issuing more shares will dilute the banks’ profit. For instance, after Awash increased its paid-up capital by 2.3 billion birr in 2020/21, its earnings per share modestly declined to 470 birr in 2020/21 from 510 birr in 2019/20, for a par value of 1,000 birr per share.
Abdulemenan doubts the local banks, including AIB, will meet “the exaggerated paid-up capital figures they are currently promising.” Rather, he believes local banks are taking these steps to avoid certain pressures.
The only rationale behind the dramatic pledges to increase paid-up capital is because of the pressure from the NBE and fears related to the opening up of the banking industry to foreign investors, according to Abdulmenan.
Currently, Ethiopia is preparing to open up the banking sector to foreign competition in less than one year. Local banks have been ordered to come up with a coping mechanism to survive the expected foreign competition.
The banking open-up policy and strategy, as well as NBE officials, disclosed there will be mandatory mergers and acquisitions as a mechanism once the sector is opened to foreigners.
“This decision placed all local banks in an immense state of fear. This means the NBE can force mergers. But the local banks do not want to merge but rather survive as they are. Therefore, they are pledging to increase their capital manifold to escape the mandatory merger,” said Abdulmenan.
Local banks, according to him, concluded that if they raised their capital as quickly as possible, the NBE would not impose mandatory mergers on them.
“Everybody is thinking that foreign banks will gang up and crowd out the Ethiopian market once the banking sector is opened up. Local banks, in particular, have concluded that this concentration scenario is unavoidable,” Abdulmenan said.
He claims that local banks fear that foreign banks will come and saturate the lending business and overtake all the banking businesses at once. “That is why the NBE has lately mentioned that foreign banks’ entry will be limited in numbers. This statement from the NBE is made to stabilize local banks for fear of being crowded out by foreigners.”
However, various bankers and industry experts stress that foreign banks will take time before entering the Ethiopian market due to issues related to account liberalization, the fixed exchange regime, peace and security, complaints related to the allowed entry modalities, and the NBE’s restrictions.
An influx of foreign banks will not happen, says Abdulmenan, adding, “The banking business in Ethiopia is not as attractive as it might seem. The profit rate is only five percent, after inflation reduction. Foreign banks will take their time before deciding to invest in Ethiopia. They will not come as soon as it is opened up.”
However, raising their capital can also be useful for local banks in case they sell their shares to foreign banks, since a higher valuation can generate more revenue from their equity sales, according to him. “Hence, the hypothesis is that local banks are increasing their capital ahead of such valuations in a bid to attract more capital in the form of equity sales,” he concluded.