The findings of the Nigerian Securities and Exchange Commission investigation into Ecobank Transnational Incorporated (ETI) this month highlight the supervision and corporate governance risks of large pan-African groups, Fitch Ratings says. Insufficient cross-border supervision and lower regulatory standards in some frontier markets are constraints on the ratings of pan-African banking groups.
The ratings of many African banks already incorporate operating risks from volatile political and economic environments, and significant credit risks from weak asset quality, high related-party lending and large asset concentrations. Pan-African banks are growing rapidly, but diversification is not always beneficial to their credit profiles, and their ratings are also constrained by the lack of consolidated supervision and collaboration among national regulators.
For example, ETI has operations in 33 countries and is supervised by 21 regulators. The Nigerian regulator took a lead in scrutinising the group’s corporate governance following well-publicised allegations of mismanagement in 2013. We believe consolidated supervision for pan-African groups would encourage a more cohesive approach to risk management and regulation, and reduce corporate governance risks. This is important because these banking groups are becoming systemically important in the region.
We believe the regulators of South Africa, Morocco, Kenya and Nigeria to be the strongest in the continent. Outside these countries, most banks report according to local accounting standards and transparency is weak. The overall lack of complexity in the banks’ operations means that regulatory standards in many frontier markets are not in line with international ones.
There is often significant variation from one national regulator to another and we believe there is an element of regulatory forbearance for regulatory reporting requirements in some markets. In addition, some risks such as operational risk, exposure to low-rated sovereigns and concentration risks are not always adequately captured in prudential reporting and capital requirements.
Limited coordination between national and regional regulators in some regions, where bilateral memorandums of understanding are relatively few and new, can exacerbate the risks being taken by pan-African banks. We believe that local and regional regulators face difficulties in adequately supervising these groups, despite technical support from multilateral agencies and foreign regulators like that of France.
Regulators face basic challenges, despite continuous efforts to work together – such as within the West African Economic and Monetary Union and Central African Economic and Monetary Community. These can be as simple as finding experienced individuals with strong credit and risk skills to regulate pan-African operations across multiple and culturally diverse countries.
The lack of regulatory coordination means it is difficult to rely on any single national authority to support a pan-African banking group, if needed. We do not factor in sovereign support to ETI’s ‘B-’ rating for this reason. The low rating partly reflects the group’s exposure to more volatile markets. We would factor in sovereign support if there were a formal regional support framework between the countries where ETI’s key subsidiaries are based.
