Ecobank under pressure as Africa tightens bank scrutiny

Fri Jan 17, 2014 12:34pm EST

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By Matthew Mpoke Bigg

ACCRA, Jan 17 (Reuters) - Ecobank's response to criticism of its corporate governance by Nigeria's financial watchdog will be seen as a test case for the African banking industry, closely watched by potential investors tracking the region's fast growth and heady returns.

Growth in sub-Saharan Africa is rising and is projected at 6 percent this year according to International Monetary Fund figures, yet only an estimated 20 percent of the adult population has a bank account, the lowest in the world.

Ecobank , often touted as a pan-African banking success story, is one of the biggest financial institutions in the region, outside of South African giants such as Standard Bank and FirstRand.

But the bank is now under pressure to show it can drive reform after Nigeria's Securities and Exchange Commission (SEC) criticised weaknesses in the board's ability to manage its own activities, monitor management, evaluate performance and oversee ethical behaviour.

The SEC said in its report last week that there was an absence of a clear vision and strategy at the bank, inadequate transparency in recruitment procedures and conflicts of interest.

Ecobank, which has rapidly expanded from its headquarters in Togo to operate in 33 African countries, is listed in Nigeria and Ghana, two of Africa's foremost frontier markets. Its pretax profit for the first nine months of 2013 grew 56 percent from a year ago. Its assets rose to nearly $20 billion in 2013 from $8.3 billion in 2008, according to its website.

"Our view is not positive. It is quite disappointing that this is happening in such a big listed stock," said Thabo Ncalo, portfolio manager at Stanlib Africa Equity Fund. "I would expect existing shareholders to be up in arms calling for reform."

The SEC began its probe into Ecobank after former finance director Laurence do Rego, who the bank had suspended, told regulators she was pressured to misstate 2012 financial results. The bank denies her allegations.

Ecobank, led by chief executive Thierry Tanoh, a former vice president of the World Bank's International Finance Corporation, said in a statement changes have already been made. The statement did not spell out the changes but the bank said it took the criticism of its governance seriously.

As Africa's economic potential attracts new players to the banking industry, central bankers say improved regulation must accompany the deepening of financial markets needed to power economic growth in the region.

One measure already taken by Nigeria's central bank was to require lenders to sell all non-core businesses and form a holding company if they intend to carry out insurance, asset management and capital market activities.

Two senior African financial officials, who asked not to be identified, welcomed the SEC release as a sign that regulators are flexing their muscles at a time when central bankers are on a drive to tighten regulation of the fast-growing banking industry on the continent.

"We think this is very positive because it shows that the SEC is doing its job. Ecobank has responded in a very positive manner," said Sven Richter, a Johannesburg-based fund manager for Renaissance Asset Management, a top 10 Ecobank shareholder.

One central banker spoke of the possibility of establishing a College of Supervisors for Ecobank because its cross-border listing poses a particular challenge to regulators.

Ecobank pledged to call a shareholder meeting in a few weeks once it has received external reports on its governance from consultants EY and leading Swiss business school, the International Institute for Management Development.

Ecobank needs to appoint a new chairman after the previous incumbent stepped down in October, saying it was inappropriate for him to remain given the ongoing governance reviews.

The SEC has called for Ecobank's shareholder meeting to take place by the end of February. Bank executives said they expected to comply with that timeframe, wishing to avoid any suggestion that waiting for the additional reports could appear defiant.

Ecobank officials said Tanoh is working to clean up lapses in governance that predate his one-year tenure.

Mwambu Wanendeya, spokesman for Ecobank Transnational Incorporated, as the bank is officially known, said management was meeting the firm's top 100 executives and sentiment was supportive of the leadership.

"We have had very full and frank exchanges. There are obviously concerns," Wanendeya said.

"People are now understanding that questions of internal governance don't affect the value of the bank," he said, adding that the SEC release had not impacted the bank's share price and that 2013 profits were strong.

The governance allegations, however, could potentially impact Fitch's credit rating on the bank, the agency said.

"In the event that recent allegations of weak corporate governance are proven and materially alter the risk profile of the group, this could lead to a review of the ratings," said Mahin Dissanayake, a director at Fitch.

The need for stronger regulation became apparent during the region's most prominent banking scandal in 2009 when Nigeria's central bank sacked eight CEO's and spent $4 billion bailing out financial institutions close to collapse due to bad debts accrued lending to speculators without adequate collateral.

Total banking assets in sub-Saharan Africa stood at $709 billion in 2010, according to French development finance institution Proparco.

South African bankers already factor in lower standards of corporate governance in the rest of Africa's banking sector compared to their own country, one analyst in Johannesburg said.

One institution that will be watching Ecobank closely is Nedbank, which holds an option to acquire up to 20 percent in Ecobank under the terms of a $285 million loan which it has the right to convert into equity.

"Ecobank forms the thrust of their expansion plan. The (financial) exposure is on the margin. The bigger risk is on the reputational side," said Johann Scholtz, head of research at Afrifocus Securities.

Nedbank declined to comment, as did South Africa's Public Investment Corporation, which holds an 18.35 percent stake in the bank. (Additional reporting by Chijioke Ohuocha in Lagos, Tiiesetso Motsoeneng and Helen Nyambura-Mwaura in Johannesburg and Joachim Dagenborg in Oslo; Editing by Daniel Flynn and Elaine Hardcastle)

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