JPMorgan Chase & Co. (NYSE:JPM) is taking an aggressive stand in Africa. America’s largest bank, with regard to asset size, has made inroads in Africa as it tries to tap into a market that many other multinational corporations are already exploiting.
Kenya’s Business Daily, the financial services newspaper for Nation Media Group, East and Central Africa’s largest media house, reports that JPMorgan Chase & Co. (NYSE:JPM) has been given approval to open a representative office by the Central Bank of Kenya. The CBK, in a statement on bank supervision last week, stated “The applicants had been granted approval-in-principle by the end of 2012, and processing for final authorization was at an advanced stage.”
The UK bank, HSBC Holdings plc (ADR) (NYSE:HBC), set base in Kenya in 2011. JPMorgan Chase & Co. (NYSE:JPM), on the other hand, also operates offices in Nigeria and South Africa. From its website, JPMorgan states its business portfolio in Africa includes asset management, investment banking, private banking, treasury and securities services, and global corporate banking. In the first quarter of 2013, the company’s private bank and asset management divisions raised $737 million in profits against $2.4 billion in revenue. Evidently, these are portfolios the company plan to cash in on immensely.
JPMorgan African services further include but are not limited to “Leveraging the capital strength of JPMorgan Chase & Co. (NYSE:JPM) and extend credit to help clients grow their business.” This will be vital, if not the core, of its business model in Africa. African banks are facing tough competition with regard to big project and large infrastructure financing. Relatively low capital bases and regulatory hitches consistently block local African banks from being able to lend to large multi-million dollar projects. In Kenya, for instance, the Business Daily notes that CBK regulations bar Kenyan banks from lending to a single borrower up to 25% of their core capital. Kenya Commercial Bank, Kenya’s largest bank, can only lend a maximum of $125 million. The situation should be grimmer in many other African countries.
The wide berth for huge-potential retail banking
The Economist reports that, due to low infiltration rates, Africa holds a multi-million dollar potential for retail banking investments. The multinationals, however, have a different agenda in mind. According to a 2011 World Bank survey, across sub-Saharan Africa, only about a quarter of adults have accounts at formal financial institutions. Mauritius led with the percentage of the population 15 years and over holding an account being 15. South Africa and Kenya came second and third, respectively at 52% and 44%. But, figures for the rest of Africa are predominantly single-digits.
Yet, JPMorgan Chase & Co. (NYSE:JPM)’s in Kenya will be just but a representative office. In an option for either the top-down or bottom-up approach, the American giant obviously chose the former. In essence, JPMorgan is just in Africa to pitch multi-million dollar deals for its mother institution, choosing this simpler and cleaner job over retail banking.
In fact, even HSBC, which had, in 2010, lined up to acquire Nedbank, South Africa’s fourth largest bank, later pulled out of the deal. In ignoring direct injection from the start into retail banking, and further giving the relatively simpler option of acquisition of local banks a wide berth, The Economist notes only one (the third) option was left for these multinationals.
A third approach is that taken by most big international banks, of which Citigroup Inc (NYSE:C) is a good example. It has opted for a top-down approach, helping governments to sell bonds and offering banking services to the biggest companies in each country. This has allowed it to build a geographically vast, yet light, infrastructure network in Africa. Even nimbler are investment banks such as Goldman Sachs, Morgan Stanley, and Deutsche Bank, whose staff fly in to arrange deals, but which have very little local presence.
Why JPMorgan and Citigroup over HSBC
JPMorgan Chase & Co. (NYSE:JPM) is going to have a robust next three years for investors. Deposits are in the green, growing to the region of $1.2 trillion, representing a 7% growth YOY. Industry competitor, Bank of America Corp (NYSE:BAC), trades at 21 times earnings, while Wells Fargo & Co (NYSE:WFC) trades at 12 times earnings. JPMorgan definitely offers a better quotient at just nine times earnings.