Luanda, via Lisbon

Posted by Tracy Alloway on Jun 22 09:03. 4 comments | Share

Big call from Citi’s Kato Mukuru and Alex Atienza.

In a 132-page note out on Wednesday, they recommend investors buy Portuguese banks — in order to gain exposure to Africa, and specifically Angola. More…

Big call from Citi’s Kato Mukuru and Alex Atienza.

In a 132-page note out on Wednesday, they recommend investors buy Portuguese banks — in order to gain exposure to Africa, and specifically Angola. Portugal’s Banco BPI and Banco Espirito Santo, they believe, “have built some of the most profitable and well managed banks on the African continent which, we believe, need to be introduced to the global investor community.”

Well, go on then.

Whilst the African businesses of BES and BPI have provided significant earnings support throughout their domestic downturn, we believe that the current increase in the system’s cost of capital (14.4%) will encourage the Portuguese to export more capital to Africa, where they can deliver returns significantly higher than their domestic businesses. As shown below, the historic business model for Africa has been characterised by low capital commitment. Whilst this has been historically justified by the high cost of capital in Africa, the current divergence of Portuguese risk premiums from core Europe has significantly reduced the opportunity costs of allocating capital to Africa and Angola in particular. This should encourage the Portuguese banks to export more capital to Africa and thereby significantly increase the earnings contributions of these businesses. By 2013, we expect Africa to represent 47% and 65% of group earnings at BES and BPI, respectively.

(Colonial banking anyone?)

The whole history of Western-sponsored African banking is a fascinating one, by the way. By dint of former colonial ties, Portugal’s banks already have a foothold in Angola (and other former colonies, like Mozambique). Espirito Santo has Banco Espirito Santo Angola, while BPI has Banco de Fomento Angola (BFA). There’s also Banco Millennium Angola, held by Banco Comercial Portugues.

Most relevant in the Citigroup note, however, seems the apparent reversal between African ‘frontier’ banks and, err, the fortunes of the eurozone. It’s worth looking at Citi’s risk factors here.

There’s little mention of Angolan corruption or erratic legislation here. Just Portuguese risk:

Ironically, we see Europe as the key risk to our call, reflecting the uncertainties over the EU’s handing of its sovereign debt crisis. These uncertainties have propelled domestic risk free rates (Portuguese 10yr bond yields) to historic highs (c10% and c7pps higher than Germany) and brought valuations to their lows. BES and BPI are now trading at 0.45x and 0.62x their 2011E BVPS and their shares are now being priced at a c20% below their previous lows at the trough of the financial crisis in March 2009, whilst the European banks index is at a 76% premium to these lows.

Small wonder that plenty of the big banks’ are now trading eurozone peripherals with hefty political risk — think Portugal and Greece — from their emerging market desks.

Related links:
Portuguese banks look to Africa – The Namibian
Ecobank eyes Brazilian, Portuguese partner – FT Tilt
Africa’s banking boom: scrambled in Africa – The Economist
Greek government bonds go back to the EM indices – FT Alphaville

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