Banking on Africa's trade potential

#themes: growth, NIM, asset quality

Event: We initiate coverage of the African Export-Import Bank (Afreximbank), a pan-African multilateral financial institution (MFI), which was established in 1993 under the aegis of the African Development Bank (AfDB) to facilitate and promote intra-African and Africa trade in general. As of January 2025, 53 out of 55 African countries and 12 out of the 15 Caribbean countries had joined the bank as members, making it both Africa-centric and intercontinental. This geographical spread has helped the bank to diversify its credit exposure in terms of sub-regions and countries minimising concentration risk.

The bank has a dual mandate (a) development impact – develop Africa’s trade and economically empower its people, and (b) commercial – seek to make an impact profitably. This commercial model has helped Afreximbank deliver double-digit ROEs consistently over the past two decades while growing its balance sheet at a CAGR of over 20%. The returns are generated from short-term trade finance loans to African member states, state-owned enterprises and corporates engaged in the export and import industries. Additionally, the bank extends longer term project finance loans (up to twelve years) to institutions investing in Africa’s infrastructure.

To help achieve its trade development mandate, Afreximbank has established subsidiaries and rolled out various initiatives over the years including the (i) Pan-African Payment and Settlement System (PAPSS) to facilitate the clearing and instant settlement of intra-African trade transactions in African currencies, and (ii) the Fund for Export Development in Africa (FEDA) – its asset management arm - which provides equity financing to, among others, companies involved in export development such as construction of industrial parks.

Despite its fast balance sheet growth, Afreximbank has maintained a low NPL ratio (c.3% on average) due to its continuous risk monitoring, structured nature of trade finance loans and preferred creditor status (only triggered as a last resort). Trade finance loans are typically very short term in nature and highly collateralised making them relatively low risk. Historically, trade finance loans’ NPL ratios have been c.4% in Africa, significantly lower than other commercial loans. This trend is expected to continue though some downside risks exist. The risks include elevated fiscal debt in many countries, which could constrain growth and limit member states’ ability to support Afreximbank’s creditor status; rising geopolitical tensions, which may dampen global demand for commodities or lead to price shocks; and hard currency liquidity challenges given that Afreximbank lends largely in US dollars (c.85%) and euros.

Earnings growth: Afreximbank’s net profits have grown at a CAGR of 20% over the past 20 years, similar to the pace of revenue growth, helped by a low and steady level of costs of risk and high operational efficiency supported by its wholesale business model. We estimate slower growth of 17% in FY24E (FY23E: +66%), largely due to base effects. Our forecast CAGR for the next three years is also lower at 17% than the past three years (+29%), largely reflective of our expectations of lower NIMs as rates correct downwards. Additionally, EPS growth rate may slow down due to dilution (as the bank raises more capital from its other shareholders) but will remain attractive in our view

We think the bank provides an attractive investment avenue offering diversification benefits – with low correlation to typical commercial financial institutions. It also pays dividends consistently, with a dividend payout ratio of 30-35%, which translates to a 10%+ dividend yield on the dollar (for listed DRs) at a time when FI rates are falling globally.

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