Will macro trends support FEM banking in SSA?

Emerging and Frontier Capital (EFC) analysts are optimistic about the potential for small FEM (frontier and emerging markets) banking in Sub-Saharan Africa in 2025. They believe that macroeconomic trends such as real GDP growth, improved performance of local currencies, and narrowing inflation differentials among others, may create a favorable environment for small FEM banking. Kato Mukuru, Founding Partner at EFC, joined CNBC Africa to discuss the large valuation gaps between small and large caps that could present interesting opportunities in the region. Mukuru highlighted that while the frontier and emerging market banking system is currently trading slightly above historical averages at 15% of GDP, there are significant discrepancies within the sector. The top 15 banking institutions are trading at an average of around 19% of GDP, while the bottom 15 are at approximately 5% of GDP. Countries like Bangladesh, Ghana, Nigeria, and Pakistan are trading at even less than 3% of GDP, indicating attractive valuations. Regarding the macro trends supporting small FEM banking, Mukuru stressed the importance of positive momentum, discounted valuations, and strong earnings prospects. He pointed out that banks such as Zenith, Jitika, and UBA with PE valuations of less than two times are offering compelling investment opportunities. Additionally, the relatively stable local currencies against the dollar are expected to provide a supportive backdrop for small FEMs in 2025. In terms of wealth creation and asset growth, Mukuru emphasized the need for small FEM banks to signal a return to asset growth accompanied by wealth creation. He highlighted the importance of creating real dollar wealth, job opportunities, and individual prosperity to drive economic growth in the region. Mukuru noted that without significant wealth creation and a stable economic environment, it would be challenging for small FEMs to experience substantial asset growth. Looking ahead to 2025, Mukuru discussed the potential impact of macro trends outside Sub-Saharan Africa on the region. He highlighted the significance of developments between the US, China, India, and Japan, particularly in relation to raw material availability. Mukuru suggested that the competitive dynamics among these global players could create opportunities for African nations to leverage their natural resources for economic development. Overall, the outlook for small FEM banking in Sub-Saharan Africa remains positive, with favorable macroeconomic trends and attractive valuations offering interesting prospects for investors in 2025.