PTA Bank, formally known as the Eastern and Southern African Trade and Development Bank, is a little known but significant player on the African financial scene.Established in 1985 under a treaty that created the Preferential Trade Area for Eastern and Southern Africa (PTA), the bank is now the commercial arm of the 19-member Common Market of East and Southern Africa (Comesa) but with a membership that is not restricted to those member countries. After surviving a challenging period, the bank has become profitable and has launched an ambitious expansion, as the president and chief executive, Admassu Tadesse, outlined in an interview during the U.S.-Africa Business Summit on Chicago last month.
Since the bank was established, have the operational objectives been changed?
When PTA bank was formed 29 years ago as a specialized institution it was intended to do two specific things: advance trade within the region and with the rest of the world and develop infrastructure to facilitate the trade and advance and diversify the economies of the region.
Trade and infrastructure: that continues to be the focus, except now we also do mainstream economic sectors. We fund agribusiness and industry and services too. We do telecoms, which are part of infrastructure, and we fund special-purpose financial institutions and commercial banks in some instances as well.
What about the geographic scope of operations?
The region was always defined as eastern and southern Africa. Eastern Africa is different from east Africa and goes all the way from Egypt and Libya down the entire eastern seaboard of the African continent. It's expanded over time. This particular bank has always been a commerce-based bank, and Comesa of course is the Common Market for Eastern and Southern Africa.
Even though the terminology would suggest that all of eastern Africa and southern Africa are in, it's not the case. We have a country like Madagascar that's clearly in the eastern part of the continent but not yet in the bank. It's on its way to joining, but it's not yet in. Mozambique is clearly in southern Africa and not in the bank but on its way to coming in as well. So from defining the region as the membership of COMESA, we're now saying if you're physically anywhere from Tripoli to Cape Town, you're eligible to be in the bank. At the moment, we have 17 member countries, and that will be moving to 26 in the years to come.
How do you raise capital - from government sources or private investors?
It's an interesting question, because the bank is a commercial funder with a professional management team. Share capital comes from the 17 African member states plus the African Development Bank, which is an institutional shareholder. We also have the People's Bank of China, which is the treasury of China. We've introduced some reforms that mean the bank is going to be a public-private partnership institution that blends the capital of states and institutions, which is fairly unusual in the African context. As a result, in January we're going to have more institutional shareholders coming into the bank - pension funds, sovereign wealth funds, other banks and also insurance companies. So the bank is essentially going to be a PPP, a public/private partnership institution that blends the capitol of states and institutions. It is quite unusual in the African context.
Is PTA Bank able to raise capital at competitive rates?
We are very pleased that we had a first-ever upgrade of the bank's credit rating by Fitch [in October]. We are now double B rated, up from up from double B minus. The upgrade of course is a reference to the capital of the bank being a lot stronger and the performance of the bank being at a record high for both its profitability and quality of assets as well as very robust growth. It's the first upgrading we've had in 29 years and we're quite proud of it. It's a milestone for us, an important beacon to our potential funders and investors. This is a bank that's on the move, that's generating very strong interest from new partners. With strong growth in Africa now, we need to mobilize much more capital than we ever have.
Timing is right, we think, to share the good news about the bank being a good credit and a better credit than it's ever been. The strategy we put into place two years ago was to rapidly raise the credit of the bank, raise the capital, improve the technology and strengthen a number of functions of the treasury, including risk management. These are areas where we're pushing very hard to strengthen the institution and to prepare ourselves for even more growth to come.
There's a lot more ground to cover. We are looking to achieve investment grade in few years and even go higher than that. We don't have the benefit of G7 country shareholders, which is what really helps the big multilaterals worldwide to have high ratings. But our returns are good compensation for the lower credit rating that we have compared to multilaterals. From an investment point of view, we are a proxy investment destination for anybody that wants exposure in eastern and southern Africa because we are a mix. Instead of investing in one country or two countries and facing the risk of one or two countries, invest in us to get direct exposure diversified across 17 countries. It's easy. It also comes with the benefit of a treaty, and us having a positioning that is quite robust and unique actually in the region.
So your shareholders benefit from the higher rating and other achievements?
Indeed, indeed. We are very proud to be one of the best performing trade and development financial institutions in the world. We have a return on equity now of 16 percent on the dollar. It was about just over 10 percent when I joined. We grew the balance sheet by 35 percent in the first year after I took office, and we will probably be closing at about 30 percent growth again year-on-year in December - two record years of growth for us, profitability-wise, asset growth-wise, quality of assets-wise, as well.
Nonperforming loans have come down considerably - to around about 4 percent by year-end, we're projecting. So we're outperforming and on the back of this very strong performance our shareholders have agreed to offer new capital of $100 million. We have new shares being issued over the months to come, and we are seeing new shareholders signing up to come into the bank, institutional shareholders. We've had the first pension fund sign up now. They invested $10 million dollars and we see another institutional investor buying what we call Class B shares.
The bank is always had just a single instrument of equity participation, which is basically an ordinary share with a callable capital component as well as a paid income component. What we did is to introduce a new instrument called a class B share. Governments would buy a share, pay 20 percent up front, with 80 percent is callable. That was the historical way of doing it. As of January, we've introduced Class B shares, which don't have a callable component.
We go to institutional investors and say: 'This has been our growth. This has been our performance. These are the kind of returns that we've had. These are the reserves that have been built up over many years of consistent performance. We offer a very interesting value proposition and by joining the bank not only do you make returns but you also get a partner who you can work with in terms of facilitating and co-financing transactions as well.'
We've managed to sell that proposition, which means institutional investors can invest, they don't have the callable piece, and it's clean-cut for them, it's easy. If you want to invest a dollar you invest a dollar. You have no contingent liabilities; you don't have to deal with this overhang of the potential call on capitol. We simplified [the investment process] to encourage private institutional investors to come into the bank.
This is how you are raising the bank's capitalization?
Absolutely. At our shareholders meeting in September, existing shareholders resolved to recapitalize the bank by a $100 million over the next three years as a gradual process and, at the same time, they approved a whole host of new potential shareholders. That's separate from the $100 million.
It's very exciting, and we now have a pension fund that's decided to join, to acquire $10 million as I've said, and then we have an insurance company that's done the same. We have a specialized institution in Europe, which will be our first European shareholder. In fact, we have two European shareholders joining by Christmas time this year.
The Chinese were the first non-African shareholders?
Indeed. They joined about 10 years ago, when the bank was not doing very well. They took a leap of faith. They had a lot of confidence. They came in when the bank really needed them. Of course now, with the bank doing so well, there's a lot of interest in joining the bank. And we have strong financial relations. We raise funding on the Euro bond capital markets. Our bonds trade in Luxembourg, today trading at a premium actually, because our bank has done so well [and] the risk profile is perceived as mismatched to the returns that we offer.
We also raise lines of credit. We have correspondent banking relations with about 25 banks here in the United States, in Asia, in Europe. And within Africa, we have strong funding relations with Mauritian banks, South African banks and now with Ghanaian and Nigerian banks and Egyptian banks as well. This is an amazing network where we raise hundreds of millions of dollars in short-term financing - one-to-three years. About two-thirds of our lending is for trade finance. We help import and export partners, and about one third is for medium-to-long-term finance for infrastructure, telecoms, agribusiness projects, for industrial projects.
Do you loan to private and state-owned companies?
We lend to enterprises who have viable operations, who've got a track record, that are able to borrow on their on their own balance sheets. Some of those are privately owned enterprises; some of those are state-owned banks or utilities. In many instances they're also PPPs. We don't lend straight to sovereigns, because we were set up as a commercial bank to provide funding to commercial projects and for trade-finance operations.
Some of our trade finance involves sovereigns directly, so you'll have countries that import fertilizer to support the agricultural sector. It's done on a strategic, commodity-level basis. We'll work with the Ministry of Agriculture and the Central Bank of a country to help import that kind of commodity. Sometimes we do petroleum as well, and in other cases we'll work on sugar, medicines. We help some of our member countries export their products, be it in coffee, tea, tobacco - depending on the nature of the economy and what the country produces.
How complicated it is to be operating in 17 separate countries?
It would normally be very complicated, but we are a multilateral organization. We are treaty-based, so we don't have to go through all of that, thank goodness. Some banks do that of course, but we are not among the banks that have to because we are a treaty-based international organization. We're owned collectively by those 17 countries, and so we're not regulated by independent countries.
What are the principal impediments to growth?
Well, our only obstacle now is growth capital. We found our sweet spot if you like, and we've been growing now at 30 percent for four or five years. We've proven to be very profitable; we've found a very good way of doing business and we've got very good clients. So our only challenge at this point is finding a manageable pace of growth. That's why we've had the $100 million capital increase, and that's why we're also mobilizing members who can acquire new shares. And so, that would be the primary issue.
There are countries that we would like to bring in, like South Sudan, Madagascar, and countries like Angola and Mozambique. These are countries that have not yet joined the bank. We believe that these are countries that would benefit from the bank, and the bank would also benefit from their membership. So, there's a question of expanding and filling the gaps in our membership if you like.
Do you have a sufficient number of bankable projects or is that also a problem?
Generally, we do. We have strong networks, and we have a history of successful transactions with clients who know us. So we're not one of those institutions that has trouble finding bankable projects. If you don't have a network, if you don't have presence, if you don't have relationships, then it can be difficult to find those opportunities. But not for us. In fact, we have a lot of partners who come to us and ask about co-financing opportunities or ask to join syndications that we might be leading. We get the mandates from a number of strong enterprises that ask us to lead the fundraising process for them. We undertake and underwrite a certain amount and also commit to bringing in other capital from other partners, so we also have the capability of doing that.
We have this very interesting arrangement where we do master-risk participation agreements, meaning we'll go in and say, put $50 million into a deal and, on the backend, we'll will sign a risk participation agreement with another funder. Then we share all the revenues, interest rates and the fees that come from that project. They have 50 percent exposure, and we have 50 percent exposure. We're the lender of record. They come behind us. Sometimes it's silent; sometimes it's not silent. So there are other ways for partners to come in as well without getting very involved in extensive loan documentation with a client. We'll do all of that up front, and then we'll have iron-clad legal agreements that allow us to bring in our partners and to give them the exposure that they want. It's a very efficient way of doing it.
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To what extent are considerations of social impact a part of your lending decisions?
It is a very important part. We subscribe fully to sustainability principles. Environmental and social consequences of our projects are very important to us. We do our appraisals beyond the commercial side to look at the neutrality of the effects on the social aspects of a project and of course the environmental ones as well. What we typically do is tabulate per project the impacts we've estimated to have had. It could be jobs created. It could be export earnings that a country has generated; it could be foreign exchange generation as well. It could also be households connected to a telecommunications service. So we do tabulate that on a project-by-project project basis.
Why did you come to the U.S.-Africa Business Summit and to Washington at this time?
As a bank that promotes investment and trade between member states and also with the rest of the world, the United States is an economy that we've done quite a bit of business with. We've imported Boeing jets for some of our clients. We've worked very closely with a number of American financial institutions - the U.S. Export Import Bank is one. We also work with a number of commercial banks, Citibank is a partner of ours; so is JP Morgan, Goldman Sachs. These American financial institutions have bought our paper, so they always like to hear from us and see how we're doing so they can continue to have confidence as an obligore if you like. In terms of our future, direct foreign investment will require debt finance to be raised to help complement the direct equity coming from the United States. So we feel that we can be a very good partner to American firms looking to do business in Africa, to export to Africa and to import as well.
With pension funds and sovereign wealth funds around the world investing and looking to invest in our part of the world with reasonable returns, we're willing to give them opportunities to place five-year money with us, even take equity positions and to have developmental impacts above getting a good return on their investment. We have a lot of investors who are looking for socially responsible or developmentally-inclined investment opportunities, provided that it meets a minimum hurdle rate of profitability. For us, profitability is an instrument.
We don't believe in charity; we believe in doing good business. So that's something we also will be looking to do more of in the United States. We know there is also a lot of interest now in Africa, so we feel we offer a very interesting avenue for that. On a risk-return basis, relationship-wise, we think that we have something to offer. If the big commercial institutions and investment banks in the United States buy our paper, we think there will be many others who will find it interesting as well.
