Angola’s Financial Sector

The growth opportunityAngola Day

US-Angola Chamber of Commerce

Washington, May 9, 2007.

2

Topics

1. Macroeconomic outlook

2. Overview of the Financial Sector

3. Major challenges for the near future

3

Strong macroeconomic outlook

Non-oil sectors

Accelerating growth: well above 10% for five years in a row and rising;

Non-oil sectors are expanding at buoyant pace;

Government’s inflation goal is set at 10% for 2007, remaining stable afterwards.

REAL GDP

3.0%

15.0%

4.0%

31.2%

19.5%20.6%

3.0%

11.2%

28%

9%

14%

17%

0%

5%

10%

15%

20%

25%

30%

35%

2000 2001 2002 2003 2004 2005 2006 2007

Source: Ministry of Finance, IMF.

INFLATION

268.3%

76.6%

12.2%18.5%

105.6%

116.1%

31.0%

0%

50%

100%

150%

200%

250%

300%

2000 2002 2004 2006 2008 2010

Source:INE Angola, IMF

4

Increasing oil production => Higher reserves

TRADE BALANCE(% of GDP)

34

40.8

29.1

38.7

48

41.937.6

0

10

20

30

40

50

60

2001 2002 2003 2004 2005 2006 2007 F

Source: BNA, IMF.

%

0.3 0.6 1.3 3.2 8.5

OVERALL FISCAL BALANCE(% of GDP)

6.28.1

-7.8

0.6

8.5

3.2

-3.3

-12

-8

-4

0

4

8

12

2001 2002 2003 2004 2005 2006 2007 F

Source: BNA, Ministry of Finance.

%

Net Reserves

Bln USD

OIL PRODUCTIONMillion barrels per day

741894 875

996

1,2461,365

2,018

0

500

1,000

1,500

2,000

2,500

2001 2002 2003 2004 2005 2006 2007

Source: Ministry of Finance, World Bank.

CARG:18%

AVERAGE ANGOLAN OIL PRICEUSD

22.7 24.228.2

36.9

50

56

45

0

10

20

30

40

50

60

2001 2002 2003 2004 2005 2006 2007

CARG:20%

Source: Ministry of Finance, BNA.

5

Recently, inflation is resisting deceleration

Recently, consumer prices are showing resistance to deceleration. After staying at negative real levels for most of 2005, real interest rates have now

returned to positive grounds as a result of recent Central Bank’s effort to absorb excess liquidity, in order to try to put a lid on inflation.

0

10

20

30

40

50

60

70

80

90

2003 2004 2005 2006

CBB 91d Inflation yoy

INTEREST RATESvs INFLATION

Source: BNA, INE Angola.

11.8

11.9

12.0

12.1

12.2

12.3

12.4

Set-06 Nov-06 Jan-07 Mar-07

INFLATIONyoy, %

Source: INE.

CENTRAL BANK BILLSINTEREST RATE

(91 DAYS)

5

10

15

Dec-06 Mar-07

May 07: 14.97%

(%)

Source: BNA, Bloomberg.

6

USD / KWANZA

25

50

75

100

2002 2003 2004 2005 2006 2007

Source: BNA, Bloomberg.

07 May 2007: 76.26

Strong currency

On the back of an external surplus, a stable Kwanza induces hoarding of reserves. There is room for some appreciation, which is another tool to help bringing inflation down.

USD / KWANZA

70

75

80

85

Dec-06 Feb-07 Apr-07

07 May 2007: 76.26

Source: BNA,

5% appreciation

7

Increasing efforts to absorb liquidity

Treasury financing needs reduced severely; TBills outstanding at present is null.

Meanwhile, in order to absorb liquidity, Central Bank has increased its reliance on open market short term CB Bills.

TBILLS & CB BILLS(Outstanding amount)

387

129

728

330

0

1,432

0

500

1,000

1,500

2,000

TREASURY BILLS CENTRAL BANK BILLS

2004 2005 2006

Source: BNA.

mln USD

9

Topics

1. Macroeconomic outlook

2. Overview of the Financial Sector

3. Major challenges for the near future

10

Banking sector milestones

Insurance and bank nationalization.1975

1991

1993 Opening of foreign banks’ offices: BFE, BTA, and BPA. Later turned into local banks, despite being controlled by foreign capital.

1996 The first two private-owned banks: BAI e BCA initiated their activity.

Banking sector reform: abolition of an one bank only regime with the creation two state-owned banks: BPC and BCI.

New Central Bank Law, restraining the monetary authority from acting as bank of the Treasury and abolishing direct financing of the Treasury.

1997

Abolition of interest rates administrative constraints. First issuance of Central Bank bills. Opening of the insurance sector to private capital. New Financial Sector Law, that aligned the domestic regulation with international best practices.

1999

11

Banking sector milestones

2001 Introduction of debit cards and implementation a retail payment system (creation of EMIS).

2003 Setting a standard reserve requirement at 15% and issuance of Treasury bonds up to 7.5 years in order to settle arrears.

2006 Appointment of the committee in charge for the creation of the stock exchange.

2005New Financial Institutions Law and introduction of a RTGS system. Issue of 200 MUSD TBonds with maturities ranging from 1 to 7 years to finance TAAG’s acquisition of new planes.

2007 Integration to the VISA clearing. 1st issue of TBonds in USD (400 MUSD) with maturities ranging from 7 to 12 years.

12

Key points

Banking sector is small but growing very rapidly.

Financial depth indicators are low, highlighting the early steps of the bancarization and financial intermediation processes.

Institutions are financially sound, presenting strong capital ratios.

Lending to the private sector accounts to 80% of total credit, and the main currency is the USD.

Competition is fierce and rising due to the opening of new banks.

The surge of several new banks resulted from high profitability levels and perceived growth opportunities both in private and public sectors.

The banking sector is rather efficient, though it faces higher operational costs because of the present expansion.

13

Key points (cont’ed)

Credit activity is hampered by legal, institutional and regulatory weaknesses lack of a systematic credit information weak property rights poor enforceability of contracts.

Minimal interbank activity that reflects mainly the present excess of liquidity.

Excess of liquidity is being absorbed by the Central Bank through issue of central bank bills. This liquidity relates to large inflows from oil revenues but also because of limited and risky lending opportunities and asymmetric information (arising moral hazard problems).

Reserve requirements are high (15%) and have recently been further restrained. Its use, as a means to stabilize inflation, is a heavy tax on banks.

Still, it was implemented a state-of-the-art real-time gross settlement and retail payments systems. Angola stands out as a front-runner in what concerns settlement (both retail and gross) systems in the region.

14

Small but growing rapidly: Deposits

Strong increase of deposits as the economy stabilizes, living standards improve and preference for liquidity/cash declines;

USD deposits still prevail, but AKZ is gaining ground.

TOTAL DEPOSITSUSD millions

3,043

4,950

8,740

0

1,0002,000

3,0004,000

5,000

6,0007,000

8,0009,000

10,000

2004 2005 2006Source: BNA

CARG:69%

TOTAL DEPOSITSPRIVATE SECTOR vs STATE OWNED BANKS

USD millions

21.3%18.6%18.1%

81.9%

81.4%

78.7%

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

2004 2005 2006

STATE OWNED PRIVATE SECTORSource: BNA

TOTAL DEPOSITSNATIONAL CURRENCY vs FOREIGN CURRENCY

USD millions

44.4%34.5%

25.7%

74.3%

65.5%

55.6%

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

2004 2005 2006

NATIONAL CURRENCY FOREIGN CURRENCYSource: BNA

15

Small but growing rapidly: Credit

Strong increase of credit mainly to the private sector.

While USD is still the preferred currency, kwanza has been gaining adepts, in part due to its stable evolution. Nevertheless, a significant portion of AKZ credit is still indexed to the USD.

TOTAL CREDITUSD millions

1654

2764

4168

0

1,000

2,000

3,000

4,000

5,000

2004 2005 2006Source: BNA

CARG: 58%

TOTAL CREDITPRIVATE SECTOR vs STATE OWNED BANKS

USD millions

34.1%43.4%45.6%

65.9%

56.6%

54.4%

0

1,000

2,000

3,000

4,000

5,000

2004 2005 2006

STATE OWNED PRIVATE SECTORSource: BNA

TOTAL CREDITNATIONAL CURRENCY vs FOREIGN CURRENCY

USD millions

57.3%53.1%40.7%

59.3%

46.9%

42.8%

0

1,000

2,000

3,000

4,000

5,000

2004 2005 2006

NATIONAL CURRENCY FOREIGN CURRENCYSource: BNA

16

Low transformation of deposits into credit

Low transformation of deposits into credit because of structural constraints and low investment opportunities.

Most deposits are very short term, imposing restrictions on long term credit

47

63

47

81

0

15

30

45

60

75

90

Angola Brazil Nigeria South AfricaSource: FMI, BFA.

DEPOSIT TRANSFORMATION RATIO

17

Still in the early steps of the bancarization

Bank branch networks are still small and physical access to financial services is difficult.

2.8 4.0 5.8

25.3

46.0

1.1 1.7 2.55.6 5.6

0.05.0

10.015.020.025.030.035.040.045.050.0

Angola2004

Angola2005

Angola2006

SSA w/oSAfrica

SouthAfrica

Population w/formal bank accountBranch network per 100,000 inhabitantsSource: BNA, BFA, IMF.

ACCESS TO FINANCIAL SERVICES

Note: SSA w/o South Africa refers to Sub-Saharan middle-income countries such as Botswana, Cape Verde, Equatorial Guinea,Gabon, Mauritius, Seychelles, and Swaziland.

X 2

18

Small financial sector but … not for long!

Poverty limits the demand for savings while on the credit side alternatives are still narrow.

Improved living standards and economic stabilization are driving higher the demand for financial services.

Note: SSA w/o South Africa refers to Sub-Saharan middle-income countries such as Botswana, Cape Verde, Equatorial Guinea,Gabon, Mauritius, Seychelles, and Swaziland.

15.8 16.221.8

29.2

72.0

14.7 14.719.0

32.1

66.5

5.2 5.18.3

21.0

79.9

0.010.0

20.030.040.0

50.060.070.0

80.090.0

Angola2004

Angola2005

Angola2006

SSA w/oS.Africa

SouthAfrica

Bank deposits/GDP M2/GDP Private sector credit/GDPSource: BNA, IMF.

FINANCIAL DEVELOPMENT INDICATORS

X 1.4

19

Financial development into perspective excl. oil

Because oil revenues are not channeled through the domestic banking sector, financial development indicators improve significantly when oil industry is excluded from GDP.

Note: SSA w/o South Africa refers to Sub-Saharan middle-income countries such as Botswana, Cape Verde, Equatorial Guinea,Gabon, Mauritius, Seychelles, and Swaziland.

24.332.0

38.329.2

72.0

32.539.5

44.1

32.1

66.5

11.5 13.619.3 21.0

79.9

0.010.0

20.030.0

40.050.060.070.080.090.0

Angola2004

Angola2005

Angola2006

SSA w/oSAfrica

SouthAfrica

Bank deposits/GDP M2/GDP Private sector credit/GDPSource: BNA, IMF.

FINANCIAL DEVELOPMENT INDICATORS

X 1.6

20

Fast growth of bank’s branch networks …

The bancarization process and high profitability has driven a more aggressive expansion of network from privately owned banks.

117

161140

250

0

50

100

150

200

250

300

State-owned banks Private banks

2005 2006Source: BNA and bank reports.

Nr. OF BANK BRANCHES+ 55%

+ 20%

21

… and some segmentation arises

In order to better serve client needs, some banks are segmenting theirs Client base and specific sites are being created.

59

211

5 3

278

77

298

10 5

390

0

50

100

150

200

250

300

350

400

450

Stands Branches Corporatecenters

PrivateBanking

Total

2005 2006Source: BNA and bank reports.

Nr. OF BANK BRANCHES

22

Fast development of access to electronic banking

State-of-the-art in both retail and gross payment systems induce a very accelerated development of electronic banking.

0

50

100

150

200

250

300

350

400

2004 2005 2006ATMs POS Debit cards per 10,000 inhabitants

ACCESS TO ELECTRONIC BANKING

Source: EMIS.

x 3.6

0

200

400

600

800

1,000

1,200

2004 2005 2006

M AKZ

Source: EMIS.

ATM MONTHLY AVERAGE TRANSACTION VOLUME

x 6.8

23

Efficiency on the rise

Expanding operations and low domestic interest rates hinder profitability. Nevertheless compares favourably with its peers. Competition and growth investment requirements will impose pressure on

profitability.

Note: SSA w/o South Africa refers to Sub-Saharan middle-income countries such as Botswana, Cape Verde, Equatorial Guinea,Gabon, Mauritius, Seychelles, and Swaziland.

6.45.7

6.6

2.7

5.5

3.95.2

3.63.8 4.13.5

1.1

0.0

3.0

6.0

9.0

12.0

15.0

Angola 2004 Angola 2005 SSA w/oS.Africa

South Africa

Interest margin Overhead ProfitsSource: IMF, Deloitte.

EFFICIENCY RATIOS(as percent of assets)

24

Sound banking sector … but still high NPL’s

High capital ratios alongside with high NPL’s. Credit growth to the private sector should induce convergence of Capital

Adequacy Ratio towards peer average.

Note: SSA w/o South Africa refers to Sub-Saharan middle-income countries such as Botswana, Cape Verde, Equatorial Guinea, Gabon, Mauritius, Seychelles, and Swaziland.

23.5 24.2

16.9

8.16.7 7.5

0.0

10.0

20.0

30.0

Angola 2004 Angola 2005 SSA w/o S.Africa

Capital adequacy ratio Non-performing loansSource: IMF, KPMG.

SOUNDNESS RATIOS

25

NPL’s by bank

NPL’s ratios vary significantly amongst banks: from considerably high to very low.

0 5 10 15 20 25

BFA

SOL

BCP

BAI

BPC

BKEVE

BCA

2004 2005Source: KPMG.

NPL RATIO

26

Deposits Market Share

65.2%

TOTAL DEPOSITS Market Share 2006

23.68%

22.12%

19.35%

13.03%

7.45%

14.38%

0% 5% 10% 15% 20% 25%

BAI

BFA

BPC

BIC

BESA

OTHER

PRIVATE SECTOR BANK STATE OWNED BANKSource: BNA

(#7)

27

Credit Market Share by bank

62.9%

TOTAL CREDIT Market Share 2006

25.26%

24.07%

13.54%

12.58%

9.67%

14.88%

0% 5% 10% 15% 20% 25% 30%

BPC

BFA

BIC

BAI

BESA

OTHER

PRIVATE SECTOR BANK STATE-OWNED BANKSource: BNA

28

Topics

1. Macroeconomic outlook

2. Overview of the Financial Sector

3. Major challenges for the near future

29

Major challenges for the near future

Improvements to the operating environment:

changes in business law, including bankruptcy, and better enforceability of contracts

in order to ensure an efficient financial system operation, it is needed better and more rapid registration of property and collateral

information on client creditworthiness

property rights issues are likely to take some time to address, so it should be beneficial to devise alternative instruments (e.g. leasing) or alternatives to collateralization (e.g. group guarantees,…).

Development of the interbank market and improvement of market-based monetary instruments, in order for government or central bank securities to act as benchmark to establish risk-free yield curve, and thus allow adequate pricing of corporate risk.

30

Major challenges for the near future

Even in a situation of fiscal surpluses, Governement should consider issuing other types of Treasury Bonds to help set in place high-quality legal and technical frameworks for debt instruments. Moreover, the relatively lower risk of government debt familiarizes new investors with debt instruments.

Approach accounting standards and criteria to international norms.

Introduction of the regulatory framework for new financial products as: investment funds, leasing and factoring.

Creation of a capital market (stock exchange)

Development of the industry of pension funds and investment funds.

Improvement of the qualification of the workforce.

Angola’s Financial Sector

The growth opportunityAngola Day

US-Angola Chamber of Commerce

Washington, May 9, 2007.