This year, Africa emerged as the growth focus for information technology (IT) giant IBM Corp. (IBM), as the company continues to extend its support toward the banking and financial services sector across the continent.
IBM recently revealed the details of the strategic agreements that it has entered with five Kenyan banks. Under the terms of the agreement, IBM will provide advanced technologies to the Kenyan banks that are expected to support rapid growth, increase profitability and launch innovative new services.
The agreements are a part of IBM’s extensive expansion policy in the continent, and are expected to enhance its presence in key growth markets and support its global growth strategy over the long term. Apart from the five Kenyan banks, IBM has also extended its support and service to the Commercial Bank of Ethiopia and the National Microfinance Bank of Tanzania earlier this year. Year to date, IBM has signed more than 20 agreements with leading African banks.
Africa’s emergence as a key growth market for IBM does not surprise us, as the continent’s financial services market (currently worth over $100 billion) is expected to grow at a double-digit rate until 2020, outpacing the growth in Africa's gross domestic product (GDP).
According to McKinsey Global Institute, Africa’s collective GDP is expected to rise to $2.6 trillion by 2020. This impressive growth of financial services is primarily driven by the strong demand for retail banking and higher demand for deposit accounts, which reflects the increasing affluence of the African middle class.
Moreover, cheaper internet and mobile services and improved connectivity have made it a lot easier for the banks to launch sophisticated banking services such as mobile and internet banking in the recent times. According to McKinsey Global Institute, Africa has been the fastest growing mobile market in the world, registering approximately 316 million new mobile phone subscribers between 2000 and 2011.
IBM, through its collaborations with leading African telecommunication companies and global mobile telecommunication service providers such as Vodafone Group plc (VOD”>VOD) and Bharti Airtel, is providing full support to the banks to launch these financial services for their growing customer base.
Other than banking and financial services, IBM also serves a number of clients across key sectors, such as telecommunications, oil & gas and government verticals. This year, IBM has been chosen by various government agencies from different countries in the African region to support their operations, and thus has ensured steady flow of orders and market share gains across the region.
Moreover, IBM is also developing academic relationships with a number of universities in Africa for imparting information technology training to students, thereby boosting its socio-economic relevance in the continent.
According to market research firm IDC, IT spending in the Sub Saharan Africa region is expected to increase 9.9% annually in 2011 and hit the $23 billion mark, based on strong double-digit software growth. IT spending in the continent is expected to grow at a compound annual growth rate (CAGR) of 11.5% over the next four years. We believe that IBM’s initiatives to grow in Africa positions it well to benefit from the increasing IT spending in the region.
IBM has invested approximately $300 million in Africa since 2006 and plans to increase its spending by 47.0% to $12.5 billion by 2015. To expand its operations and raise demand for its service and solutions, IBM has also opened more than 20 offices across Africa. By 2015, IBM expects to expand its operations to at least 23 countries across the continent.
Despite the socio-political instability and underdeveloped economic conditions in Africa, we believe that IBM is well positioned to benefit from the tremendous growth opportunities in the region over the long term.
Moreover, as the growth and investment opportunities in developed countries slow down in 2012 and beyond (the visibility is particularly murkier), we believe that Africa and the Asia-Pacific are the new cash cows for IBM. IBM expects the growth markets to contribute 30.0% of its total geographic revenue by 2015, up from 21.0% in 2010.
We have a long-term Neutral recommendation on IBM. Currently, IBM has a Zacks #3 Rank, which translates into a short-term Hold rating.
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