South Africa-based Grindrod Asset Management has chosen Société Générale Securities Services to act as custodian and trustee for its collective investment scheme. Grindrod Asset Management is the asset management division of the Grindrod Bank. In part, this particular mandate results from SGSS’s strategy to add to its custody offering in South Africa by establishing global trustee services for collective investment schemes managers and pension funds and recognises the local and international expertise that SGSS has built up in the country. With the new trustee offering, SGSS becomes the first foreign bank trustee for collective investment schemes. SGSS now offers a full range of services to a client base of asset managers and pension funds in South Africa. SGSS’s overall offering in the country (a business head by Hilda de Villiers, who is head of trustee and custody for the bank in Africa) includes both local and global custody, clearing and settlement services across all asset classes, as well as securities lending and treasury solutions.
In part, it also illustrates the continuing domination of financial services in the continent’s key markets by foreign firms. That trend looked to have been underscored with a bold stroke last year as, in August 2010, HSBC began talks with insurer Old Mutual about buying up its controlling stake in Nedbank, South Africa’s fourth-biggest bank, at a reported cost of over £4bn. That deal came to an abrupt close by October 2010, leaving HSBC’s Africa business strategy open.
Analysts suggested that HSBC was keen to develop its platform on the continent and capitalise on the burgeoning economic ties and trade traffic between South Africa and the bank’s main area of operation, Asia. HSBC has been present in South Africa since 1995, gaining a banking licence there in 2005 and with offices in the major cities of Johannesburg, Cape Town and Durban. The City long suspected that HSBC wanted to substantially beef-up its presence in the country and fully expected the Nedbank deal to go through. “HSBC remains committed to the South African market and growing its business in South Africa,” has been its sole statement on the issue.
Nonetheless, the move highlighted the growing interest shown by the major global banks in not only South Africa but also the Southern African cone countries including Angola, Namibia, Botswana and Zambia. HSBC would have been following in the path of Barclays, which has a significant presence in the Southern African cone with branches in Botswana, Mozambique, Zambia and Zimbabwe offering services to individual and corporate clients.
If there is a signal indication of the growing appeal of Africa’s southern cone it is the announcement in early August this year that Johannesburg Stock Exchange (JSE) trading figures were at record levels, with an attendant rise in the FTSE/JSE All Share index, which rose 267 points to close at 28658 on August 10th. “The JSE’s equity market moved sharply ... following big moves on world markets,” says head of equities trade, Leanne Parsons. “Our new record, of 230,797 trades, marks a 12% increase on our previous record of 205,784 transactions (in June). That is a significant jump.”
Even so, there is also growing confidence in the commercial banking segment. Afrifocus Securities analysts Johann Scholtz says there is a much greater interest from foreign banks in Southern Africa than in the past and that competition among them and local banks is increasing. “Traditionally, banking in Africa for South African banks such as Standard Bank, Absa, First Rand and Nedbank has been a very easy game,” he says. “It was a question of taking mostly corporate deposits and investing them in government bonds and earning a nice spread on that. That is no longer a feasible business model as global players enter the markets with new products.”
In 2005 Barclays bought a 54% stake in Absa Group, South Africa’s largest retail bank, for $4.48bn. The move marked Barclays return to South Africa following its departure from the country in the mid-1980s after anti-apartheid protests. It said at the time that the Absa deal would create the “pre-eminent bank in the African continent”. Last year Absa deputy chief executive Louis von Zeuner said the company had failed to make the progress expected in the past five years particularly in credit cards, wealth management and expansion into the rest of Africa. Indeed, since Zeuner’s statement Barclays has had to reiterate its intention to retain its stake in the bank. In a recent annual results presentation, new chief executive Bob Diamond maintained that Africa as a region was set to perform strongly and that Absa would be aligned more closely with Barclays other businesses on the continent. Absa has also declared an interest in restarting operations in Namibia and Angola.
Standard Chartered is another institution with a long, but interrupted history in South Africa—again, in response to anti-apartheid concerns—that spanned 100 years before leaving the country. The bank returned in force, and now has offices in Botswana, Zambia and Zimbabwe, having identified opportunities in corporate advisory services, project finance, commodity trading services and private equity transaction funding. The bank is also reported to be looking at potential acquisitions and in building a retail banking presence in South Africa.
“Other global banks follow a suitcase banking approach focusing on infrastructure-related products and simple trade finance products. They are almost piggybacking on their existing clients as they expand into Africa’s growing economies and commodity boom,” says Scholtz. Meanwhile, a growing middle class is also being targeted by wealth management and cash equity products with UBS, Merrill Lynch and Citigroup to the fore.
“The global players are now dominant in this area. South Africa has 13 stockbrokers of which ten are foreign owned. Indeed it is the only area where they compete successfully against the local players,” states Scholtz. “They have tried competing on some financing deals but got the pricing wrong in terms of risk. Local corporates are also staying true to their relationships with their local banks when seeking to raise money. Those relationships are quite deep and unless the global banks want to come and compete on price they will still stick to their traditional bankers,” he adds.
Not surprisingly perhaps, China is now part of the inward investment equation. “They are taking strategic stakes in South African banks and building from there,” Scholtz explains. “ICBC owns 20% of Standard Bank and First Rand has a working relationship with China Construction Bank. They are interested in mining and infrastructure-related products.”
The growing closeness between the Standard Bank Group and the Industrial and Commercial Bank of China (ICBC) was illustrated in early August when the two banks agreed to sell ICBC a minority stake in Standard Bank Argentina (SBA). ICBC will purchase an 80% shareholding in SBA for an estimated cash consideration of $600m, valuing 100% of Standard Bank Argentina at $750m. Standard Bank Group will sell 55% of its current 75% shareholding and retain a 20% shareholding in SBA. It will realise an estimated $400m after transaction costs and has committed its $20m share of a $100m capital injection to fund SBA’s future growth, resulting in net proceeds of $380m. The deal is subject to regulatory approvals and is expected to be completed in the first half of 2012.
Jacko Maree, Standard Bank Group chief executive, explains: “Since December we have received a number of unsolicited indicative offers for SBA, including an approach from our strategic partner, ICBC. Of all the indicative offers, ICBC’s was the most attractive. We know ICBC well, work closely together and have developed a sound relationship with them ... Our refined strategic focus is on serving the needs of our customers through first-class, on-the-ground operations in chosen countries in Africa. We will also connect other selected emerging markets to Africa and to each other, applying our sector expertise, particularly in natural resources, globally.” With China being Argentina’s second-largest trading partner, the proposed transaction will provide ICBC with an entry point into Argentina as the first Chinese bank to operate there. The proceeds on disposal will also realise and release a significant amount of capital for Standard Bank from outside the African continent.
The growing role of China
China is also set to play a bigger role in the construction and infrastructure sectors in Africa, according to an official statement in July this year by Jeremy Stevens, Standard Bank Group’s Beijing-based economist. He states that the nature and driver of construction will change as highly-skilled Chinese companies increasingly capitalise on their ability to provide cost-effective infrastructure solutions. “The cost of upgrading and maintaining Africa’s infrastructure is in the region of $100bn per year. China is already a critical partner, funding around two-thirds of Africa’s new infrastructure spending since 2007. Furthermore, China’s infrastructure involvement in Africa creates additional opportunities for auxiliary needs—from banking services to accommodation and education.”
Stevens notes that, over the next 30 years, the share of Africans living in cities will nearly double to around 60%; and the number of African cities with a population of more than 1m will also double to 60 in the next decade. Africa’s pending mass urbanisation is heavily dependent on meaningful upgrades to its infrastructure, and without infrastructure development it will be very difficult for Africa to genuinely connect to global markets. The deficit is already enormous (even relative to low-income countries) and is having growth-penalising effects on the continent. Africa will need help in meeting the infrastructure demands placed on it by an urbanising population and increased industrialisation.
Stevens also estimates that China-Africa trade is on track to surpass $300bn by 2015 as incomes in Africa will increase by 30% and move closer to $4,000 per year in the next five years, offering Chinese exporters, who have been flourishing in recent years, additional opportunities on the continent. Last year, China exported nearly $50bn-worth of goods to Africa, targeting primarily South Africa, Nigeria, and Egypt among others. In comparison, the US only exported half of that amount to Africa. Even now, most of China’s exports to Africa (and its key markets) are made up of manufactured goods. Considering that demand from advanced economies will be sluggish for some time, African markets’ importance to China is increasing.
Continent-bound interest however is also rising from other sectors: “There is a bit of interest from the global banks in Botswana and Angola as both are mineral-rich countries,” says Scholtz. “Indeed, in Angola I would expect Brazilian or Portuguese banks to become more active. As for the other countries it is a question of scale. Where are the economies of scale for small countries such as Namibia and Lesotho? The scale isn’t there.”
Lelo Rantloane, vice president, global markets (DCM) of Deutsche Bank in South Africa, agrees, declaring that banking is already well developed in South Africa with its “deep capital markets” but its neighbours are “not so fortunate”. He says: “Historically the governments of these countries have enjoyed a lot of concessionary funding from DFI. That has taken them away from looking at commercial funding which has been to the detriment of their local capital markets. There are very few capital markets, particularly debt capital, outside of South Africa.” That may be changing however.
“Namibia and Botswana put a soft moratorium on foreign borrowing and this is an attempt to borrow locally and put the local savings to work and develop the local debt capital markets that way,” Rantloane says. “They really need to do it. Savings are growing rapidly and there is no capital market to speak of. We have met with a few of the pension funds in these countries and they are sitting there hungry for assets. You will now see more and more governments saying look there is appetite for me in the offshore banks but I need to borrow locally.”
To meet the needs of these pension funds, Deutsche began looking at ways of repackaging rand assets from South Africa into local currencies. “From a debt capital market point of view we are looking at the opportunities of taking sub-Saharan sovereigns and corporates offshore to raise money,” he explains. “That is limited to sovereigns at present but over time they will be followed by corporates.”
The role of ECA financing
Export credit agency (ECA) and trade financing is another main area of work as the region, particularly South Africa and Angola, develops and infrastructure projects grow. “On those projects which have import content and enjoy ECA cover we have been able to use our own balance sheets to facilitate or fund them,” Rantloane adds. “The ECA model is going to be pivotal going forward as more infrastructure projects get commissioned. The commodity boom will also help offshore banks as they facilitate projects from production to export and manage exposures including multi-currency on behalf of the source country. We are looking at how we can take advantage there.”
“Banks with a local presence in country have a better long-term future than the suitcase bankers because they have built local relationships through traditional commercial banking including vanilla lending to corporates,” he states. “You are increasingly seeing banks without a presence going in opportunistically to look for trades. They are picking up all the exotic products such as hedges for commodities or structured export finance deals. But competition will still favour those in country. It’s a difficult market to crack if you don’t have a presence on the ground.”
Even so, local banks have managed to maintain a strong hold of the market. “They are the biggest lenders in South Africa’s capital markets,” Rantloane says. “Traditionally they are buy and hold-type lenders and through that they entrench themselves within corporate relationships. Because those corporates need to appease the local bank they will apportion a large amount of their business to them to protect their lending relationships.”
There are obvious growth opportunities for foreign financial institutions. Current market conditions aside, the overall trend is towards an opening up of the continent to foreign banking institutions. “It is changing. South African corporates are increasingly seeing the value an offshore bank can give them in terms of international product ideas and international distribution,” Rantloane adds.
Guido Haller, head of global markets Africa at Standard Bank, still sees plenty of potential in its home markets. “There are a number of key positive themes in Africa such as high commodity prices and lower external debt levels. As a result we are seeing more infrastructure spending and if you fly into Botswana and Mozambique you enter new airports and then drive on new roads,” says Haller. “The African diaspora is also returning, bringing their money back home. There is also increasing inward investment from global multi-nationals and we have seen portfolio investors get involved again since the credit crunch. Some of the big asset managers are getting involved, seeing Africa as a diversification play for higher returns.”
These developments have created more opportunities for Standard in both retail banking and private banking creating wealth management tools for the growing middle class. “It’s driven our expansion and that of Barclays, who have moved here and built out their retail branch network,” he explains. “Other African banks, such as Nigeria’s UBA Access and Ecobank, are getting involved.”
In the corporate space, banking opportunities exist via increased trade. “Local corporates need letters of credit and trade related-type finance,” Haller says. “You’re looking at cross-border flow, foreign exchange, helping them with payments and providing them with risk management and advisory services. They are also trying to raise capital, some through IPOs, initially in the local funding space. However, for large project finance transactions or large capital raising they will go offshore.”
Foreign corporates, he adds, are more likely to stick with their “natural partners”, the offshore banks. “The other global banks come in a specialised way around commodity trade finance and some project finance business. They use their advisory experience but also their ability to tap into the liquidity centres in Europe and in the US.”
Standard Bank acknowledges that the capital markets in the other Southern states outside of South Africa are “relatively illiquid” but developing year by year. “It is one of our roles to keep bringing new products into the local markets to provide local funding for corporates,” he says. “One of the dangers for African companies and countries is to go back to the Seventies and Eighties when they had large external debts. They don’t want to go back there. They need to create their own capital markets to allow them to fund their own growth internally. To do that they need to create pools of liquidity such as asset management and a pension fund industry. Botswana is very progressive in this area with some very strong asset managers who actively invest in the local market. But it is still in the early phase in Southern Africa.” You’d expect global banks to be queuing up to get involved but the continent’s volatile past is difficult to leave behind.
Scholtz of Afrifocus says: “Foreign banks should be careful not to underestimate the inherent risk still present in Africa. Politically and economically it is on the upward curve but the events in Egypt and Tunisia highlight the potential for instability. This may preclude some of the larger banks developing on the ground anytime soon. They will continue to follow a suitcase banking model and not commit too much capital or infrastructure.”
Herman Bosman, chief executive of Deutsche Bank in South Africa, says global banks need to be aware of a “high degree of political dynamics” in Africa. “Bankers need to stay aware of the moving parts and factors when it comes to making an investment decision,” he states. Not that much different from home then but Southern Africa’s potential for growth may leave us in the shade.