PoliticsNews & AnalysisStandard Bank comes home to Africa

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Posted on Tuesday, 16 October 2012 11:35

Standard Bank comes home to Africa

The bank’s single-minded plan for African expansion may secure outperformance in the future/Photo©SHIZHAO/FLICKRStandard Bank has streamlined its emerging- markets strategy: deploying resources freed up by its retreat from other continents, it has its sights firmly set on sub-Saharan Africa.

 

The Johannesburg-listed Standard Bank Group announced early last year that it was refocusing its energies on Africa, reversing what had been a bold, decade-long foray into markets as far-flung as Brazil, Turkey and Russia. The move came as restless shareholders were becoming confrontational about these banking exploits, which were guzzling capital faster than they were generating returns. Calculating the expense of implementing pending regulatory changes might have marked a tipping point in this decision, as new stipulations would require the group to maintain costly pockets of idle capital across the globe. Though still a capital-heavy strategy that could weigh on shareholder returns for many years to come, Standard Bank's single-minded African expansion may be the ticket to profits a decade from now.

Having recently established a presence in South Sudan, Standard Bank now operates in 18 African countries, with an enviable network that makes it the continent's biggest bank by assets and earnings. Established in South Africa 150 years ago, the bank initially limited its regional reach to Southern Africa. By the early 1990s – long before other local banks began looking outward – it embarked on a second wave of African expansion, this time in markets such as Tanzania, Kenya and Uganda.

About a decade ago the emerging-markets scope moved beyond Africa, to cover parts of Latin America, Europe and Asia. The bank gained firepower for those ambitions in 2007, with the sale of a one-fifth stake to the Chinese banking behemoth Industrial and Commercial Bank of China. Armed with fresh capital, Standard Bank announced in March 2009 that it was buying a one-third share in the Russia-based Troika Dialog Group.

With the passage of time, cracks began to show. Standard Bank's extensive capital outlays have undermined its return on equity, which has dwindled compared with the metrics produced by its more home-bound banking compatriots. Fallout from the financial crisis brought matters to a head and, as earnings growth sputtered and risk-management systems were shaken up, the bank launched an introspective strategic review. The outcome has been a drastic cutting back of its operations and balance sheets in Russia, Argentina, Brazil, Turkey and the UK, and a clearly articulated drive to hunker down in Africa instead.

UNIVERSAL BANKING MODEL

"It was apparent that in extending the franchise to countries where it had neither critical mass nor a universal bank- ing model – in other words, it lacked a combined retail and investment banking presence – its capital needs had become too demanding," says Jean Pierre Verster, equity analyst at 36ONE Asset Management. "Without retail operations that could help fund the investment banking leg in Russia and Brazil, for instance, the parent would have had to continue capitalising these regional banks. The prospect of banks in each jurisdiction having to comply with the capital and liquidity requirements of new banking regulation would have made it doubly problematic to keep pumping funds in at this rate."

Some of those funding constraints apply in parts of Africa, too, but the bank has a deeper history in its home continent, not to mention more viable prospects. "Having perhaps done too much and losing its way a bit, Standard Bank is now concentrating its energies in those areas where it has an advantage – Africa and commodities," argues Chris Steward, head of equity research at Investec Asset Management.

THE BANK'S EXTENSIVE CAPITAL OUTLAYS UNDERMINED ITS RETURN ON EQUITY

"Compared with the other regions where it has been, the bank is a slightly more dominant player in Africa. It has a good foothold in South Africa, the largest banking market on the continent, and has a decent distribution footprint that helps drive deal flow into and out of the continent. This redoubled focus on its core gives the group a far better chance of generating returns within a time frame that would satisfy shareholders."

Management has signalled this shift emphatically, with chief executive Jacko Maree stating in the latest annual report that, "Africa remains at the core of our growth strategy and we will continue to serve the fast-growing needs of our customers, either by maintaining or building first-class, on-the-ground operations in chosen countries sub-Saharan Africa."

Standard Bank management will nevertheless have its work cut out to keep investors intrigued, despite this convincing and commendable change in tack. "It is fair to say that returns out of the Africa network have lagged shareholder expectations, mainly because of the aggressive continued investment that has happened at a pace much faster than the underlying revenue growth in those markets," explains Goodwill Chahwahwa, portfolio manager at Coronation Asset Management. "While this bodes well for the long-term strength of the franchise, it has meant that returns have been ploughed back into the business in the near term."

Maree is well aware of shareholder frustration, acknowledging that the "pace of our organic build strategy in Africa has been slower than we had hoped. It is a reality that it takes time to resolve some of the practical impediments of doing business on the continent." Yet, citing the enormous growth potential there, Maree is adamant that the strategy will benefit shareholders in the long run.

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The quality of that success depends on Standard Bank's ability to build more dominant positions in important markets, including making a more substantial shift from its already active role in corporate and investment banking, into retail banking. As Siboniso Nxumalo, investment analyst at the Old Mutual investment boutique ELECTUS, cautions, "There are no guarantees about the timeline within which Standard Bank would reach its objectives. This is not the first time someone thought banking in Africa was a good idea. The key will be in whether it can set up or acquire a strong retail franchise; you have to be number one or number two in a market to make real money in retail banking. Building such scale organically takes time and is expensive."

GAINING STATURE

Building adequate scale in markets such as Nigeria and Kenya will be pivotal. Despite its acquisition in 2007 of a one-half stake in Nigeria-based IBTC Chartered and having devoted several years to a major branch rollout, Standard Bank still lacks stature in Nigeria. "These operations are sub-scale and therefore have generated very poor returns on equity," Investec's Steward says. "By contrast, it has a dominant position in Uganda, which reports fantastic returns on equity, but which in the grander scheme of things is a small and relatively insignificant market."

The unfortunate timing of the Nigerian acquisition – coming just before the bank- ing crisis in that market – is one reason why Standard Bank will be careful about buying its way into market dominance. "The deal came at precisely the wrong time," says Patrice Rassou, head of equities at Sanlam Investment Management. "Return on equity in Nigeria declined massively from then on, dragging down Standard Bank's overall African returns from around 30% to 15%, and then to 8% at last count."

He believes the lesson learned is that big bank acquisitions are not easy – and are becoming harder as the region becomes more competitive. "We are likely to see a much more cautious approach to capital deployment as Standard Bank expands in Africa."

Rassou describes the bank's newly calibrated African strategy as fundamentally different from what it was before 2008. "Back then, it was rather like a suitcase banker operating out of Johannesburg. Today, with the redeployment of capital from the other international businesses and the brains in the business focused on leveraging off the African footprint, Standard Bank has a far better chance of succeeding on the continent." ●

 



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