Global banks’ woes opportunity for locals
THE domestic woes facing global banks are giving their South African rivals the breathing space they need to erect more barriers to entry into sub-Saharan Africa.
And it can be the blessing in disguise they need to deploy their cash-flush balance sheets to fund organic and acquisitive expansion into the region, says Mgcinisihlalo Jordan, the financial services leader at the local office of global consultancy firm Deloitte.
"Banks in the US and the EU (European Union) are hampered by regulatory and other challenges in addition to dealing with a more volatile economy," Mr Jordan says. "So there is going to be uneasiness and hesitation from senior bank executives and shareholders to enter the African landscape."
He spoke as rating agency Fitch released a new report painting a positive outlook for SA’s biggest banks despite uneven economic growth. Fitch says their nonperforming loan ratios should continue to decline, helped by interest rates at 38-year lows that have further lowered debt-service costs. The banks are also strongly capitalised and will easily meet tougher Basel rules, while prospects for revenue growth appear to have not been dimmed by the sluggish economic growth.
Fitch says expansion into Africa is a key focus for the big South African banks, although they appear to be taking measured steps to expand. "Standard Bank already has a commanding position in the rest of Africa with subsidiaries in (more than) 16 African countries outside SA," it says.
The outlook for local banks contrasts with that of some global retail and investment banks who are implementing a raft of cost-cutting measures to protect tepid earnings growth.
A recent report in the Financial Times says Morgan Stanley is cutting a further 700 jobs, taking its total to 4,000 for the year, Deutsche Bank is set to lay off about 1,000 of its investment banking staff, equivalent to about 10% of the unit’s workforce, while Citigroup is retrenching 350 bankers.
Mr Jordan says added to staff cuts are reputational issues related to the recent Libor scandal that has engulfed some of the leading global banks such as HSBC and Barclays, which is likely to make investing outside home markets less of a priority for some of them.
"That is why I think SA’s big banks have a better chance to expand in the region. One of their advantages over their counterparts in the US or Europe is that they understand the market better because they are from the same region," Mr Jordan says.
SA’s big banks’ expansion in the continent is through different entry and growth models such as outright acquisitions, strategic partnerships and the starting of greenfield operations.
Nedbank, which has a strategic alliance with Ecobank, has an option until 2014 to acquire up to 20% of the Togo-based pan-African bank, while FirstRand is starting operations from scratch, though it may announce acquisitions in Nigeria and Ghana. Absa has partnered with parent Barclays to expand in and beyond the 13 markets in which they are represented.
Mr Jordan says the real battle for market share and revenue growth for the big banks is in SA where analysts expect all the banks — except Absa — to register double-digit earnings growth this year.
He warns, however that the days of generating returns on equity of as high as 30% are "long gone" as new capital requirements meant banks will struggle to generate such high returns in the future.
"The new banking operating model does not give them such returns on equity any longer. The banks are therefore wrestling with how to grow from here," says Mr Jordan. He believes the unsecured loan segment shows signs of further expansion, but warns its uncontrolled expansion can lead to some "burnt fingers".
Absa CEO Maria Ramos said last week she did not believe the big banks were recklessly providing unsecured credit, but admitted there was always the risk of consumers being heavily indebted to other lenders.
"What I want to ensure as a bank is that we are consciously lending to our primary clients and we have not grown unsecured lending significantly; if anything, it has remained fairly flat because we want to make sure consumers are able to repay us," she said.
Fitch says unsecured lending still represents a small proportion of lending with total unsecured personal-term loans likely to remain below 15% in all the banks’ retail portfolios in the longer term.
Mr Jordan also says the big banks are likely to face new competitors providing mobile banking, and a question they will ask themselves is whether their strategies will withstand the disruptive market behaviour of new players.