Barclays. Picture: AFP PHOTO/NIKLAS HALLEN
Barclays. Picture: AFP PHOTO/NIKLAS HALLEN

ARE we seeing the end of the era of multinational banks? Running a global bank has become expensive. Whether headquartered in London or New York, it is making less sense to own a network of international businesses.

Consider that Barclays has to pay a 0.2% levy on liabilities on its balance sheet to regulators in the UK (some liabilities can be excluded from the calculation).

Accounting rules require that Barclays consolidate all the businesses it controls. So even though it owns only 62% of Barclays Africa, 100% of its assets are consolidated onto the parent’s balance sheet.

Last year, it paid £476m for the bank levy, £52m of which was specifically for Barclays Africa — that’s more than R1bn in extra costs carried by Barclays simply for the privilege of being the controlling shareholder of Barclays Africa.

To justify that and other costs, Barclays Africa would have to be phenomenally profitable. It is not bad, with a return-on-equity of 17%, but that is diluted to 8.7% by the time it ends up on the parent’s income statement due to the levy, capital and currency translation costs. Currency translation costs are also a contributor, so the weak rand is part of the story. But UK regulators are also critical.

Then there is the extra capital buffer Barclays will be required to hold, as one of 30 global systemically important financial institutions (Sifi).

The Sifi rules stem from post-2008 efforts to build up the resilience of the financial sector, with all the world’s largest banks required to hold additional capital. Sifis now face the "total loss absorbing capacity" rule that will kick in in 2019.

That requires them to be able to "absorb" losses of up to 16% (this ratio can vary depending on market and some other issues) of their risk-weighted assets.

All told, global banks have strong reasons to reduce the size of their balance sheets.

Disposing of Barclays Africa will achieve that for Barclays. There is also significant goodwill on the parent balance sheet, accumulated through the acquisitions that make up Barclays Africa, that could be shorn off in a disposal. The disposal would reduce the costs Barclays faces for being the parent of Barclays Africa — about R2bn, it reckons. It will also generate cash to help build capital levels.

Of course, the prospect of such a disposal complicates the life of Barclays Africa, even though it is an independent company listed on the JSE. Only four of its 14 board members come from its UK parent, and there are strict rules that require the business to be operationally independent, so the disposal has very little formal consequences for Barclays Africa.

However, the holding company was last week downgraded to below the credit rating of Absa by Standard & Poor’s (S&P).

This is a technical issue — Absa is the more heavily regulated entity and the Reserve Bank can force it to do various things to protect creditors. Barclays Africa would be a passenger to many of those, such as preventing dividends from being declared by Absa to it.

S&P reckons the UK company would not back it in the event of distress. The rating structure for Barclays Africa/ Absa is now the same as that of FirstRand/FirstRand Bank, which has a similar holding company structure.

Other big multinationals, such as Citibank, JP Morgan and HSBC, face similar pressures. Old Mutual’s announcement last week that it will split its business up and similarly reduce its holding in Nedbank reflects this.

Although Old Mutual is not a bank, insurers are also facing significant additional regulation and capital requirements.

The bottom line is that the era of multinational financial services giants may well be over.

All told, global banks have strong reasons to reduce the size of their balance sheets