The dust is settling after Minister of Finance Trevor Manuel ended the acrimonious Nedcor-Stanbic battle
Belinda Beresford
In an age where bigger is better, the government has finally put the brakes on the growth in size and power of the “big four” banks.
In refusing Nedcor permission to go ahead with an attempted hostile takeover of Standard Bank Investment Corporation (Stanbic), Minister of Finance Trevor Manuel emphasised the importance of larger economic concerns above potential commercial gains.
The weighty tome of reasons backing the government’s decision is undoubtedly being pored over by the finest financial, political and economic minds in the country. And possibly offshore as well. The reasoning behind the decision is being examined for indications of future strategic decisions on mergers and acquisitions in South Africa.
Some analysts say the decision would be seen as a warning sign of a government intent on interfering with the markets, after Manuel has repeatedly sought to establish its investor-friendly credentials.
Others say that allowing the merger would have taken the concentration in the banking sector beyond international norms, sending a negative signal to observers. This was the view of the Competition Commission and the registrar of banks, and ultimately the judgement call that Manuel made.
In his decision, which ended one of South Africa’s most publicly acrimonious corporate battles, Manuel said: “The registrar of banks has advised that the proposed merger could be viewed negatively by international observers. Such observations may result in lower assessments of the long-term viability of the banking system in South Africa.”
The strength of South Africa’s banking system was one of the contributing factors which helped the country win coveted investment grade ratings from international rating agencies Standard & Poor’s and Moody’s.
A megabank would have added to the structural risks in the economy since if it ran into difficulties the domino effect could crash the whole banking system. Alternatively, people – including the bank’s management – could rely on the, possibly mistaken, impression that such a bank would be “too big to fail”. The expectation that the government would bail it out if it got into difficulties could encourage more risky behaviour.
Nedcor chair Chris Liebenberg said one of the results of the attempted merger would be policy changes for the financial services sector. Perhaps some hint of that could be seen in Manuel’s speech, when he reported that the Competition Commission felt that levels of concentration “have been unacceptably high from an international perspective in the current pre-merger market situation, and will be even less acceptable after the merger”.
Another issue considered was the impact of such a merger on Liberty Life, which is controlled by Stanbic. Old Mutual is the controlling shareholder in Nedcor as well as holding a 23% stake in Stanbic on behalf of its policyholders. The merger would almost certainly have forced the new megabank to sever its ties with Liberty.
The Banks Act, which regulates banking requirements, emphasises the well-being of depositors, said Manuel. If allowed, there was concern the merger could have seen a reduction in the number of products, services and branches available to consumers. He also pointed out that while there would be possibilities of efficiency gains for the merged bank, “there can be no guarantee that benefits derived from efficiencies realised … will indeed be passed on to the consumer”.
Fears of a reduction in competition among banks were a major factor in swaying the decision.
The differences in strategy between the two banks were visible at the press conferences held at venues in Sandton a few hours after the announcement.
Looking drained rather than euphoric, Stanbic’s management emphasised that its strategies were in place and the company now needed to concentrate on growing revenue streams. The group earns a quarter of its revenue from outside South Africa, and another 15% from life assurance. Commercial banking in South Africa contributes only 42% of revenues.
As one interested observer, First National Bank head Viv Barlett says, Standard Bank is likely to be more aggressive in future, to ensure that it is never seen as a victim again.
In terms of assets Standard Bank is the biggest of the big four. In December 1999 it had assets of about R184,3-billion with shareholder funds of R20,4-billion. In comparison Nedcor came in fourth with total assets of about R129,8-billion and shareholder funds of R10,1-billion. The merged bank would thus have been worth about R344,2-billion.
Nedcor’s CEO Richard Laubscher looked so cheerful that attendees at his press conference were speculating on what he has up his sleeve. Nedcor is also a very successful bank. In terms of cost-to-income ratio, an accepted quick indicator of efficiency, Nedcor is way ahead of its competitors on 51%. It boasts of having been the only bank to consistently grow market share.
However, there is a perception that Nedcor’s track record largely rests on its ability to increase efficiency, and that this route of expansion is almost fully exploited, hence the need to buy other businesses.
Whether this view is justifiable or not, Nedcor has made it clear that it intends to make further acquisitions but that these will not be constrained by sectoral or geographical boundaries. Laubscher said that any offshore expansion will not be in investment or high-street banking, but is more likely to be technology related. Nedcor already has an effective 21,5% stake in technology company Dimension Data, which recently received permission to relocate to London. Laubscher also talked admiringly about Egg, the Internet-based bank launched in the United Kingdom in 1998. It will probably not be long before Nedbank does some hatching itself, at home and overseas.