The success of Barclays’s R20-billion-plus bid for control of Absa may hinge on which tool the government trusts to crack open the cosy oligopoly of the big four banks.
Any transaction that results in control of a bank changing hands — whether to a local or a foreign buyer — requires regulatory approval.
Several analysts suggest that frustration over the lack of competition in the sector will be a crucial factor in Minister of Finance Trevor Manuel’s decision on the deal.
Between them, Standard Bank, Nedbank, FirstRand and Absa have 95% of the retail market, the highest concentration since local financial markets began opening up in the early 1990s. The big four and Investec also have de facto control of the national payments system, the electronic plumbing that makes modern banking possible.
A critical report commissioned by the Reserve Bank and the National Treasury makes it clear that the government now believes banks have exploited their position to regulate the market, limiting price competition, burdening low-income consumers with disproportionate costs and widening interest rate differentials.
The report lays the blame squarely on inadequate competition, remarking that banks were able to charge higher rates for loans, and pay less on deposits, after the demise of “A2” banks like Saambou, Regal, BOE and Mercantile Lisbon.
Analysts say the question is whether Manuel will see the entry of a major foreign player, with the muscle to face down the biggest local players, as a move to promote competition.
Penelope Hawkins, MD of FEASibility, who collaborated on the Reserve Bank report, believes the deal could form part of a series of efforts aimed at opening up the sector.
“It’s part of a picture: the Financial Sector Charter, the introduction of tiered licences for different kinds of banks, foreign players, and new legislation are all likely to increase the contestability of the market,” she said.
Hawkins pointed out that Absa has made profitable gains into the low-income end of the market, with its “flexibank” product delivering a 151% return on equity last year.
“They are coming knowing that the charter is in place, knowing that margins may not stay at the same level. Absa proves that banking the lower-income groups is profitable and sustainable, and Barclays is buying into that.”
Hawkins also pointed out that British banks made most of their money out of interest rate differentials, while local institutions had increasingly relied on fees for their profits. This had increased costs for low-income consumers and small business.
“If they took that approach here, it could be very interesting,” she said.
The financial sector campaign, a coalition of social movements spearheaded by the South African Communist Party and the Congress of South African Trade Unions, is doing its best to convince Manuel that the risks outweigh the benefits.
SACP deputy general secretary Jeremy Cronin highlighted two risks. As Barclays repatriated dividends to the United Kingdom, the savings of South Africans could be drawn offshore at the expense of local investment. In addition, foreign shareholders were unlikely to buy the argument that banks must make short-term concessions for the country’s long-term good.
The campaign wants financial institutions to invest much more aggressively in greenfields projects to stimulate economic growth and job creation, and substantial improvements in access to credit and other banking services for the poor.
“We want to exert some kind of social responsibility leverage over banks. If the head office is offshore you start to lose leverage,” said Cronin.
Hawkins argues that the campaign’s worries are overdone. “New Zealand’s banks are almost all foreign-owned, and there’s no sign that they don’t deliver.”
Other private sector analysts concede that a foreign owner could strip assets from the local bank to fund offshore operations. They also point out that if the sale is approved, it will be difficult to argue against other similar transactions — First National is thought to be the next potential target.
“Does the Treasury really believe in competition delivering, or does it trust a few players who can be politically pressured?” said an independent analyst close to the Treasury.
The Treasury has so far refused to comment on the deal, and as the Mail & Guardian went to press, operations chief Logan Wort said no formal approach had yet been made.
But some in government privately caution Barclays against running a publicity campaign representing approval as the only rational alternative for the economy, warning that Manuel does not like being painted into a corner. It may, however, be possible for him to limit the risks associated with the deal, while still reaping most of the benefits by granting only conditional approval.
If Barclays is required to maintain a local listing for Absa, and prevented from increasing its stake above a certain level, some of the concerns about capital being stripped out of the company would be mitigated.
Minority shareholders, who are increasingly active in protecting their rights, would almost certainly resist moves that would benefit Barclays at the expense of Absa.
A big impact
The sheer scale of what Barclays would pay for half of Absa — a figure of R20-billion has been bandied about — would have an immediate impact on the South African macro-economy.
It would almost certainly give a fillip to the rand, as the Reserve Bank acts to “sterilise” the rush of hard currency into the local market. And it would bulk out the capital account, helping the overall balance of payments to remain on an even keel as local shoppers gorge themselves on lower interest rates and cheap imports.
But the most important effects are likely to be felt in the medium to long term.
Other international banks are actively investigating the possibility of local investments. Some are looking at purchases, others at starting new operations here.
T-Sec economist Mike Schussler says he thinks this is the start of a new wave of foreign direct investment, which will accelerate an economic growth rate that is already beginning to take off. — Nic Dawes