A few months ago new Absa CEO, Steve Booysen, predicted that the bank would look at buying an African bank every year for the foreseeable future as part of its future strategy.
The proposed Barclays deal to take a 50,1% stake in Absa may leapfrog this bold prediction, as a tie-up with Barclays would give Absa access to banking operations in nine African countries where it is currently not represented — Botswana, Egypt, Ghana, Kenya, Mauritius, Nigeria, Seychelles, Uganda and Zambia.
The countries where the banks both have a presence are Tanzania, Zimbabwe and South Africa, where Barclays moved its African headquarters several years ago.
Absa is a strong player in Tanzania through its majority stake in the National Bank of Tanzania, the country’s biggest retail bank. Barclays returned to Tanzania in 2000 with a greenfield development, its first on the continent for several decades, after leaving the country in 1967 when the government nationalised the banks.
Absa also has a small shareholding in the Commercial Bank of Zimbabwe. It has a presence in two markets from which Barclays is absent — Namibia, where it owns a 36% stake in Bank Windhoek, and Banco Austral in Mozambique.
It has been in talks with the Zambian government for nearly a year with a view to buying the Zambia National Commercial Bank, which the government is under donor pressure to privatise.
Exactly where these talks are at present is unclear. The Zambian government seems to regularly change its mind on the preferred bidder, although Absa confirmed this week that it is still in the running.
The other main contender in this deal is the private United States equity fund, African International Financial Holdings (AIFH) whose investors include HSBC Investment Bank Holdings, the European Investment Bank, the International Finance Corporation and FMO, the Dutch development agency.
AIFH, along with Stanbic, recently lost the bid for a stake in Afribank Nigeria when the government decided to award it to the bank’s management.
Absa is also looking for an acquisition in the Angolan market, as well as Kenya and the Great Lakes countries of Central Africa.
One of Barclays’s biggest African operations is in Kenya, a highly competitive banking market and one of the most sophisticated on the continent.
The group also has a representative office in Nigeria for private clients although it does not provide a local banking service from that office. Absa has been eyeing the Nigerian market for some time, but has hesitated to make a move.
Stanbic has a small operation in Nigeria, which may grow as a result of the Nigerian government’s recently introduced requirements for a massive increase in the capitalisation of banks. Stanbic currently does not meet the requirement, and may read this as a reason to increase its presence in Nigeria, which has about 90 banks, through acquisitions.
The potential for banking profits on the continent is highlighted by Barclays Africa’s recently released half-year results. These show overall economic profit growth up by 64% to Â£36-million, operating income up 18% to Â£325-million, customer deposits up by 8% to Â£2,8-billion, customer lending up by 20% to Â£1,8-billion and profit before expenses up by 27% to Â£113-million.
That the African banking market is lucrative is not in dispute. Overseas banks have traditionally dominated corporate and blue-chip banking on the continent, but South African banks are increasingly reaching into these markets.
Stanbic has been a market leader. It began its African expansion with the acquisition of the Grindlays network in seven countries in 1992 and now operates in 16 countries, including Nigeria.
The main problems of acquisitions in Africa are the strength of the banks in these markets, management and labour problems and government interference, particularly over privatisations.
But returns are good. Stanbic is looking at an earnings growth of up to 30% from its Africa division in the medium term, with a return on equity of 30% and above.
There are, of course, many potential problems and political risks, including currency issues; overbanking in small markets, particularly those close to home; weak domestic private sectors; large unbanked populations; relatively few creditworthy borrowers; shortages of long-term finance; and large government deficits supported by the private banking system.
Financial-sector reforms have taken place in many African markets and regulators are finding ways to increase the stability of the banking system. Instability, however, has brought good business to established banks like Barclays and Stanbic, as corporates, in particular, look for safe havens for their money.
South African banks have a sizeable competitive advantage in Africa because of their capital strength and technological capabilities.
One of their strengths is the fact that South African businesses are flocking into the rest of Africa and, where possible, keeping their business with their traditional bankers. This has given banks like Stanbic a sizeable, ready-made client base.
Barclays stands to gain from Absa clients doing business in Africa as a natural leverage of the deal. It appears that Standard Chartered, which entered the South African market by acquiring online banking operation 20twenty, is looking to use the leverage of the South African market to increase its African business as well.
As banking in Africa gets more efficient and better regulated, local and regional banks are increasingly becoming major competitors. These include African Banking Corporation, First Bank of Nigeria and Union Bank of Nigeria, Kenya Commercial Bank and Ghana Commercial Bank.
The Barclays-Absa deal may put paid to Absa’s ambitious African expansion plans in their current form. But if Absa goes ahead with its plans, even in the event of the deal going through, it would mean the creation of an African banking giant to be reckoned with.
Dianna Games is director of Africa @ Work, a company specialising in the African market in the fields of research, publishing and events