The world’s largest bank last week announced it would take a 20% stake in Standard Bank, Africa’s largest bank, in the biggest foreign direct investment by a Chinese company anywhere in the world. This means South Africa is now the top destination for Chinese foreign investment, ahead of Zambia and the Sudan.
On Thursday it was announced that the Industrial and Commercial Bank of China (ICBC) would purchase the stake in the bank for $5,5-billion. Standard Bank will issue new shares representing 11,1% of issued share capital. A further 11,1% of existing shares will be purchased for cash from existing ordinary shareholders at R136, a 30% premium on the 30-day trading average of R104,58.
All shareholders will be required to sell 11,1% of their shares, including the bank’s black economic empowerment (BEE) partners. However, the BEE groups — among them Safika and Shanduka — bought their shares at R40,50.
Standard Bank said together with ICBC it “hopes to lay the foundation for significant expansion in Africa and to position itself at the crossroads of the substantial and growing trade and investment flows between China and the African continent”.
ICBC will have the right to appoint two non-executive members to the board including the group’s vice-chairperson. The deal was concluded in less than 45 days, having been initiated on September 10, although it is still subject to regulatory approval.
The bank’s cautionary announcement on Tuesday had sent the market into a frenzy of speculation with the share price running from R105 to R110,99 until trading in the share was suspended on Thursday morning at the board’s request. The rand had strengthened for two days on the expectation that the deal would result in significant inflows. But while announcing the deal Standard Bank stated that about 25% of its shareholders reside outside of South Africa and that, subject to regulatory approval, a significant amount of the money was likely to be retained offshore.
Jacko Maree, the bank’s CE, said the deal showed that “one does not have to list in London” to finance global growth. “This transaction capitalises on a significant trade flow between the regions and is a vote of confidence in South Africa and Africa,” he said.
ICBC’s purchase means that South Africa is now the recipient of the largest foreign direct investment from China, said Dr Martyn Davies, executive director of the Centre for Chinese Studies at Stellenbosch University. He added that the decision marked a shift towards retail finance, in addition to trade finance. China Eximbank, Bank of China, China Construction Bank and China Development Bank are already invested in Africa.
The move by ICBC makes sense as Standard Bank offered not only a gateway into Africa but also had a substantial footprint across many emerging markets, including Latin America, the Middle East and Asia, with representation in 38 countries, said Patrice Rassou of Sanlam Investment Management.
He said China would want to control the financial flows from commodities between buyers and sellers, and Standard Bank was well positioned in the trade finance area. Chinese banks are not as technologically advanced as local banks and Standard Bank has a very sophisticated banking and trading know-how tailored to emerging markets.
This also reflected a change in perspective about Africa, said Rassou.
So far the growth has been in Asia and Latin America and the assets have been priced accordingly. Africa is now the new frontier, with South Africa being the gateway. Most activity has been focused on commodities, with a general belief that the structure of the banking system the South African authorities would block deals. But this, together with the Barclays deal, means more opportunities may have opened up for foreigners to take stakes in South African banks.
South African banks are fundamentally cheap relative to those in other emerging markets, said Donald Rogan of BoE Private Clients. Chinese banks trade on price to earnings ratios (p:e) of about 20 to 40 times, which makes Standard Bank look cheap at a p:e of 12 times.
“If you look at the Barclays/Absa deal, the reason they came to South Africa was not only because our banks are relatively cheap but because we have good corporate governance and internal systems. Our banking system is world class. It lowers the risk of the deal,” he said.
Rassou said the deal also had wider implications for South Africa as a whole. The country faces an increasingly large current account deficit at 6,5% of gross domestic product, currently the third-largest in the world. As spend on infrastructure continues, South Africa will import more goods putting further pressure on the deficit.
“There have been concerns about how much we can rely on portfolio flows to fund the deficit. An investment like this is proof that we have attractive assets. For some reason South Africa has been off the radar screen of global investors and we haven’t been an attractive proposition. Our banks are attractive assets, priced attractively at substantial discounts. This is a valuation gap which will close,” Rassou said.
What is the ICBC?
The Industrial and Commercial Bank of China (ICBC) manages assets worth 8,3-trillion renminbi ($1,1-trillion) and is listed on the Hong Kong and Shanghai stock exchanges. It is the world’s largest bank by market value, with a market capitalisation at October 22 2007 of 2,53-trillion renminbi (about $319-billion).
The bank has more than 2,51-million corporate customers and 180-million personal banking customers through its 16 807 domestic and 98 international branches. By December 31 last year ICBC was the leading bank by market share in China in terms of total assets managed (17,1%), total deposits (18,3%) and total loans (15,2%). (Source: Standard Bank)