The potential cash injection into South Africa’s economy by HSBC’s bid for Nedbank would be limited by the £1.5-billion that Nedbank’s parent, Old Mutual, hopes to take offshore, according to analysts.
But the long-term benefits of the potential deal to inter-African trade, trade with Asia and increased competition in the local banking sector could be profound. The outcome will depend largely on whether Old Mutual gets the go-ahead to use the proceeds from the sale of its local assets to reduce its offshore debt.
Old Mutual has indicated it aims to repatriate £1.5-billion offshore, subject to approval from the Reserve Bank and treasury. Old Mutual, listed in London, owns just over half of the local bank. Whether or not this approval will be granted remains to be seen.
According to the treasury, there are currently no exchange controls on foreign investors. But it noted that Old Mutual’s request would be subject to the conditions that were attached to the approval of the company’s move of its headquarters to the United Kingdom in 1999.
“The conditions were meant to ensure that the move to the UK did not result in Old Mutual selling its local assets,” Jabulani Sikhakhane, the treasury spokesperson, said. “However, current exchange control policy empowers the minister to consider on a case-by-case basis requests to repatriate capital offshore, taking into account factors such as net benefits to the economy, the interests of Old Mutual’s policyholders and businesses in South Africa.”
Errol Kruger, the registrar of banks, said the implications the potential deal would have for exchange controls matters would become clear only once there was more certainty about the details of the offer and after discussions with the parties involved. But the deal was a huge vote of confidence in South Africa, said Kruger, and could pose an increase in economic activity on the part of Nedbank with a “concomitant positive effect on the country as a whole”.
But what form such a boost would take would become clear only when “proposed synergies and future strategies” were spelled out. The proposed deal could see HSBC buying a 70% portion of the Nedbank Group, valued at about R50-billion.
According to Dawie Roodt, an economist at the Efficient Group, this could decrease the country’s current account deficit, about R150-billion, at least in the short term, by nearly a quarter. ‘This would be a significant once-off payment. HSBC would be topping up South Africa’s savings gap,” he said.
But the likelihood of all the money remaining in the country was slim, said Kokkie Kooyman of Sanlam Investment Management, given Old Mutual’s indications. Nevertheless, the authorities might approve it to be moved offshore. It was the Reserve Bank’s intention to keep the rand strong to combat inflation but capital inflows to the country had been too high, he said.
“They might decide we don’t need the money and give the go-ahead.” But he noted that in previous international bids for local banks, such as the sale of Absa to Barclays and the Standard Bank transaction with ICBC, the international companies had settled for smaller portions than they had initially sought.
The deal would retain the status quo, where two of the big four banks, were foreign owned. Kruger said that the Reserve Bank’s preference was for at least two of the big four to be owned locally. “But this is just a preference — nothing is cast in stone.”
The South African banking sector, viewed positively by international markets, was relatively unscathed by the financial crisis and, Kruger said, a deal with HSBC was unlikely to leave the country or the local banking sector exposed to any financial contagion, as was seen during the crisis.
“HSBC is one of the few global banks that did not have fallout from the financial crisis,” he said. “They are ranked number one [in terms of] brand, one of the top four measured by assets, [have a] market cap of $170-billion and recently reported first-half earnings of $6.8-billion — so it would be hard to imagine that Nedbank would not be able to leverage off of all these advantages.”
Andrew Vintcent from Stanlib said that, given the sheer size of HSBC, the deal would increase the stability of the local banking sector. It would also give HSBC a launch pad into the African market, he said. “This is not an expensive entry into the African market. From a strategic point of view, it is very wise, although the benefits will take a decade or two to play out,”
Vintcent said. Kooyman was more cautious, saying much would depend on HSBC’s objectives. He noted that in the Barclays/Absa deal, the intention had been for Absa to buy up other operations in Africa but it had been blocked by the Reserve Bank. “There are some risks for HSBC in this respect,” he said.
HSBC could bring greater competition into the local market with tougher performance targets for Nedbank, Kooyman said. HSBC’s push into Africa, through the likes of Nedbank, could also boost South African companies’ entrance into the continent. “This would facilitate inter-African trade,” he said. Nedbank is part of the Ecobank Nedbank Alliance, a network of 29 banks in Africa.