Owning more than 62% of Barclays Africa meant the UK bank as controlling shareholder was required to hold capital as though it owned 100% of the business.
It’s not often that a controlling stake in a high-quality bank comes on to the market, but hard times have hit the global banking sector and are forcing Barclays Plc to sell off its African business. But the news comes at an inopportune time for almost all likely buyers.
Tougher banking regulation is making it too difficult for Barclays to hold on to its operations in Africa.
Tom Hoskin, the head of communications for Barclays, said changes in the regulatory environment meant Barclays needed to hold a much higher level of capital.
Barclays Africa was specifically an issue because the structure of the ownership – more than 62% – meant the UK bank was the controlling shareholder and was required to hold capital as if it owned 100% of the business.
The return on equity for Barclays Africa is 17% after taxes and meeting regulatory requirements, but the return proportion for Barclays Plc is far less.
“We actually only derive a benefit of 8.7% return on equity,” Hoskin said, explaining that the return was diminished by taxes and regulatory requirements. “The issue is really about the capital requirements in general.”
Barclays will need to sell down its shareholding to a level at which the deconsolidation of Barclays Africa would be permitted. For accounting purposes, this would be below 50%. But it’s expected to be below 20% for regulatory purposes.
Barclays Africa is itself is a great business, Hoskin said. “It would make sense for almost any other owner, other than Barclays.”
But Barclays is not alone: the global banking industry as a whole is feeling the pressure from increased regulatory burdens, said Jan Meintjes, portfolio manager at Denker Capital.
“Most globally significant banks are under pressure to raise capital or reduce assets on the balance sheet,” he said.
To buy Barclays’s 62.3% controlling stake in Barclays Africa, with a market value of R76-billion, is to add significant assets to a balance sheet, Meintjes said.
Although regulatory considerations are paramount, volatility in South Africa and its weak growth expectations “in a way would have made the decision [to sell] easier”, Meintjes said.
Included in Barclays’s problems is the weakening of currencies in relation to the pound, affecting its earnings from its South African operations, Meintjes said.
“There is no obvious buyer in terms of a well-known international banking name,” he added.
The timing of the Barclays Africa sale is an opportunity to make a sea change in the ownership structure of the South African banking sector.
Foreign ownership of the sector is highlighted each year in the Reserve Bank’s bank supervision annual report. At the end of 2014, foreign ownership of banks was 50% of the nominal value of the sector. This was significantly buoyed by Barclays’s majority stake in Barclays Africa.
As far as potential buyers are concerned, Barclays Africa’s chief executive, Maria Ramos, said it is too soon to say.
The Public Investment Corporation (PIC), with more than R1.8?trillion in assets, which it manages on behalf of the Government Employees Pension Fund (GEPF), has already signalled it might be interested in increasing its shareholding.
The PIC already has a significant shareholding in all South Africa’s major banks. Its highest stake in any of the big four banks is 12.5% in Standard Bank. It has a 10% share in RMB Holdings, the major shareholder in First Rand. It is the second-largest shareholder in Nedbank, with a 6.29% stake. And it is also currently the second-largest shareholder in Barclays Africa, with a 5.44% stake.
Other than the PIC’s shares in the big four banks, it has a 16.7% shareholding in up-and-coming Capitec Bank and a 25% stake in African Bank through the GEPF.
Vestact portfolio manager Sasha Naryshkine said the sell-off requires a big cheque, a challenge for a South African bank in a low-growth environment. Naryshkine said an obvious buyer is the PIC, although its mandate may prevent it from going over a stipulated percentage.
Asked specifically about the PIC, Ramos said Barclays is under no obligation to sell to the entity. “This is going to be a good investment and I’m sure we are going to find a lot of interested parties out there,” she said.
Anyone can be an investor, said Patrice Rassou, head of equities at Sanlam Investments, but a strategic investor is different – it requires expertise in banking and a balance sheet big enough, for example, to follow their rights with a rights issue. But it would be hard to find a buyer with that kind of financing ability.
“What could happen is that you have a totally new consortium of a sort, facilitated by the PIC,” Rassou said. He said consolidation within the big four banks, with a combined market value of R661?billion, is unlikely at this time because of competition issues.
Many of South Africa’s large financial services companies also already have existing relationships with the major banks.
Old Mutual holds a 55% stake in Nedbank, Rand Merchant Bank Holdings has a stake in First National, and Liberty Life took over Standard Bank’s asset and wealth management and unit trust interests in 2006.
Meintjes said Barclays Africa’s dividend yield provides an attractive cash flow for an empowerment transaction, “although not for the whole stake”, he said.
Naryshkine said it is possible the asset management community could “lap up” the shareholding if there was a collective approach.
It’s thought that a Chinese bank may have a bigger appetite for a large bite of Barclays Africa.
The Industrial and Commercial Bank of China has a 21.5% stake in Standard Bank. It is one of four Chinese state-controlled banks, with a combined market capitalisation of more than R10-trillion.
Nico Smuts, an analyst at 36ONE Asset Management, said that, for Barclays to get down from its 62.3% shareholding to 20%, it needs to sell a “big slug – far too big to place in the South African market … They are going to have to find another large foreign bank.
“The most likely candidates are the Chinese banks,” Smuts said. “For them, this shareholding in Barclays Africa would be quite small … and they don’t have all the regulatory hurdles.”
Rassou agreed: “Developed-market banks are still under pressure. And the United States banks are also refocusing operations. That leaves you with maybe an emerging-market bank – maybe another Chinese or Indian bank.”
But the Chinese are experiencing problems back home, Naryshkine said. “They have lowered the capital reserve requirements to stimulate the domestic economy. It doesn’t tell you there is a focus on making big expansionary investments.”
Jeremy Stevens, a Standard Bank emerging market economist based in Beijing, said there is a need to move beyond the narrative that China is a bottomless source of capital.
“China is facing a host of internal challenges, one of which is tight liquidity inside the financial system and another is deteriorating asset quality in the banking sector.
“Another is an economic slowdown, and one more is declining returns on investments.”
On Wednesday, Moody’s Investors Service changed its rating outlook on 25 Chinese financial institutions, including three policy banks, 12 domestic commercial banks, three distressed asset management companies, three financial leasing companies, three securities firms and one asset manager from stable to negative.
But the situation in China is complex and fluid, Stevens said.
“Many of the ongoing changes here in China actually make the externalisation of Chinese corporates front and centre of their own corporate strategies. Others, however, may affect the ability and timing of these objectives.”
Stevens said it would be foolish to rule out the emergence of a willing Chinese buyer for Barclays Africa who sees this as an ideal opportunity, but that would have to be anchored by a solid, commercial rationale.
At a Barclays Africa round-table discussion on Tuesday, Ramos was asked how she felt about the announcement by the majority shareholder.
She responded: “I feel absolutely great.”
With a return on equity of 17% – the highest since 2008 – and profit up by 8% over the past year, Barclays Africa appears to be doing better than its British parent.
Even at a time when sentiment about Africa is weak, the bank’s operations in 12 African countries performed well and enhanced group earnings, Ramos said. Its balance sheet stands at R1-trillion and it remains well capitalised.
“The opportunity for growth across the continent has never been better,” Ramos said.
Enticing buyers will need to be done in a measured fashion, Rassou said. “Maybe they [Barclays Plc] will even need to provide funding … They will be on the hook for quite a bit to make this happen.”
But, whatever happens, Meintjes said, it’s not going to be the usual suspects this time around.