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Barclays’ CEO Jes Staley |
Barclays’ decision to cut off its Africa operations – one of the few parts of its core business that generates a return above its cost of equity – is a sign of how far the continent has fallen in investors’ estimations and the cost of financial regulation.
Perhaps it’s a statement of intent, signalling Barclays’ commitment to a leaner and simpler business model, while underscoring its poor pre-crisis move to buy South African lender Absa.
Until last year, the group pointed to its Africa operations as one of its most attractive areas of growth.
However, on Tuesday, Barclays said it would slim down its 62.3% Africa stake in the next two to three years, after reporting a drop in full-year profits and a dividend cut that triggered an 11% fall in its share price.
Analysts at Citi are not impressed.
“Africa attributable profit grew 4% on a constant currency basis in 2015 and the RoTE of 11.7% is higher than the core bank average and double the investment bank,” they state.
“Meanwhile, the majority of any capital benefit from selling the 62% stake is only likely to materialize when the holding drops below 20%, which could take two to three years. We question the rationale behind the disposal.”
What's more, Barclays says selling the African stake would boost its capital ratio by just one percentage point. Barclays CEO Jes Staley on an earnings call with analysts even trumpeted the unit's recent earnings. "The underlying performance in Rand was encouraging: income grew by 7%, driven by continued good momentum in Retail and Business Banking, both inside and outside of South Africa."
The divestment, therefore, raises questions. If Barclays thinks antagonizing shareholders by selling off one of the few parts of its core business that generates a return on equity above its cost of equity is worth the risk, is that because it has particularly depressing read on Africa’s profitability prospects going forward?
Staley shed light on the decision on the call: "This has been a very difficult decision to make. Barclays has been in Africa for over 100 years. We have some excellent franchises across the continent, with a great management team and dedicated colleagues. But we face a regulatory environment where we carry 100% of the financial responsibility for Barclays Africa, and yet receive only 62% of the benefits."
Barclays’ decision comes at a tough time for Africa.
The downturn in the commodities cycle has highlighted many African countries’ lack of economic diversification, and in some cases – notably Nigeria – their governance challenges.
The sale at first glance suggests Staley is turning cold on Africa’s fundamental opportunities as well as its short-term difficulties.
Meanwhile, it is hard to see how a Gulf or Chinese banking group – or a vehicle cobbled together by former Barclays CEO Bob Diamond – would bring better technical competence to African banking.
Barclays’ African operations – from Ghana, to Kenya, to Zambia and beyond – are a unique franchise dating back more than 100 years. Of late, the business as a whole has also outperformed the only other big international banking group to have a widespread universal banking franchise on the continent, Standard Chartered.
The Barclays exit – rather than simply underscoring the costs of global banking regulation – indicts the prospects of the South Africa unit specifically.
South Africa was always a poor and unrepresentative cheerleader for the rest of the continent’s much-feted resurgence, even during the commodities boom. Barclays’ South African business, however – a relatively new addition to the group – is the bank’s biggest national market on the continent.
Aside from the regulatory costs of retaining the 62.3% stake in Barclays Africa, Staley highlights how Barclays Africa’s local currency ROE of 17% in 2015 has fallen to 8.7% at the group level, in sterling. South African policymakers – and arguably its president’s misjudged handling of finance ministry appointments – can take much of the blame for a weak rand.
Absa
Now Barclays could be selling out of a 100-year-old franchise largely because of a purchase it made little more than 10 ago – Absa.
Barclays’ £2.9 billion acquisition of South Africa’s third biggest lender in 2005 might always have been a bad bet. Aside from South Africa’s poor growth prospects – developed country-style growth with frontier-market political risks – it might also have been the wrong bank.
The old Barclays franchise in South Africa – before it exited during the late apartheid era – was FNB, now a thriving part of FirstRand. Hardly surprising, then, if the purchase of Absa was beset from the outset with cultural clashes. Barclays was buying one of its old rivals, while its old franchise remained a competitor.
Absa and the rest of Barclays’ African businesses only got round to merging in 2013, despite it being part of the plan behind the acquisition.
It was ironic, then, when two years ago Diamond’s newly launched African banking investment vehicle Atlas Mara bought a big chunk of another former Barclays franchise – Union Bank in Nigeria – now the continent’s biggest economy. How much more ironic if the rest of Barclays Africa – perhaps minus the old Absa franchise – were to end up back in Diamond’s hands via Atlas Mara.
Whether or not a Diamond solution would be the best outcome for African banking is up for debate, but it is certainly not the only permutation imaginable. South Africa’s Public Investment Corporation (PIC), for one, would be keen to up its stake in Barclays Africa, according to management comments reported by local media last month.
Interestingly, PIC – alongside Nedbank (the number-four South African lender) and Qatar National Bank – also holds a big stake in a home-grown pan-African group Ecobank, which unlike Barclays is less strong in east and southern Africa.
Barclays’ Africa exit is just another post-crisis example of bulge-bracket banks’ downsizing their global footprint, but the move seems counter-intuitive given its profitability.
Perhaps it serves as a positive signal to investors that the bank is becoming a more-simple, nimble franchise with a targeted transatlantic business strategy, and is, therefore, less prone, in theory, to event-driven and regulatory risk. Staley admitted as much on the call: "Regulations are structured to drive banks to become simpler institutions."