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Will Barclays Bank sell off its Africa assets?

FINANCIAL STANDARD
By Hezron Gikang'a | February 16th 2016

Barclays Bank releases its full year results on March 1. This date will mark a turning point in the bank’s storied history.

Jes Staley, the CEO, only two-months-old on the job, is a man in dire straits. The bank’s fortunes have tanked — dipping profits, declining market and revenue share, a prolonged shares slide and a stock that has shaved 40 per cent of its value since July 2015.

Markets, shareholders and analysts assert that Britain’s second-largest retail lender by assets is now worth far less, and ought to cut its losses and sell its underperforming Investment Bank and African unit.

Will Mr Staley sell to calm markets and placate shareholders? And what is his turnaround plan?

Barclays revised downwards its 2015-16 financial year return on equity (RoE) target from its four units — personal and corporate; BarclayCard; the Investment Bank; and the African unit — to 11 per cent from 12 per cent.

The Investment Bank reported a RoE of 5.2 per cent in the third quarter and has warned fourth-quarter income will fall 11 per cent, while Africa’s RoE of 9.3 per cent is well below the revised target.

Weighed down

The African business is about 100 years old and extensive, spanning 12 countries and 12 million accounts. South Africa leads with nine million accounts, Kenya is second with 800,000.

A combination of factors has constrained the bank’s growth and weighed down profitability lately.

A cautious lending policy and risk averseness, coupled with a conservative growth strategy, has stymied loan book and assets growth, leading to lower interest and non-interest income in comparison to its African peers.

Topline growth has slowed, pummeled by currency depreciations, tightening liquidity, market volatility and a fall in commodity prices, especially in South Africa, its biggest market.

The rand depreciated 25 per cent, exacerbated by President Jacob Zuma’s erratic macro-economic policies, disruptive labour, lower economic productivity and heightened economic and political uncertainties.

Across Africa, Barclays has faced intense competition from local banks, reducing its profit margins and growth. Local banks are more attuned to local trends, and often serve a niche market with flexible terms, have a diversified portfolio, and lower cost-to-income ratios.

They are leveraging on convergence, technology, mobile platforms and innovative distribution channels like agency networks to drive penetration.

They have tailored their pricing to the lucrative SME market, outperforming Barclays, which previously shunned the sector as too risky.

Barclays pursued a low-risk, bricks-and-mortar model. This starved the vast SME ecosystem of finance, as the one-size fits-all strategy primarily served the white-collar formal sector.

It worked for a while.

Meanwhile, Africa’s demographics and sustained economic growth nurtured a burgeoning entrepreneurial class. Homegrown banks spotted the un-banked opportunity.

Liberal regulators incubated innovations. Local banks tweaked their models, were nimble and resonated with the market. They cultivated productive relationships, leveraged their brand equity and affinity. The runaway success of banks like KCB, Equity, Family, Co-operative and CBA, as well as Safaricom, attests to this.

Expansionary streak

In seven years, Safaricom has ridden the convergence of mobile telephony, technology and financial services to become East and Central Africa’s most valuable, innovative and profitable firm, at a market capitalisation of Sh650 billion.

Kenya, Africa’s most financially inclusive country, has banks and insurance firms that are regional leaders and on an expansionary streak.

Top African banks by Tier 1 capital are also local: South Africa’s Standard Bank in pole, with FirstRand, Absa and Nedbank next; Moroccan banks Groupe Banque Populaire and Attijariwafa Bank take fifth and sixth positions; Nigeria’s Zenith is seventh, closely followed by Ecobank, United Bank of Africa and Guaranty Trust; and then Egyptian banks.

Frequent management and strategy changes have hurt Barclays — Staley is the fourth CEO in five years. Anthony Jenkins, his predecessor, left over strategy and boardroom wrangles. Bob Diamond, a fixed income securities trader who was CEO before Jenkins, replaced John Varley in 2011. Mr Diamond resigned in 2012 under the shadow of scandal.

There are also downside risks. Barclays is under closer regulatory scrutiny. Regulators have instituted stringent ‘ring-fencing’, prudential guidelines and disclosure requirements to insulate retail and corporate banking from investment banking. This reduces exposure and structural risks to avert another global contagion. These have hurt growth and tied up capital as banks race to comply.

Barclays was implicated in interest rates manipulation in the London interbank offered rate (Libor). The firm reached a hefty $453 million (Sh46.1 billion) out-of-court civil settlement with US and UK regulators.

The bank was again fined $70 million (Sh7.1 billion) by US regulators this month for its “dark pool” trading operations, which allowed investors to trade large blocks of shares but keep the prices private.

Potential buyers

In November last year, Barclays was fined £72 million (Sh10.6 billion) by UK regulators over a £1.9 billion (Sh279.8 billion) transaction that breached its own financial crime safeguards. Barclays stood to make £50 million (Sh7.4 billion) in profit from the transaction.

The UK’s Serious Fraud Office has a long-running probe into the bank’s cash-raising during the 2008 crisis, when it raised £5.3 billion (Sh780.2 billion) from Qatar Holdings LLC, a subsidiary of the Qatar Investment Authority’s Sovereign Wealth Fund. Barclays, unlike many of its peers like the Royal Bank of Scotland (RBS), rejected a government bailout and maintained its independence.

If Barclays were to sell its African assets, apart from triggering a new wave of consolidation in the financial services sector, it would become Africa’s biggest financial services deal, after Qatar National Bank’s (QNB) acquisition of a 23 per cent stake in Ecobank in 2014 for $503 million (Sh51.3 billion).

Barclays Plc holds a 62 per cent stake in Johannesburg-listed Barclays Africa Group Limited (BAGL). BAGL controls the lender’s main operations in the continent.

The potential buyers of this stake include Standard Bank, Nedbank, FirstRand, cash-rich Gulf Cooperation Council (GCC) banks, private equity funds with this kind of risk appetite, and the highly capitalised Chinese banks.

Atlas Mara, owned by former CEO Diamond, is keen, but valued at £400 million (Sh58.9 billion), is a lightweight. BAGL is valued at £3.3 billion (Sh485.8 billion). Mr Diamond would have to execute a reverse, highly leveraged and ambitious buy-out, if at all.

The Investment Bank, acquired from the collapsed Lehman Brothers that triggered the 2008 financial crisis, is a bad fit — a US investment bank domiciled in a UK retail bank, analysts say.

Further, it is undercapitalised by $6 billion (Sh610.6 billion). It has declared redundancies, closed offices in nine Asia-Pacific and Middle East operations, including Russia. More layoffs and restructurings are expected.

Shareholders, markets and analysts favour a return to the highly capitalised, prudently managed, highly profitable UK-focused retail banking model.

But whatever Staley does — or does not do — Barclays will never be the same again.

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