Africa a ‘natural choice’ for Standard

STANDARD Bank ’s decision to abandon its global emerging markets focus and concentrate on Africa will please shareholders but could present a new challenge for local rivals who have also decided the continent is the best place to be.

Last week, Standard said it was abandoning its global emerging markets strategy to focus on Africa, where it ranks as the largest bank by revenue and assets. Group CEO Jacko Maree says Africa is a priority for the bank, which is under pressure from shareholders to sweat its capital of more than R160bn and produce higher returns.

“Africa is at our core. We will continue to build first-class, on-the-ground banking franchises in chosen markets in Africa, investing in people, branch networks and systems,” he says.

This renewed focus is expected to cause sleepless nights for executives at FirstRand , Absa and Nedbank , who were hoping Standard’s decision last year to slow down the pace of growth in response to rising costs and slow revenue growth could give them breathing space to gain market share on the continent.

But Standard executives last week said all that has changed and the bank intends exploiting opportunities on the continent with a vengeance. The executives dismiss talk of competition, pointing to the bank’s large customer and asset base, and its vast retail network in countries stretching from Malawi to Kenya, Ghana to Nigeria.

CEO of Standard Bank SA Sim Tshabalala says Africa’s growth rates over the next two decades make it a natural choice for Standard to invest.

“If you look at the latest statistical information coming out of (such groups as) the World Bank, countries like Nigeria, SA, Angola, Ghana and Kenya are expected to experience some of the fastest growth rates over the next 20 years. Nigeria and SA are expected to experience some of the fastest growth rates in the world,” says Mr Tshabalala. “Therefore, it makes sense for us to be in that space and we already have the franchise, the skills, the people and the balance sheet to do so.”

Standard will face FirstRand, whose CEO, Sizwe Nxasana, is expected tomorrow to outline the group’s Africa strategy; and Nedbank, which last week repeated its wish of becoming “Africa’s most admired bank”. Absa, SA’s largest bank by customer numbers, is also slowly marching into Africa, although it has been slow off the mark to affect markets outside SA.

But Absa CEO Maria Ramos says Absa already has an advantage because it is part of UK-based Barclays, which already has an extensive and expanding retail franchise in Africa. Absa wants to target niche markets, among them Nigeria and Angola.

Of all the big four banks, Standard appears to have a distinct advantage in Africa, not least because of its history — and experience — on the continent, but most importantly in that it already has a larger slice of the market.

Mr Tshabalala agrees, saying the bank simply needs to ramp up investment in existing markets by among other things adding more branches and ATMs, and installing the latest IT infrastructure. For its rivals, it could mean building new branches from scratch, recruiting staff and spending money to promote and reinforce brand loyalty.

He says Standard is planning a big onslaught on Nigeria where it is already a major player in the investment banking sector but has been “thin” in the retail market. In Angola, the bank already has a banking licence and plans to start building its retail network.

Analysts are divided over the strategy, but overall, they say the bank has no choice but to reinforce its income stream and begin to generate higher revenue. The bank’s cost base is also a worry as shown by the cost-to-income ratio of more than 61% in the year to December. Return on capital has been lower than the cost of capital and analysts say the bank should urgently find a solution to sweating its excess capital.

Intellidex senior analyst Nesbert Ruwo says Standard’s changed focus shows the bank could have expanded too fast without generating adequate sustainable returns for shareholders.

“It seems the group took more than it could swallow getting into developed markets, Russia’s Troika being a case in example. Their confirmation that they would want to focus on markets they are comfortable with, that is, Africa, as well as entry into the Bric countries through partnership, is a way to share operating risks as they enter into these markets,” says Mr Ruwo. “It seems they have more capital outside of SA generating less returns than capital invested in SA, so they have to de-risk their non-South African operations.

“Non-South African operations have dragged the group’s return on equity. I need to see the group sweating its non- South African operations to drive (return on equity) higher,” he says.

Avior Research analyst Faizal Moolla says he is comfortable with the bank’s changed focus and has recommend Standard’s stock as a buy.

He agrees with Mr Maree that Standard is still focused on emerging markets; just that the focus has changed. “It does not mean they are pulling out (of emerging markets) but they are not going to buy domestic banks internationally. The emerging markets strategy appears unchanged,” says Mr Moolla.

Metropolitan Asset Management analyst Safs Narker says the proof of the plan is in the results. “I think everyone can buy the strategy (of) being in the Bric countries but the reality is that Bric countries are tough to invest in. You need to invest and build it.”

kamhungas@bdfm.co.za