The resur­gence in cor­po­rate bank­ing

Re­tail still dom­i­nates, but there’s life in in­vest­ment bank­ing

Finweek English Edition - - Companies & markets - BRUCE WHIT­FIELD

WHILE RE­TAIL BANK­ING re­mains the driv­ing force be­hind the sec­tor’s con­tin­ued stel­lar growth, cor­po­rate and in­vest­ment bank­ing are, af­ter years of un­spec­tac­u­lar per­for­mance, start­ing to make a more mean­ing­ful con­tri­bu­tion to the earn­ings pie.

And it’s not only in South Africa. A re­cent re­port by in­ter­na­tional pro­fes­sional ser­vices group Ac­cen­ture high­lights the like­li­hood that re­tail bank­ing glob­ally will be­gin to re­flect more pedes­trian growth in com­par­i­son with the faster pace of ex­pan­sion in in­vest­ment bank­ing, cor­po­rate mar­kets and in­vest­ment man­age­ment.

The con­tra­dic­tion in the South African mar­ket has been Ned­bank, the coun­try’s big­gest cor­po­rate lender. Years of un­der­in­vest­ment in its re­tail fran­chise have meant it has been de­pen­dent on the out­per­for­mance of its cor­po­rate and in­vest­ment bank­ing di­vi­sions. While Ned­bank has grown all of its key di­vi­sions sub­stan­tially over the past three years, it has had to play catch up in the race for dom­i­nance in the com­pet­i­tive re­tail space – and de­spite its best ef­forts, it has, for much of that time, lost con­sid­er­able mar­ket share.

While Ned­bank’s re­tail di­vi­sion grew earn­ings by an im­pres­sive 63% to R1,46bn in the year to end-De­cem­ber, its profit con­tri­bu­tion was out­shone by Ned­bank Cor­po­rate. It grew by a more muted, but solid 35% to R2,55bn. Ned­bank Cap­i­tal grew by 18% to R1,14bn.

FirstRand’s star per­former in the six months to end-De­cem­ber was in­vest­ment di­vi­sion RMB, which re­ported head­line earn­ings growth of 75%. While its con­tri­bu­tion to group profit of R1,57bn was con­sid­er­able, FNB, the re­tail fran­chise, con­tin­ues to be the big­gest sin­gle con­trib­u­tor at R2,28bn.

FirstRand CEO Paul Har­ris does not ex­pect the con­tri­bu­tion from RMB to out­strip the per­for­mance of the ro­bust re­tail sec­tor any time soon, but the group’s re­sults do clearly il­lus­trate how the ris­ing in­ter­est rate cy­cle has curbed con­sumer ap­petite for debt. Be­tween De­cem­ber 2005 and June 2006, re­tail bor­row­ing rose by 14%. Be­tween June 2006 and De­cem­ber last year, that growth had slowed to 11,4%.

“Cor­po­rate South Africa has come to life, and BEE and private eq­uity buy­outs are cre­at­ing plenty of ac­tiv­ity from which in­vest­ment banks ben­e­fit,” said Har­ris, stress­ing that re­tail bank­ing was likely to re­main the dom­i­nant profit gen­er­a­tor in the South African mar­ket, de­spite new reg­u­la­tory is­sues in­clud­ing the Na­tional Credit Act due for im­ple­men­ta­tion from June and grow­ing con­cerns about the po­ten­tial of the Re­serve Bank up­ping cash re­serve re­quire­ments in its ef­forts to cool con­sumer bor­row­ing.

The sub­stan­tial re­struc­tur­ing of Absa Cap­i­tal last year has also borne fruit for the Bar­clays-con­trolled group. Pre­dom­i­nantly a re­tail bank­ing op­er­a­tion, Absa’s cor­po­rate and in­vest­ment-bank­ing busi­nesses have been a source of con­cern to in­vestors for some time. Un­der new man­age­ment of John Vi­talo, a for­mer Bar­clays ex­ec­u­tive sec­onded to Absa, the unit has be­come more fo­cused and ag­gres­sive in pur­su­ing new busi­ness. The unit grew at­trib­ut­able earn­ings 46% to R1,11bn, lift­ing its con­tri­bu­tion to group earn­ings to 14%. Absa Cor­po­rate and Busi­ness Bank grew its con­tri­bu­tion to group earn­ings by 37% to R1,282bn. The unit also ben­e­fited from a mi­gra­tion of cer­tain cus­tomers and prod­ucts from Absa Cap­i­tal.

Absa CEO Steve Booy­sen said the group would con­tinue to work on di­ver­si­fy­ing its rev­enue streams – re­flect­ing an­a­lyst con­cerns about its heavy de­pen­dence on re­tail bank­ing. Its bias to re­tail bank­ing has borne hand­some re­wards, with more than 8m clients driv­ing record vol­umes through its branch in­fra­struc­ture. That’s re­flected in the out­per­for­mance of the Absa share price rel­a­tive to its peers over the past five years.

Stan­dard Bank is yet to re­port fi­nan­cial re­sults to end-De­cem­ber but a re­cent trad­ing up­date gave a clear in­di­ca­tion that head­line earn­ings per share would in­crease by as much as 20%. The fig­ure is lower than the 23% achieved in 2005, but within mar­ket ex­pec­ta­tions.

The group gave no in­di­ca­tion of the rel­a­tive per­for­mance of par­tic­u­lar busi­ness units, but an­a­lysts an­tic­i­pate a stronger per­for­mance from its cor­po­rate and in­vest­ment bank­ing busi­ness. It recorded a dis­ap­point­ing per­for­mance in 2005 es­pe­cially in its in­ter­na­tional di­vi­sion. A man­age­ment re­struc­tur­ing – de­signed to im­prove per­for­mance and seek greater in­ter­na­tional op­por­tu­ni­ties in emerg­ing mar­kets dur­ing 2006 – was in­sti­tuted. In­vestors will see this week whether it has paid off.

Plenty of aciv­ity from which in­vest­ment banks can ben­e­fit. Paul Har­ris


Source: I-Net Bridge

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