Rationale for London office weaker as Africa rises

STANDARD Bank has been cleaning out its portfolio over the past few years, after what in truth has been an unsuccessful foray into emerging markets outside Africa.

Up to the financial crisis, the bank had aggressively expanded its international operations. Since the crisis, it has sold assets in Latin America, Russia and Turkey.

But the bank still has a presence in the UK, where there have been significant job cuts in recent times. Analysts are now beginning to question whether the country’s largest bank by assets still needs a London address.

“Standard Bank’s major headache is the amount of capital trapped on its London balance sheet, which is not making profit,” Renier de Bruyn, an investment analyst at Sanlam Private Investments, said in a note.

“It is a complicated problem, but we are confident that management will manage down over time, perhaps even find a buyer (of which there have been rumours), which will unlock value in the share.”

High regulatory costs, combined with revenue pressures have destroyed profits in the UK.

And with those costs unlikely to ease in the years to come, a rethink is necessary.

Standard Bank established its London office in 1992, using the office as its base for the corporate and investment arm’s expansion into emerging markets.

According to its website, the UK office, which employs more than 900 staffers, is the hub from which it manages all its international operations outside Africa.

With those operations now scaled back and Africa being the next frontier, what is the rationale for that office now? It’s one of the many decisions facing the new leadership team of Sim Tshabalala and Ben Kruger.

Mind you, there are quite a few other London-based companies focused on SA and Africa that should be asking themselves the same question. afternoon trade yesterday dipped below the R9/$ mark for the first time since February and is threatening to break below R8.90.

Over the past week, the volatile currency has been the third-bestperforming emerging market currency against the dollar, appreciating more than 2.5%. Only the Hungarian forint and Icelandic krona have outperformed the rand.

With confirmation that the world’s leading central banks will keep the taps open for the foreseeable future, the currency that not that long ago was by far the worst-performing of the world’s major currencies this year, received some support.

In a surprise move last week, the Bank of Japan said it would buy more long-term government bonds than forecast as part of its assetpurchase programme.

The European Central Bank expects monetary policy to remain accommodative for a while and the Bank of England said it will continue buying assets.

And disappointing jobs data from the US last Friday has eased any investor concern that the Federal Reserve will look to reduce its $85bn monthly bond purchases soon. The numbers did not include the effect of the March spending cuts that the Republican and Democratic parties failed to avoid, meaning even more pessimism about the next round of jobs data.

The security that stimulus is set to remain a feature has seen investors looking for higher yielding assets, and SA’s higher interest environment is making a telling case for the time being. Carry trade is a feature once again.

For now, the South African fundamentals don’t matter. As long as the story of a US economic recovery is not assured, local asset classes are in calmer waters.

But with markets so eager for the US recovery to just get going, any positive data from the world’s biggest economy in the weeks and months to come should automatically trigger a rand sell-off.

So the downside bias for the rand has certainly not dissipated. For that to happen, the markets are going to have to lose all hope in a US economic recovery in the second half of the year.

THE news only gets worse for what’s surely now a dwindling crowd of believers in the South African consumer story.

Confidence levels are in the doldrums, with the Bureau for Economic Research in Stellenbosch reporting that they have plunged to a nine-year low during the first quarter of this year.

The outlook for retailers isn’t too good.

E-Mail: derbyr@bdfm.co.za Twitter: @Ronderby