Banking monsters’ days are numbered
Lenders are shedding foreign units because of increasing costs and high capital demands
SINCE the financial crisis that started almost eight years ago to the day, there have been question marks over the future of banking behemoths with flags planted in almost every jurisdiction on the globe.
The threat of a crippling $14billion (about R196-billion) fine faced by Germany’s biggest bank, Deutsche Bank, in the US and the share free fall that has dragged the stock to its lowest level in three decades may just be the answer. Their days seem numbered. The fine was subsequently reduced.
The penalty fee is a case study for the changing banking environment, especially when it comes to operating in foreign jurisdictions.
“Regulators have recognised that the larger banks may constitute a system risk and have imposed even higher capital burdens on them,” said Patrice Rassou, head of equities at Sanlam Investments.
The crisis facing the German bank may sound the death knell for the era of large international banks seeking expansion opportunities outside their domestic base, with them preferring regional strength instead.
The fate of the world’s leading lenders was best captured by Barclays plc’s decision to sell its stake in the Maria Ramos-led Barclays Africa Group, although the unit was the standout performer in Barclays’ portfolio of assets in recent years.
News of the exit may in earlier years have seen a rush of speculation around which of the world’s big players would be chomping at the bit to get a stake in one of Africa’s largest banking operations, with a presence in 14 countries.
Instead, the most high-profile of bidders has been the British bank’s former CEO, Bob Diamond, who now heads Atlas Mara, whose London-listed market cap is a fraction of the size of Barclays Africa’s R241 billion. Barclays pulled off a first selldown in its stake in its African operation in May this year, reducing its stake to just above 50%, from 62%. People close to the situation say the bank may choose to follow a similar path in reducing its stake to below 20% within two years.
Stephen Koseff, who as CEO of Investec chose to exit the lender’s Australian operation more than two years ago, bemoans the regulatory burden that has been imposed on banks over the past decade.
“Planting banks all over the show is a massive regulatory burden,” he said.
Burnt by the administrative costs of keeping the lights on in Australia, Investec has rather focused on its primary and secondary markets, namely, South Africa and the UK. Its only other footprint in Africa is in Botswana and Namibia.
The chances of expansion into the world’s biggest economy, the US, are simply not on the table.
“You are going to get killed. That’s why we have never started a bank in the US,” Koseff said.
But for investment banking, Koseff said, a bank simply could not undertake any large corporate transaction without some sort of representation in New York or London. The bank has offices in both cities, as well as in Hong Kong.
Corporate investment banking, unlike retail banking, tends to require a lot less in terms of operational presence as the bank does not need to set up a branch network. Investment banks are also lighter on staff costs.
Banks such as Barclays plc and Citigroup have been curtailing noncore operations and raising capital by means of disposals to meet the more stringent capital and liquidity requirements of their regulators.
Last year, Citigroup withdrew from its retail operations in Egypt, in line with its general withdrawal from retail in many parts of the globe.
Lenders “have been cutting costs and exiting markets where they don’t have scale. The growth imperative has changed towards one of capital preservation and focusing on their home bases,” Rassou said.
Standard Bank has rolled back large-scale expansion plans in markets outside Africa in recent years, choosing to focus on its domestic and regional strength.
Before the pullback, “our operations were enormous. If they were listed separately, they would have been one of the five largest banks in South Africa,” joint CEO Sim Tshabalala said earlier this year.
“With the global financial crisis, things changed fundamentally. They made the proposition of an Africa-based financial institution growing globally an invalid proposition,” he said.
“The cost base necessary to support the business was high, but the revenues generated were not sufficient to support it.”
Speaking at the Africa Financial Summit this week, Mthuli Ncube, chief economist and vice-president of the African Development Bank, said it was undeniable that global banks would strengthen their operational capacity in domestic markets.
In that process, “they will be pressed to shrink fast in order to contain their costs. Once this is under control, they’ll be looking for growth” he said.
“During the boom years, large global banks were taking a lot of risks, and that’s how we ended up with a financial crisis.”
Rob Price, an economist at Investment Solutions, said banks would have to think carefully about growth strategies and regulation, and strike a balance between returns, compliance and operational costs while factoring in the growth outlook in the regions they operated in and those where they had plans to expand.
It will be interesting to see where global banks as we know them will be in the next few years.
“There are always going to be banks that are global, but there may be fewer,” Koseff said. “There will be less of the unmanageable behemoths that existed before the crisis.” tsamelad@sundaytimes.co.za
You’re going to get killed. That’s why we have never started a bank in the US
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