Bankorp and Brexit cast shadow over Absa sale
THE Bankorp noise, which has dogged Absa for several years, could play a big role in resolving concerns on the part of potential buyers and regulatory bodies about any continued liability this could pose.
Chris Steward, of Investec Asset Management, said this week that, when looking at the business, prospective buyers would want some kind of assurance that they were indemnified from any liability.
“If I was a regulator approving a potential transaction for this business to be sold, I would prefer to see certainty as to the outcome of this claim prior to the approval. Probably, to make it clean, Absa would as well,” he said.
However, Steward said, it was unlikely that the Bankorp issue would materially delay the process. “I can’t unambiguously state that this is all going to go away very soon and that it’s a storm in a teacup; that’s my suspicion, but I don’t know.”
This week protesters at an Absa branch in Durban demanded the bank pay back money from a bailout provided to Bankorp, which it bought in 1992. Barclays Africa has said it paid fair value for the asset and did not benefit unfairly from the deal.
The recurring Bankorp issue is but a small component of a very complex separation process that goes deeper than Barclays Africa simply sitting down with a willing buyer and accepting a cheque.
There have been mutterings about whether Barclays would consider keeping the African business in the wake of the decision by the UK government to go for a hard Brexit. But Barclays and several analysts insisted that Brexit would have no bearing on Barclays plc’s decision to sell its stake in Barclays Africa as it would not make economic sense for the business under the banking capital requirements.
Carrying 100% of the capital required while receiving half of Barclays Africa’s profits, makes no economic sense.
Barclays plc — which began treating Barclays Africa as a discontinued operation from its interim results presentation in July last year — declined this week to comment on the progress of the sale.
Steward said that while Barclays plc remained reasonably capitalised, it was not completely comfortably capitalised in the context of a potential downturn scenario that the UK regulator may place upon it. “Based on this, I believe that they are still intent on achieving regulatory deconsolidation from Barclays Africa,” he said.
The process of separating the two does not end at simply finding a buyer. Issues such as branding and transactional systems are likely to draw it out still further.
Adrian Cloete, a portfolio manager at PSG, said the other complication in this process was the lack of law that the South African Reserve Bank and the Prudential Regulation Authority in the UK can turn to when it comes to splitting up two intricately connected business entities that are both large and operate across several jurisdictions.
“The process needs to cover all systems across 12 countries,” he said. Cloete said that the regulators in all countries will also need to be assured that systemic risk is fully covered for their banking system.
Given that Barclays Africa’s share price growth has lagged behind its peers since the impact on the business last year from the Edcon deal, it is likely that the settlement of all or part of the stake could boost the share price.
Steward said some of the underperformance of Barclays Africa last year was probably idiosyncratic.
“They did score a larger Edcon own-goal than some of their peers,” said Steward, referring to the losses incurred by Barclays Africa in its partnership with Edcon.
Steward said what would otherwise have been a reasonable year for it operationally “was negatively impacted by a substantial impairment charge related to one individual credit and certainly a much larger charge relating to that particular credit than its peers”.
However, with this behind it, the market expects that when Barclays plc does sell the business there is a possibility of more shares being brought to market at a discount, which could be another reason investors have held off buying the stock.
Cloete said at the current price-earnings ratio of 9.7 and a dividend yield of 6%, “Barclays Africa does seem quite undervalued relative to the market”. — Additional reporting Bloomberg