HSBC needs more than Nedbank to win big in Africa

An interesting analysis about the latest acquisition target of HSBC. So, I guess, more will come in the next few years?

http://af.reuters.com/article/southAfricaNews/idAFLDE67P1F220100901


ANALYSIS-HSBC needs more than Nedbank to win big in Africa
Wed Sep 1, 2010 12:09pm GMT


* Nedbank stake will give HSBC little outside S.Africa
* Pan-African Ecobank, Nigeria lenders could be target
* Needs to avoid "suitcase banking" in Africa strategy


By David Dolan


JOHANNESBURG, Sept 1 (Reuters) - HSBC (HSBA.L) will need more than just a controlling stake in South Africa's Nedbank (NEDJ.J) if Europe's top lender aims to be a serious player on the fast-growing African continent.

HSBC (0005.HK) said last week it was in exclusive talks to buy up to 70 percent of South Africa's fourth-largest bank, a potential $8 billion deal that would pull London-based HSBC out of obscurity in Africa's biggest economy. [ID:nLDE67M05Q]

But acquiring Nedbank, a lender overwhelmingly focused on South Africa, would give HSBC little advantage in rising frontier markets such as Nigeria and Kenya.

Nor would the Nedbank stake give HSBC the tools to elbow aside Standard Chartered (STAN.L), Barclays (BARC.L), or South Africa's Standard Bank (SBKJ.J) in the race for deals between Africa and Asia, HSBC's strongest market.

"Is HSBC building something that would vastly increase its pan-African presence and ability to close the trade corridors between the East and Africa? I would say no," said Chris Steward, head of equity research at Investec Asset Management.

"If you are buying Nedbank, you are buying the No.4 franchise in South Africa, and really, very little else."

While Nedbank owns a majority stake in a Zimbabwe lender and has retail operations in other southern African countries, less than 5 percent of its first-half earnings came from African countries outside of South Africa.

Nedbank is strong in low-margin corporate lending, but has a money-losing retail operation and, analysts say, a weak capital markets business.

It also has an alliance with pan-African banking group Ecobank Transnational (ETI.LG) (ETI.GH), a $3 billion lender that operates in around 30 countries across the continent, but that seems to have brought little benefit so far.

For HSBC, it may be that South Africa alone is an attractive enough proposition at the moment, but Michael Geoghegan, the bank's chief executive has acknowledged that Africa is a weak spot in its aspirations to a global network.

"That is one element of our strategy that doesn't ring to the world's local bank," he said in July.

LEFT BEHIND

Exports from China to Africa have jumped by an annual average of nearly 40 percent since 2000, hitting $55.9 billion in 2008, according to economists from Standard Bank.

HSBC's rivals have been targeting that deal flow. Standard Chartered is long established in financing such trade, while Barclays owns a majority stake in South Africa's Absa (ASAJ.J).

Standard Bank is 20 percent owned by Industrial and Commercial Bank of China (1398.HK) 601938.SS.
"(HSBC) has pretty much immaterial exposure to Africa at the moment," said John Holmes, an analyst at Keefe, Bruyette & Woods in London.

"That's why getting Nedbank now and getting access to that would make a lot of sense."
HSBC's first-half earnings results show no contribution from Africa. During the same period, Standard Chartered made $311 million from Africa, or about 10 percent of its pretax profit.

HSBC will likely struggle if it attempts to win business via "suitcase banking", where bankers are flown in for short stints to drum up business. One possibility to build scale could be an acquisition or capital alliance with Ecobank.

"You need that bricks and mortar presence on the ground. The first sort of bank that springs to mind in that line of argument would be Ecobank," said Johann Scholtz, an analyst at South Africa's Afrifocus Securities.

COURTING POLICYMAKERS

Acquisitions in Africa are likely to come with regulatory hurdles, but Nedbank could help HSBC win over policymakers in frontier African countries, said Rob Nagel, senior portfolio manager at South Africa's Cadiz Asset Management.

"A lot of the African central bankers and legislators are more open to speak to South African corporates than they are to, say, Asian corporates or European corporates. So maybe you use South Africa as a springboard into the rest of Africa."

The Nedbank brand might also make it easier for HSBC to recruit staff in Africa, he said.
HSBC's strength in corporate lending could be a calling card in frontier markets, where bankers say it is difficult to win investment banking deals without a commercial lending base.

One South African banker, who declined to be identified as he is not authorised to speak to the media, said HSBC could develop its business by focusing on three "hubs": southern Africa, West Africa and East Africa.

"The next opportunity may be presented in Nigeria, with an equivalent type of acquisition to Nedbank. You could use Nedbank to do the southern African area, and you could branch out from Nigeria," he said.

Any acquisition in Nigeria, Africa's most populous nation, would likely carry a hefty price, analysts say.

While HSBC will need to grow on the continent, it is unlikely to use Nedbank for any big organic growth, given that the South African lender will not be a wholly owned subsidiary.

"You're going to have a minimum 30 percent minority stake sitting within Nedbank," said Investec's Steward.

"Why would HSBC want to put in 100 percent of the effort to get 70 percent of the reward?" (Additional reporting by Steve Slater in London; Editing by Will Waterman)