South Africa's biggest local banks are under attack. They still dominate the retail market but mergers have increased competition and they are at varying stages of rationalization to achieve sharper focus. At the high end of the market corporate, investment and private banking they are losing market share to foreign banks and niche players.
Says Terry Davidson, general manager of Citibank: "Three years ago the big four [Standard, Nedcor, FNB and Absa] had 80% to 85% of market share and dominated in every area. Today they are losing market share." Grant Dunnington, general manager at First National Bank, agrees: "Ten years ago the market share of the big four was 90%. Now it has fallen to 76%."
The foreign banks are the biggest threat. They have been pouring into South Africa in the past six and a half years and around 75 now have a presence. At the end of 1997 the South African Banking Council estimated that foreign banks held 6.7% of the total assets of all banks doing business in South Africa. That market share was worth R37 billion ($5.9 billion). Each of the foreigners, says Philip Howell, managing director of Barclays Capital, "has its own theme, although there are overlapping areas in their strategies".
Citibank, for example, is focusing on corporate banking. "South Africa was the largest emerging market in which we did not have a presence," says Davidson. "We thought the country would emerge as the engine of growth into Africa, particularly eastern and southern Africa, and we have been justified in that sentiment with the growth in trade between South Africa and other countries in the region."
The bank had a presence in South Africa from 1959 to 1987, when it pulled out because of sanctions. Davidson claims this background is an advantage as Citibank knows the market well. He says there have been no problems accessing local clients, who "saw the advantage of having more choice".
For now Citibank will continue to focus on corporate clients rather than building a presence in the retail market as it has elsewhere. Davidson believes it does not make sense to go into retail given the high interest rate environment. He says the bank prefers to grow organically and will not consider buying a local bank as "they are too expensive".
Other banks recognize South Africa's springboard status. "We were already one of the biggest banks in Africa with an extensive retail banking network, but also a long history in South Africa," says Howell at Barclays. "Trade flows between the countries have been screaming up with South Africa overshadowing the whole continent in this respect. With local banks expanding regionally, Barclays has to have a counter-offer and be able to cover both ends of a trade or corporate investment."
|
Trimming, not slashing:
cost-income ratios of South African banks (%) |
|
1998 |
2000 target |
|
Absa |
68.2 |
62 |
|
Standard Bank |
63.4 |
60 |
|
FNB |
62.5 |
60 |
|
Nedcor |
58.7 |
55 |
|
NBS Boland |
53.4 |
50 |
|
Source: Deutsche Bank |
Gilles Rollet, head of ABN Amro's corporate division, recalls that South Africa was the last big sophisticated market in which his bank did not have a presence. Expansion into Africa is a large part of ABN Amro's South African strategy. It already has large project-finance deals in Mozambique and Namibia, and it has identified fixed-income opportunities in Namibia and Botswana. "Down the line we hope also to include trade-finance activities in Zimbabwe," says Rollet. "We are active in project and structured finance in Ghana and we do trade finance in Zambia."
Other foreign players have focused on investment banking and trading. JP Morgan is recognized as the market leader in fixed income. Director Andrew McDougall says the bank can be distinguished from its foreign competitors by its focus on fixed income, forex and derivatives. "We opened our office in June 1997 because we saw a big gap," he says. "We had been trading these product lines from London, but we felt that in order to add value to our South African business we needed the development of a local client franchise."
Along with five other foreign banks, JP Morgan has taken advantage of the reorganization of the government-bond market in April. McDougall claims JP Morgan was instrumental in helping the government create a more disciplined and regulated market. Previously, there was no regular calendar of auctions or list of primary dealers.
"Before April South Africa did not really have serious, disciplined market-makers," says Neil Morrison, head of global markets at Deutsche Bank. "There was liquidity in the markets, but in difficult times market-makers withdrew. With a highly volatile market as you find in South Africa you need market-makers with experience, strong commitment and discipline, and that is what foreign banks have brought." ABN Amro, Barclays, Deutsche Bank, Merrill Lynch, JP Morgan and Société Générale and six local banks have been appointed by the government as primary dealers and market-makers in government bonds.
Corporate-bond opportunities
McDougall also believes that the growing corporate-bond market will create opportunities for JP Morgan and other firms. In August the majority state-owned telephone company Telkom announced plans to launch a five-year bond for R2.5 billion to be underwritten by JP Morgan and Standard Bank. "Traditionally, South African corporates have not borrowed on the bond markets as they viewed equities as cheaper," says McDougall. "The tide is now slowly turning towards the bond market, but the mindset is not yet there. We plan to change this by being more competitive."
| South Africa's biggest banks |
|
Market capitalization (R bn) |
Market share (%) |
|
Standard |
36.3 |
21.2 |
|
Nedcor |
33.3 |
16.4 |
|
FNB* |
31.0 |
16.3 |
|
Absa |
29.5 |
27.9 |
|
Investec |
18.5 |
2.6 |
|
NBS Boland * |
16.1 |
7.0 |
|
* figures do not reflect mergers that created First Rand and BOE |
| Source: Deutsche Bank |
Deutsche is viewed as the country's top equity house, followed closely by Merrill Lynch. Both firms, as well as ABN Amro, entered the local equity market by acquiring local brokers. Morrison says Deutsche has now moved from traditional agency stockbroking to principal trading. He says the firm was the first in South Africa to launch equity warrants on blue-chip shares. This, he says, has been a big earner for the bank.
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