BEST RETAIL BANK
Absa
BEST INVESTMENT BANK
JPMorgan
SPECIAL AWARD FOR BLACK ECONOMIC EMPOWERMENT
Deutsche Bank
Absa had a super year in 2004/05. If negotiating the most important merger in the history of African banking has been a distraction to management, performance over the period doesn’t show it. In the year to the end of March, Absa reported a 23.3% increase in headline profits from R4.45 billion to R5.48 billion ($828.4 million). Although diluted headline earnings rose by 18.8%, return on average assets improved from 1.55% to 1.68% and return on shareholders’ equity was up from 24.6% to 25.5%
Retail banking led the charge for Absa’s continued growth in 2004/05, with its customer base rising from 5.7 million to 6.9 million. “The group benefited from buoyant retail market conditions which enabled personal and commercial banking to record high earnings growth,” said Steven Booysen, Absa group chief executive, when the bank’s annual results were released at the end of May.
Given its Afrikaner pedigree, an especially noteworthy feature of Absa’s performance in 2004/05 was the success with which it continued to roll out its retail banking services to South Africa’s large unbanked black population, which was estimated in October 2004 to total about 13 million. South Africa’s financial sector charter calls for full-service banking facilities and ATM outlets to be brought within reasonable reach of all South Africans over the coming few years, and Absa has already won extensive local recognition for the progress it has made on this front in the past 12 to 18 months.
Absa believes that by the end of this year it will have brought its banking services within the reach of 70% of South Africans, up from 59% at the start of this year. It has already taken tangible steps towards that goal with the rollout, alongside all the other leading local banks, of its Mzansi entry-level service offering blue-collar workers and small entrepreneurs free banking.
Absa assumed it would take at least six months for its Mzansi operation to break even. In the event, with some 100,000 new accounts being opened each month, it did so within about 10 weeks. That made it the front runner in providing basic banking products to new entrants to the banking market – the overwhelming majority of whom are black South Africans. “The only player that’s outperformed us on numbers is the post office,” says Louis von Zeuner, head of retail banking at Absa’s Johannesburg headquarters. “But we are leading the pack among the banks.”
Absa is also reaching out to a bigger customer base by adding some 50 new outlets in 2005 to a 675-strong branch network and by expanding its mobile banking services. “In terms of mobile banking we are in the very early stages, but we believe we already have a market share of about 35%,” says von Zeuner.
Looking to the future, Absa’s competitiveness in the South African market can only be enhanced, says von Zeuner, by its tie-up with Barclays. The deal blends Barclays’ corporate banking strength with that of Absa’s wider retail banking network in the region.
Internationally, Absa has operations in Angola (through Banco Comercial Angolano) and Mozambique (through Banco Austral), both countries in which Barclays has no representation. There is a small overlap between the two banks’ franchises in Tanzania and Zimbabwe, but as the banks’ presentation on their deal observes, the “intended acquisition and integration of Barclays’ 10 sub-Saharan operations on an arm’s-length basis” significantly “accelerates Absa’s African strategy”.
In South African investment banking there is little to choose between JPMorgan and Deutsche Bank, both of which have continued over the past 12 months to combine the strengths of their local operations and international franchises to good effect.
In equities, their joint leadership was most strikingly illustrated in June 2004, when they acted as joint global coordinators and joint bookrunners in the $930 million accelerated bookbuilt offering of Telkom shares, the largest ever South African secondary equity placement. Healthily oversubscribed, this transaction greatly increased the telecoms providers’ free float and was warmly received in the aftermarket, with the share price rising by just under 5% on the day following the closure of the deal.
Against the backdrop of a relatively quiet South African IPO market in 2004/05, both banks also continued to build on their credentials in the rights and equity-linked markets. In May 2004, Deutsche acted as joint global coordinator and bookrunner for Nedcor’s key R5.15 billion ($778.5 million) rights offering, South Africa’s largest ever rights issue. JPMorgan cemented its position in the South African equity-linked sector at the start of 2005 when it acted as sole bookrunner on a challenging R1 billion convertible bond offering for construction, steel and cement group Aveng (formerly Anglovaal Engineering). This was the biggest primary equity or equity-linked offering by a South African corporate outside the mining sector since November 2001 and was only the second international convertible issue denominated in rand. As such, it built on the first deal of its kind, the R1.7 billion transaction for Harmony Gold Mining, also sole bookrun by JPMorgan.
In the secondary market, JPMorgan has strengthened its research coverage following its acquisition of Cazenove’s South African operations. That will help boost its coverage of South African companies from 85% to 92% of the stocks on the Johannesburg Stock Exchange by the end of this year, a spokesman for JPMorgan in Johannesburg notes.
Deutsche Bank has also continued to push JPMorgan hard in the South African debt market in 2005. However, the US bank has continued to mop up mandates from an impressively broad range of borrowers. In May 2004, alongside Barclays Capital, it acted as joint bookrunner and lead manager for the Republic of South Africa’s $1 billion 10-year global transaction. This benchmark, which generated demand of more than $2 billion, was notable for being priced at the tightest spread the sovereign had ever achieved in dollars.
Among other issuers, JPMorgan also acted as joint bookrunner for Standard Bank’s R2 billion lower tier 2 fixed-rate domestic transaction in November 2004. And in the fast-growing South African securitization market, JPMorgan continued to build on its credentials by being the sole bookrunner on SA Homeloan’s R3 billion Thekwini Fund 5 deal in February, the largest residential mortgage-backed securitization transaction to date in South Africa.
JPMorgan enjoys much more breathing space in the M&A sector than in debt and equity. According to Dealogic, it narrowly increased its dominant market share in the South African M&A market from 40.5% in 2003 to 41.7% in 2004. It also scooped the Ernst & Young Corporate Advisor of the Year award in 2004 for the third successive year.
The South African M&A market continues to be overwhelmed by black economic empowerment transactions. The number of BEE deals rose from 189 (worth R42.2 billion) in 2003 to 244 (worth R52.9 billion) in 2004, and the lion’s share of JPMorgan’s mandates in 2004/05 have inevitably been BEE-related.
However, in terms of sheer size the largest M&A deal it has worked on in the past 12 months has been the $5.5 billion acquisition by Barclays Bank of Absa, on which JPMorgan acted as financial adviser to the UK bank.
Of all the black economic empowerment transactions to have been completed in the South African banking sector in 2004/05, the most striking was probably the sale announced by Deutsche Bank in February 2005 of 25% of its locally incorporated operations to BEE empowerment group Uthajiri Financial Services and black staff.
Unlike the domestic South African banks, Deutsche and the other foreign players in the local market were under no compulsion to comply with the terms of October 2003’s financial sector charter requiring at least 10% of banks to be transferred to BEE ownership. Indeed, Deutsche Bank’s chief country officer in South Africa, Martin Kingston, is chairman of the International Bankers’ Association, which negotiated an explicit carve-out from the ownership provisions of the charter.
“We believe passionately that we should be fully committed to the welfare of South Africa, and that we should be practising what we preach when advising our local clients on BEE transactions,” says Kingston. Crucially, however, he adds that Deutsche sees its own BEE initiative as a strategic one from a commercial perspective that will ultimately strengthen the bank’s competitive credentials in the South African market. “The starting point was that there would only be any merit in the transaction if we could demonstrate to the bank’s Vorstand that there were compelling benefits that would flow from it,” he says. Those benefits, Deutsche believes, will in time be clearly reflected in the business opportunities arising from its relationship with Uthajiri.
In concluding this groundbreaking transaction, which won widespread political approval in South Africa, Deutsche has thrown down a gauntlet to other foreign banks with extensive local operations in the country. Don’t bet against others taking a similar path over the coming 12 to 24 months.
