Africa bulls will say it was shortsighted of HSBC to cancel its $7.3 billion bid for South Africas Nedbank last month. Others will say the affair reflects badly on HSBCs management more generally: if it wasnt interested, it shouldnt have bid.
Although HSBC has not been prepared to give a detailed explanation, a spokesperson hints that due diligence might have revealed a less compelling business case than expected. Indeed, despite efforts to improve fee income, Nedbanks earnings are too reliant on asset growth. Its retail franchise is in disarray, bulking up the cost base. This cannot be fixed quickly, and other South African banks continue to enjoy higher returns.
But such problems could have been discovered before HSBC entered exclusive talks with its target. The main development since the summer, when the bid was announced, has been the departure of HSBCs chairman and chief executive, although HSBC denies that this has anything to do with the Nedbank decision.
One advantage of buying a South African bank is the launch pad it gives to the rest of the continent. South Africa is Africas biggest economy, and home to the most developed banks and capital markets. If structural unemployment can be eroded and more South Africans get bank accounts, banks will enjoy good growth in the country.
However, the credit-to-GDP ratio is around 120% while in the rest of the continent it is around 40%. Africas banking sector is catching up. Commodities demand is booming, and links with other emerging markets are increasing. This should be a golden opportunity for HSBC. After all its second home is commodities-hungry China.
Historically HSBC has left Africa to fellow UK banks Barclays and Standard Chartered. Aside from a small operation in South Africa, its business on the continent remains next to non-existent.
Nedbanks franchise in the rest of Africa is also small, restricted to southern Africa. But the same is true for FNB, which is the only other realistic acquisition target among South Africas big-four banks. Also, the fact that Nedbank is relatively small makes it more digestible than FNB. The 51% stake in Nedbank owned by Old Mutual makes for a fairly easy route to control. FNBs shareholding structure is more fractured.
Another reason Nedbank would have provided a good platform for expansion in the rest of Africa is its alliance with pan-African group Ecobank. South Africas retail, telecom, brewing and mining firms are increasingly looking northwards to untapped African markets. Nedbanks alliance with Ecobank is designed to service this trend.
Old Mutual still wants to sell Nedbank. Standard Chartered has denied that it will use its recent rights issue to buy the bank, and there could be a lack of alternative buyers.So in the short term the losers are Nedbank and Africa. The fanfare around the deal showed optimism about Africas prospects. HSBC needs Africa just as much as Africa needs HSBC.