Africa: Absa looks abroad in wholesale banking push

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By:
Dominic O’Neill
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London office slated for Q3, New York for 2019; CIB crucial to target of doubling revenue share.

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With a new office in London and another one soon in New York, Absa is returning to the global financial scene as an independent entity for the first time since the early 2000s.

Moreover, what was mostly just a South African bank when Barclays bought it in 2005 is now a pan-African lender, with a presence in 12 other African countries thanks to Barclays’ exit.

Speaking to Euromoney in London in May at an African financial conference, where Absa was the lead sponsor, the bank’s co-head of corporate and investment banking Mike Harvey still seems slightly defensive at first.

This is perhaps to be expected, given the firm’s necessarily retiring nature previously, at least outside Africa: Barclays’ decision to exit the continent was hardly a vote of confidence.

But Harvey quickly warms to his theme: what was Barclays Africa is now Absa. And the exit sets it free.

The bank, which is based and listed in Johannesburg, confirmed its decision to roll out the South African brand across Barclays’ former African businesses in March. At the same time, it said its target was to double its share of African banking revenue to 12%.

Although that announcement gave no deadline, it implies double-digit growth, which, as Harvey also indicates, means five years at an annual compound growth of about 15%.

Pan-African corporate and investment banking is core to this goal.

“At the centre of the new strategy is the growth story,” says Harvey. “We will look at organic and inorganic opportunities across Africa. There will be a partnership strategy to allow us to reach our goals.”

Partnerships, he says, could help it enter new markets and maintain the global reach it enjoyed under Barclays.

Harvey also hopes to have Absa Securities’ London office up and running in the third quarter. It has found office space and is waiting for its banking licence. He hopes to open a New York office in 2019.

No easy task

Doubling African banking revenue share will not be easy; South Africa continues to dominate the business and all the other big South African banks increased revenues faster than Absa last year.

It is hard to tell exactly how much Absa’s underperformance was due to the lingering effect of Barclays’ constraints, including over capital.

As Absa remains a top-three retail bank in South Africa, its best chance of doubling revenue share may be to make better use of the home network than was possible under Barclays, says banks analyst Harry Botha at Avior Capital Markets in Cape Town: “It’s realistic in a positive South African environment, where they can lend more.”

Barclays’ sale below majority in what was then Barclays Africa only happened in May last year. A transition agreement, whereby Absa can use Barclays’ services, lasts until 2020. Meanwhile, the exact future contribution of the retail versus the wholesale bank, and South Africa versus the rest of the continent, remains vague.

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Mike Harvey, Absa

“What the business units are doing is putting together detailed plans about how, where, et cetera,” Harvey says.

What is certain, he adds, is that the wholesale bank will “dramatically increase share”.  

With Barclays’ departure, Absa is no longer constrained by an owner suffering from developed-market problems and reluctant to take on the risk of greater investment in Africa.

“It’s a radical shift in our thinking of how we approach the continent, of how we view our businesses and clients,” says Harvey.

There are some clear ways for the bank to grow. The bank operates in countries that account for about a third of the continent’s GDP: to achieve its ambition, Absa needs to expand into other countries so that it covers about two thirds of continental GDP.

It only has a representative office in Nigeria and is not present at all in Angola, though Harvey says the change in government there could spur an entry.

Wholesale lead

In these new markets, the wholesale business could lead.

“The cost of entering in retail in a country is very expensive,” says Harvey. “It’s far more difficult.”

Mobile phones and the internet, however, could allow for the affordable entry into new retail markets and are new channels for the South African business.

There are also products Absa does not offer but could.

Harvey gives the example of custody, after Barclays sold its African custody business to Standard Chartered in the early 2010s.

“We can scale existing businesses and move into new businesses,” he says. “It’s about making the most of the opportunities.”

In areas such as advisory and markets, the Africa teams must now build standalone platforms to replace what they had with Barclays.

“There’s no doubt that Barclays brought a lot,” Harvey admits. “The area of the bank that is most impacted [by the separation] is probably the corporate and investment bank.”

Clients operating in Africa have either decided to remain with Barclays or Absa or both. The London and New York offices will build a new link to global institutional investors and multinational corporates.

On the markets side, Barclays may still need Absa for the African currency capability it has now lost, while Absa will need to find a way to retain, for example, its dollar debt capital markets capacity. It will probably do so through Barclays.

Although some staff left the investment bank when Barclays announced its exit, Harvey says he now gets more enquiries about joining.

“It’s incredible how excited people are about the opportunity to create a pan-African regional bank,” he says.