Standard Bank’s African Push Won’t Pay Off Quickly After Global Pullback
Standard Bank Group Ltd. said its African strategy may take five years to pay off as the continent’s biggest lender hunts for acquisitions and ditches its ambitions in other emerging markets.
“We think there is a three- to five-year period to run before returns in the rest of Africa will be satisfactory,” Ross Linstrom, a spokesman for the Johannesburg-based bank, said in an e-mailed response to questions.
While Standard Bank’s return on equity, a measure of profitability, rose to 14.5 percent in the first half, from 13.5 percent a year earlier, its operations in 16 African nations outside its home market posted a return of 7 percent.
Chief Executive Officer Jacko Maree is reversing his 10- year-old strategy of expanding in emerging markets outside Africa to focus on building the bank’s network on the continent. While acquisitions in countries such as Nigeria may eventually compensate for an economic slowdown in South Africa, the expansion may devour Standard Bank’s surplus capital of $1 billion and disappoint investors hoping for a bigger dividend.
“Africa has not delivered good returns for Standard and we remain unconvinced of delivery on this strategy,” said David Danilowitz, an analyst at Nedbank Capital in Johannesburg, who has a “sell” recommendation on the stock.
First-half profit before items from African operations outside of South Africa fell 17 percent to 423 million rand ($59 million) as Standard Bank boosted capital, invested in computer systems and opened branches.
Standard Bank has said it may use proceeds from the sale of operations in Argentina and Russia to buy a retail bank in Nigeria, Africa’s most populous nation. There is a risk an acquisition in Nigeria, Kenya or Angola may be “value destructive,” said Lisa Haakman, an analyst with London-based Religare Capital Markets.
“Africa is its competitive edge, but it can’t afford to overpay and dilute return on equity,” she said. “It needs to go green-fields or pick the right opportunity.”
Standard Bank is convinced that Africa, where 221 million consumers will advance from poverty to earn annual incomes of $1,000 to $5,000 by 2015, according McKinsey & Co., should be at the core of its future strategy.
“We have a natural competitive advantage in Africa, in connecting Africa to other emerging markets, especially in natural resources,” Linstrom said on Aug. 24. “By narrowing our focus, we will be better placed to capitalize on these advantages.”
Retail banking in Africa is a long-term strategy, said Linstrom. “We’re hoping that the business will break even in 2012. We’re optimistic about the future. ”
In the first half, Standard Bank had negative returns in local currency terms of 28 percent in Angola, where it invested for the first time and plans five branches by year end. In Kenya, its local return was 7 percent and 8 percent in Nigeria, where it’s aiming for 180 branches by year end.
“Absa remains our top pick among the big four South African banks,” Colin Hundermark, an analyst at Credit Suisse Group AG, said, citing its dividend and 20 percent ROE target.
Standard Bank has dropped 12 percent this year through Aug. 26, making it the worst performer on the six-company FTSE/JSE Africa Banks Index, which has declined 6 percent. The 46-member Bloomberg Europe Banks and Financial Services Index has slumped 31 percent over this period.
That performance doesn’t deter some investors.
“At this price level, we would be buyers of Standard Bank,” said Neville Chester, who helps oversee the equivalent of $36 billion at Coronation Fund Managers Ltd. (CML) in Cape Town. “Banking penetration and debt to GDP in Africa is miniscule showing it to be the last untapped market.”
Coronation, Old Mutual Investment Group South Africa and Sanlam Investment Management’s financial funds are all weighted towards Standard Bank, with each of them investing 18 percent or more of their portfolios in the lender, according to Bloomberg data. The FTSE/JSE Africa Financial Index has dropped 5.1 percent this year while Coronation’s financial fund has slid 6.1 percent. The financial funds of Old Mutual and Sanlam have lost 2 percent and 3.1 percent respectively this year.
Standard Bank’s Africa focus is the right strategy, said Kokkie Kooyman, a fund manager at Sanlam Investment Management Global in Cape Town, whose team increased its Standard Bank holdings this month.
“They are paying school fees in Africa, but our banks have to increase their exposure,” said Kooyman. “In 10 years time we’ll stand back and say Standard did well investing there.”
The jury is still out on Standard Bank’s Africa push, said Christopher Steward, head of equity research at Cape Town-based Investec Asset Management, which manages $94 billion.
“Banks are not yet cheap enough to be massively excited about,” said Steward. “Standard Bank still needs to convince investors that its African business can become a key differentiator from its rivals, both in terms of growth and returns.”
To contact the reporter on this story: Renee Bonorchis in Johannesburg at firstname.lastname@example.org
Bloomberg moderates all comments. Comments that are abusive or off-topic will not be posted to the site. Excessively long comments may be moderated as well. Bloomberg cannot facilitate requests to remove comments or explain individual moderation decisions.