Standard Bank Outshone by Smallest of ‘Big Four’ on Growth
Standard Bank Group Ltd. (SBK), Africa’s largest bank, is falling behind the smallest of South Africa’s so-called big four, Nedbank Group Ltd. (NED), after its failed attempt to expand in emerging markets eroded profit margins.
Standard fell 1.4 percent in the five years through 2011 as it expanded from Johannesburg to buy assets in South America and Russia. During that same period, Nedbank gained 38 percent as it pursued an alliance with Ecobank Transnational Inc. (ETI), which operates in more African countries than any other bank.
Standard, whose market value of 166 billion rand ($20 billion) is double that of Nedbank, began selling assets outside Africa last year. Profit contracted at an annual 1.7 percent in the past five years, compared with Nedbank’s 0.7 percent growth. FirstRand Ltd. (FSR) and Barclays Plc’s Absa Group Ltd. (ASA) make up the other members of South Africa’s “big four” banks.
“Problems arose when Standard cast its net wider to the likes of Argentina and Russia,” Johann Scholtz, head of research at Johannesburg-based Afrifocus Securities, said in a telephone interview. “What was stark in recent results was that the South African franchise is excellent, but the rest of the group is operating at or below the cost of capital.”
Without the cost of expansion and continued investment across 16 African countries that Standard Bank is paying for, Nedbank has entered new markets in South Africa, boosted customer numbers and built on its strategy to earn fees from non-banking activities. Standard Bank’s cost-to-income ratio worsened to 59 percent from 51.4 percent in the past five years, while Nedbank’s is little changed at 56 percent.
Through Lome, Togo-based Ecobank, Nedbank also has access to 36 African countries with more than 2,000 outlets. It also has the option to take a stake of as much as 20 percent in Ecobank.
“Nedbank did great in retail by restructuring the business and refocusing on vehicle finance, unsecured lending and the mass market,” Patrice Rassou, who helps oversee about $40 billion as head of equities at Sanlam Investment Management in Cape Town, said in an e-mailed response to questions. The potential to expand the alliance with Ecobank is a “clever way to gain exposure to multiple countries,” he said.
Standard is “gaining meaningful traction” outside of South Africa, although costs are still high, according to Erik Larsen, a company spokesman. The bank’s first-half operating expenses climbed to 19.2 billion rand from 16.3 billion rand a year earlier, outstripping the 15 percent rise in income from banking activities.
Standard Bank gained funds after Industrial & Commercial Bank of China’s purchase of a 20 percent stake in 2008 and making acquisitions “seemed like a good idea at the time,” said Stephen Meintjes, head of research at stockbroker Imara S.P. Reid. “Management can be credited with not persisting overly long with South America and Russia. With hindsight, it might have been better simply to focus on Africa.”
To properly compare Standard Bank and Nedbank, the two stock prices and the “huge difference” in market value would need to be compared over a longer time frame, Larsen said.
ICBC, as the Chinese bank is known, last year agreed to pay $600 million for assets controlled by Standard in Argentina. Standard said it was making a profit of about $217 million on the sale. The African lender also sold its stake in Russia’s Troika Dialog in 2011 for $372 million, having paid $300 million for a stake in 2009. In April, it sold 53 percent of Turkish broker and investment bank Standard Unlu.
“Standard Bank has benefited financially from the disposals,” Jenny Knott, chief executive officer of Standard Bank Plc, said in an interview in London on Sept. 6. “The reality is that there was no choice” but to sell amid increased protectionism, she said.
There is some evidence from the interim results that Standard’s African portfolio is recovering, according to Greg Saffy, a banking analyst at RMB Morgan Stanley in Johannesburg. At the same time, Standard’s change in strategy destroyed shareholder value and came at an opportunity cost, he said.
Standard is the second-worst performing stock after Absa on the six-member FTSE/JSE Africa Banks Index this year, having added 2.8 percent compared with the average gain of 10 percent.
The bank fell 1.9 percent to close at 102.40 rand in Johannesburg, its lowest closing price in eight months. Nedbank, which has risen 17 percent this year, dropped 1.7 percent to 171.54 rand.
“Most business models were shattered by the crisis,” David Munro, head of corporate and investment banking for Standard Bank, said in an interview in London on Sept. 6. “Our business model has fundamentally changed. It’s impossible to say ‘yes there was an opportunity cost’ because circumstances and the world are so fundamentally different.”
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