BANKING

South Africa’s emergence from the apartheid era has not been a particularly hilarious experience for the country’s big banks. Sheltered for years behind the protective walls of sanctions and virtually unchallenged by foreign competition, the banking cartel has quite abruptly found itself struggling in the corporate market against the streetwise likes of NatWest and UBS, to name but two of the 47 foreign majors that have piled into the market, or re-entered it, since the April 1994 elections. The international majors have been drawn largely by the country’s issuing activities and the much-trumpeted privatisation programme.

Those institutions which one would have expected to open branch operations have done so: ABN Amro, Citibank, Banque Indosuez, SocGen, ING Barings and Commerzbank. Others, such as SBC Warburg and Deutsche Morgan Grenfell have swallowed up local stockbrokers, while Barclays – which 10 years ago had a 23% share of the domestic banking market and was hounded out of South Africa by the anti-apartheid lobby of British students – has opened a subsidiary and is looking to set up a merchant banking operation.

The newcomers are waging a battle to grab market share of the country’s top 200 listed companies, where margins have already narrowed as thin as rice paper. The fast-talking international players are also bringing in skills and global resources that have literally left the local banking community agape with disbelief. Most domestic stockbrokers have already thrown in the towel and are now a part of one or another of the big foreign banks.

“In the past one would pick up a copy of The Economist from time to time, and that was the extent of our international exposure,” says a director of JD Anderson & Co, a Johnannesburg broker acquired by SBC Warburg. “Now it is all conference calls and input from analysts in places like New York, Zurich and London.”

The big four banks – Amalgamated Banks of South Africa (ABSA), First National Bank of Southern Africa (FNB), Nedcor Bank and Standard Bank – control 80% of the industry’s #61.3bn total assets and hardly need worry about an outside threat to their retail franchise. But it is worth noting that having started from a base of virtually nil a little over a year ago banks like Indosuez, Citibank and Commerzbank have each managed to nibble away at more than 0.5% of the cake. It is obviously a lot easier to boost market share from that sort of level than with 25% of the country’s banking assets sitting on the balance sheet.

“For the first nine months of 1996 the share of other banks has risen from 17.8% to 19.1%,” points out Mark Young, banking analyst at the international rating agency IBCA in Johannesburg. “This was helped by the increased number of branches established by international banks and strong growth by certain niche players. Don’t be surprised to see profitability coming under pressure as South African banks adjust to the changing environment.” The South African banking industry is the classic example of the big fish in a little pond. ABSA happens to be the largest bank not only in South Africa, but in the entire African continent. Some 90% of all Africa’s banking assets are concentrated in Johannesburg. Yet the combined assets of the top three South African institutions would not match those of Keycorp, the 10th largest US bank.

Domestic niche competitors have opened up a second-front offensive on the big four. Investec, a polished and highly aggressive local merchant banking group, boosted its assets by nearly 30% last year and now controls 3% of the market. “Investec has a well-defined strategy to develop into a domestic and international niche private and investment banking group,” says analyst Steven Nathan at Deutsche Morgan Grenfell’s South African operations. Nathan is forecasting 30% annual compound growth for Investec over the next five years.

Investec, like other niche players that have entered the field, only generates a tiny portion of its earnings from commercial banking activities.

Hence it is unencumbered by high cost structures and it is not under political pressure to provide costly banking services to low-income customers in underprivileged areas of the country.

Yet more bad news may be brewing on the domestic front. Last November Boland Bank acquired a 25% stake in NBS, as a possible prelude to establishing South Africa’s fifth largest commercial bank with combined assets of #3.5bn.

Boland is the only bank outside the big four that holds a clearing license.

Lively rumours abound that a similar move may be in the works among the top players themselves. The most likely targets are FNB and Nedcor, the two smaller of the big four, whose major shareholders are said to be talking about bringing together their respective interests. Anglo American owns about 25% of FNB, while life assurer Old Mutual holds a 55% stake in Nedcor.

For the banks, this may be a more palatable alternative than the other scenario which surfaces on a regular basis: a takeover by one of the foreign banks seeking to break into the lucrative retail market. FNB is viewed as the likeliest candidate, the market rationale being that Anglo American’s stake is not a reasonable fit for the giant industrial conglomerate. However, Anglo’s 25% stake would carry a near u700m price tag.

The big South African players may have been slow to react, but they are certainly not unaware of the challenges and the need to manage down their cost-income ratios which hover in the 65% to 70% range. FNB has already taken steps to meet the invaders by setting up FirstCorp Merchant Bank and acquiring the British investment bank Henry Ansbacher & Co. ABSA’s managing executive treasury, Douglas Anderson, says the group wants to boost its share of income earned abroad from 5% to 20% in the next four years.

Developing a hard currency earnings stream will be a crucial issue for banks operating in relatively high inflation and with a depreciating rand.

“International banks are expanding into South Africa and unless we compete with them on their turf, we will not be able to offer the level of product and service our clients now demand,” says Stephen Koseff, Investec’s chief executive. Standard Bank is undergoing a radical restructuring aimed at trimming costs by 40% over the next year and it has already set up a subsidiary in London, with operations in New York and Hong Kong. Nedcor, according to IBCA’s Young, has in the past five years emerged as one of the country’s most profitable banks after a stringent drive to rationalise its operations and improve efficiency and asset quality.

Jules Stewart is a freelance journalist.