Analysis: Selling Barclays Africa Is A Smart Move

Written by Anna B. Wroblewska

This article was first published by This Is Africa on Feb. 10, 2016

Jes Staley, the new chief executive of Barclays PLC, has a problem.

He follows in the footsteps of two dismissed CEOs and likely has little time to make a significant impact on the continually weak British bank.

To turn the Barclays ship around and lower costs, the company is exploring several divestments, notably in Africa. Mr Staley recently announced plans to sell some of the firm’s 62 percent stake in Barclays Africa Group Ltd.

Barclays PLC has the lowest Tier 1 capital ratio of the five major British banks, and its shares are down nearly 30 percent year to date. Over five years, shares are down nearly 50 percent. More conclusive plans are expected around March 1, when the bank announces annual results.

Some have read the Barclays offering as an ominous sign of a wider reversal in investor sentiment towards the region as it struggles to cope with China’s slowdown, the possibility of recession in South Africa, and falling oil and commodities prices.

However, the business case for a Barclays sale, which would carry an estimated deal size of around $4.35bn (depending on where the South African rand happens to be), is strong – and indicates the deepening of a regional market with an appetite for transactions on this scale.

Former chief executive Antony Jenkins was dismissed last year after just three years in the top seat on concerns that his proposed reforms weren’t taking hold quickly enough. His appointment, in turn, followed the ouster of Bob Diamond in the wake of an interest rate rigging scandal.

Barclays Africa is a significant player both for its parent company and on the continent. Pre-tax profits make up about 15 percent of Barclays’ total of $11.6bn, much of it driven by subsidiary ABSA, which is one of the South African “big four” banks and among the largest on the continent. In total, the group operates in nine countries.

The position has been built over nearly a century, and due to its long-term potential, Barclays Africa enjoyed the enthusiastic support of the bank’s last two CEOs. Mr Staley’s turnaround came as a surprise.

The short run, however, has not been especially kind. While five year performance is positive, the group’s current share price is about $870, down nearly 28 percent from one year ago. The woeful trend closely tracks that of the other major South African banks.

The sale could reduce Barclays’ exposure to short-term currency and economic volatility in Africa, particularly South Africa, while fostering a competitive auction process among the numerous investors who have flocked to Africa in recent years.

De-risking returns

Ratings agency Fitch expects a weak outlook for banks in sub-Saharan Africa through 2016. The firm’s outlook for South Africa, however, is worse. The country’s debt was downgraded in December amid concerns about economic growth, debt levels, and the current account deficit. The World Bank cut the country’s growth outlook to 0.6 percent for 2016 in February.

Mohammed Yaseen Nalla, head of strategic research for global markets at Nedbank Corporate and Investment Banking, says there is a high probability of recession in 2016.

South African consumers are struggling, which presents an additional challenge to banks looking to preserve their loan portfolios. A heavily weakened rand has further increased costs on consumers. In December, inflation rose to a one-year high of 5.2 percent.

“The economic challenges that consumers face include increases in food prices, education cost, electricity, water and rates and taxes and on top of the beginning of an interest rate increase cycle,” says Paul Slot, president of the Debt Counselors Association of South Africa.

For now at least, banks have been cautious and have provisioned well for an uptick in non-performing loans, according to Mr Nalla. “However, should the economic deterioration be deeper than expected and persist for longer, strain on consumer balance sheets will likely start to filter through,” he says.

Given this climate, Barclays’ decision could be seen as a short-term risk avoidance measure – especially considering the potential effects of a weak rand, which negatively impacts Barclays’ overall performance in pound sterling terms.

A good moment

Despite the lacklustre macroeconomic news, it may be a good time for asset sales of this kind.

Private equity has flocked to the continent on the back of strong growth and low yields elsewhere. The first three quarters of 2015 saw an estimated $3.3bn raised for sub-Saharan African funds, the second-highest on record.

With much of the fundraising going to larger international funds, there have even been concerns that the market will start to overheat, particularly on the larger end of the deal size spectrum.

There is already interest in acquiring Barclays Africa operations. The group’s second largest shareholder, the South African government-owned Public Investment Corporation (PIC), has expressed interest in increasing its stake. Former Barclays CEO Mr Diamond and his business partner, entrepreneur Ashish Thakkar, might also take an interest through their investment vehicle Atlas Mara.

Outside buyers may also see an opportunity. In 2014, private equity exits in sub-Saharan Africa peaked at an eight year high. Twenty percent of those sales were financial services assets. One of the largest deals on the continent in 2015 involved an Egyptian financial services group, Saham Finances, which was partially sold to Bidvest, a South African bank.

With so much interest and private equity dry powder, the market for such deals is deepening. In spite of the short-term challenges facing South Africa, the country’s banks “are well-managed and run”, says Mr Slot.

He even posits that Barclays’ move might be a case of  “selling the crown jewels to make up a shortfall elsewhere”.

With Barclays PLC’s weak capital base, poor share performance and troubled investment banking earnings, this may very well be the case. Should the sale go as planned, it will be a hand well played by Mr Staley.