Barclays slow withdrawal from Africa is tied to tougher regulations, not a weak market, but it's still an awkward departure.
UK-based Barclays has reduced its shareholding in Johannesburg-listed Barclays Africa from 62.3% to 50.1% this year and is believed to be seeking to reduce that stake further to around 20%.
This exit is awkward for Britain’s post-Brexit ministers charged with forging new trade and financial links with countries around the world, including Commonwealth members. Barclays Africa is a major player in precisely those countries—South Africa, Kenya, Ghana—where long-standing relationships need to be strengthened, not severed.
The main driver behind Barclays’ move is regulation: the need to bolster capital adequacy ratios at group level, and the requirement as majority shareholder to hold capital for the whole of Barclays Africa. Barclays Africa’s latest half-year results beat expectations, according to Adrian Cloete, portfolio manager at South Africa-based PSG Wealth, and return on equity is much higher than that of Barclays PLC.
“The move to exit is not because of the [un]attractiveness of the African market,” says Chris Steward, head of equity research at Cape Town-based Investec Asset Management. “[It] is being driven by new capital rules required of systemically important global banks. They are selling down to achieve regulatory deconsolidation.”
New banking regulations require a majority shareholder to hold the same amount of capital as if they owned 100% of the shares, an approach which, Cloete comments, is “not capital-efficient.” Other pan-African banks are facing similar problems, says Steward. Standard Bank, considered systemically important by the South African regulator, has to set aside capital for 100% of the risk-weighted assets for its 52% stake in a Nigerian bank. One solution is for Barclays to sell down its stake to just below 20%, thereby freeing up capital.
Earlier this year Atlas Mara, the private equity vehicle headed by former Barclays PLC CEO Bob Diamond, expressed interest in buying into Barclays Africa. “The problem with private equity taking over a bank is that they are highly geared, using debt to fund their equity stake,” says Cloete. “Also, they have a fixed exit time-frame, so seven or eight years later you have to find a new majority shareholder.” Neither South Africa’s Reserve Bank nor its government are likely to look favorably on a bank’s being owned by private equity investors. At the same time, “a local competitor would very unlikely be allowed to buy the entire 50.1% shareholding on competition grounds,” he comments. A more likely outcome, he believes, is that Barclays PLC places the next tranche of shares with institutional investors.
The extrication process will be complex and may take years. “They will want to keep the Barclays name on the door,” says Steward, “especially in Kenya, Ghana and Botswana where they have a strong deposit-taking franchise.” But maintaining the Barclays Africa brand with only a minority stake could be ruled out by UK regulators.
Barclay’s withdrawal does not send out a good signal about investing in African banks. Still, as Steward points out, “they could always change their mind again.”