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Capitec, Barclays Africa and Atlas Mara: Thoughts from a bank ratings expert

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Between inflationary pressures, interest rate hikes and the Reserve Bank revising South Africa’s 2016 growth forecast down to 0% – corporate South Africa is feeling the pinch. And the banking sector is no exception.

However, according to a report by international banking advisory group, Lafferty, South Africa’s banks are strong enough to weather the storm. In fact, the group recently named Capitec Bank as the best in the world in its inaugural 2016 Lafferty Bank Quality Rankings.

It scored 100 global banks – including five in South Africa and eight in Nigeria – on their ability to deliver sustainable returns over the long term.

How we made it in Africa spoke to the firm’s founder and chairman, Michael Lafferty, about what South African banks are doing right, and how banks across the rest of the continent are fairing during these challenging times.

How does South Africa’s banking industry compare to other regions in the world?

Based on all of the banks we have rated so far, which are about 250 around the world, the South African banks as a whole are distinctly the best in the world. There is no two ways about it.

Why?

I think it has to do with several things. First of all they score very well on the financial side of our ratings criteria – that’s stuff like capital, liquidity and all the financial ratios that are very important in assessing banks. But they also score very well on the so-called qualitative criteria, which is where we look at things like strategy, like culture, like living the brand promise. They’re actually extremely impressive banks – that’s taking the South Africa banks as a whole. We looked at the big five, including Capitec.

And you have rated Capitec as the best bank globally.

Yes – of the banks that we have looked at. But as we look around the world, we have seen no other bank that would qualify for a five-star rating – even outside our first global study. The only one is in fact Capitec, and coming very close behind it is Barclays Africa.

Some argue Barclays Africa’s future is a bit uncertain with its parent company selling its stake – not to mention that South African banks are struggling with the country’s current economic woes. Does this not dampen these banks’ prospects?

Let’s take these things separately, because there is a good answer for both of them. The first thing is that Barclays PLC, which is still the majority owner of Barclays Africa, has a much lower rating than Barclays Africa. In the Global 100 Banks study, we gave Barclays UK the lowest rating of all the banks we looked at – which was a one-star rating. In terms of quality, it’s a long way behind Barclays Africa, or whatever they will call the bank once it gets its freedom.

I just also have to say that I think it’s a blessing for Barclays Africa to be freed from Barclays in London – because Barclays UK is challenged, to say the least. The reason it is selling Africa – its greatest asset outside the UK – is because it desperately needs to rebuild its capital. It also has a very questionable business model – one where investment banking culture dominates and has done great damage to the underlying UK commercial bank. That hasn’t happened in Africa at all and, if we think of South Africa, we have a bank that is a majority retail bank, where retail banking accounts for most of the profits and the retail banking culture is the dominant culture. So I think Barclays Africa is really lucky to be escaping from the woes of Barclays UK, which was one of the top banks in the world 30 years ago.

Let me answer the other point that you brought up, which is around the bad economic conditions and all that. There is a presumption that if an economy is having either a rough time or good time then the banks will benefit or suffer accordingly. But under our way of assessing quality in banking, a really top-quality bank will do well regardless of the status of the economy. In other words it will be quite able to function through the ups and downs of the economy… It will probably have a substantial retail component as Barclays Africa does and as Capitec has completely, because Capitec is totally a retail bank… The FirstRand group and Standard Bank group – both of them have substantial retail components. This old way of thinking was based around the days when banking was largely in a corporate banking world – that doesn’t apply anymore.

In terms of the banks that you did rank in South Africa, which ones had the poorest ranking?

We gave all five of the South African banks high ratings. So that was three stars for FirstRand, Standard Bank and Nedbank. Capitec got a five-star rating and Barclays Africa came close behind with a four-star.

Is a three-star rating good enough?

Most of the banks of Europe are two- or three-star banks. So a three-star bank is a good, sound bank. Once you get into the two-star and, of course, one-star category, I think there is some cause for concern.

But is a three-star rating enough to survive South Africa’s current economic woes?

There is absolutely no issue about any of the major South Africa banks.

We are rating a bank as a whole, and we are rating it for its ability to generate sustainable returns over the long term. In other words, to keep going as a bank over the long term. And the long term of course includes all the ups and downs and all the rest of it.

What about in the rest of Africa?

Of course in the 100 [we rated] we only had a relatively small number of African banks, apart from the South African ones. We will be diving deeper into Africa later in the year… But we did rate one bank in Nigeria quite highly – Sterling Bank. We also rated some banks in the Middle East quite highly.

Basically the message from this first-ever global study of bank quality is that Africa and the Middle East and some other parts of the world, such as Asia, have materially better quality banks than most European countries, or indeed the US. In fact, in our ratings only one American bank got a four-star rating and that was a highly focused bank called Discover.

What are banks like Sterling doing right?

Well I think first of all it is very well capitalised. It’s rapidly proceeding down the line of becoming a much more retail bank in line with the economy. Our ratings were constructed from having talked to many bankers around the world on one hand, but also regulators. Everybody agrees that if you want to be a bank that is going to sustain itself in the future, you have to be mainly deposit-funded and you have to be mainly retail deposit-funded.

Several of the Nigerian banks are now well on the way into transforming themselves from being old-style corporate banks into much more retail banks. And that’s a global phenomenon. I mean there are banks, for instance, in some Asian countries that have absolutely amazing stories. For example, in India there is a bank called HDFC – it is an extraordinary story of a bank that’s been really built up in the last sort of 20 or 30 years, and doing fantastically well.

Another interesting thing… in general the price/book values of the banks which we have rated correlate with the ratings we have given them. It is somewhere in the mid-60s – so that is quite a powerful indicator investors in general are thinking in a very similar way to the methodology we are using.

So you’re optimistic about the banking opportunities in Africa?

I think that Africa has the most fantastic potential. I think it is the most exciting region of the world. If you look out over the next 20 or something years, it has just so much fantastic potential with this young population which will overtake China’s in a few decades.

The majority of Africans remain unbanked and due to poor banking infrastructure. New technological innovations, such as mobile phone banking, have managed to replace traditional banking services in some cases. Could we not see traditional banking get leapfrogged entirely in Africa?  

If you look at the bottom of the continent with South Africa and the top with North Africa, particularly Egypt – these are the countries that have embraced some of the most advanced aspects of consumer banking. For example, with credit cards – South Africa is one of the most developed countries in the world when it comes to credit cards and, funnily enough, Egypt is also a leader in this field.

But I think that the banks of Africa in general – leaving aside the South Africans and Egyptians – have woken up to the fact that collecting deposits from whomever you can get them from and then lending the money to either the government or corporations, is a business that hasn’t got much of a future. They have woken up to what we call the “retail banking revolution”. Of course they have woken up to it about 30 years after banks in other parts of the world… The retail banking revolution began about 50 years ago incidentally and is typified by the invention of the ATM and the revolving credit card.

But the banks of Africa are now much more switched onto retail banking. Again an example of a bank in Nigeria, Diamond Bank – which actually decided to split itself into a retail-only bank with branches entirely for retail banking. You could say this is a bit like what is happening with FNB and indeed Barclays Africa. But in Nigeria this is completely unusual. So they said corporate banking is a separate thing with its own branches, although not very many. But the retail bank has its unique branches and they don’t have to do any corporate banking business there. So banks are waking up.

In the meantime the telcos have come along and of course they have all these relationships with consumers in vastly greater proportions than banks. However, the regulators in most countries, with the exception of Kenya, have really been very circumspect in allowing telcos to do very much… They have limited them to making payments and, even there, they have limited them quite a bit. So now they’re forcing the telcos to form partnerships with banks – I am talking in general. And I think that makes a lot of sense because the telco people have no experience with risk management, banking and very often they have quite weak balance sheets themselves. Many of them finance themselves with hard currency borrowing and of course their revenue is in soft currency… in African currencies. So they are not in the greatest of financial states anyhow. So I think you’ve had a bit of a battle between the telco regulators and the banking regulators – but the banking regulators have largely won.

Bob Diamond, the co-founder of the Africa-focused Atlas Mara, has been very verbal about the potential in Africa’s banking sector and his company has acquired eight banks in seven sub-Saharan African markets since its launch in November 2013. There is even talk of buying a stake in Barclays Africa. However, the company’s shares have since lost about 66% of its market value. Your thoughts?

Bob Diamond is a colourful, charismatic and highly-controversial figure. He became CEO of Barclays PLC, the UK-based banking group, and is associated with many of the decisions that left Barclays so challenged today. Of course he was forced to resign by the British regulators and so forth.

He is an investment banker and like most investment bankers, he is a super smart guy. He can see great opportunities in Africa, and of course particularly within retail banking in Africa. However, I think he faces challenges because the regulators right across Africa, first of all, talk to each other. And secondly they talk to London. I think there is no hope whatsoever that Atlas Mara or any vehicle connected with Bob Diamond will be able to become a significant shareholder in what is currently called Barclays Africa. I think that is just not on. And I think they’ll face ongoing difficulties in other markets because of what happened with Barclays in the UK.

Atlas Mara is facing difficulties in countries such as Nigeria.

I think the key thing that Atlas Mara will need to do is to convince the African regulators that really credible and independent-minded retail or commercial bankers will be in charge, and not investment bankers or wheeler-dealers.

What has been going on in the so-called universal banks of Europe, and indeed of the US, is quite horrifying. Depositors, consumers and taxpayers have been abused… and a tiny number of mainly investment bankers have got extraordinarily rich. And I think the regulators and society in general are catching up with these things. This is why retail banking is now being ring-fenced off from investment banking in the UK and why similar moves are being proposed by both the Democrats and the Republicans in the US.

If you had to put your money in any African bank – first of all, would you? And secondly, which top three would you invest in?

I’ll keep my answer, if you don’t mind, to South African banks since I am talking to you in Cape Town. I have total confidence in all of the South African banks that we rated – Capitec, Barclays Africa, FirstRand, Standard Bank and Nedbank.

All are world-class and all have laudable international ambitions, particularly across Africa. These banks apart, I expect more and more South African bankers to be recruited to top positions in banks around the world over the next 10 years. This has been happening for a while and it will soon become a big trend.

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