Scalded foreign banks pull in horns

Some of world’s biggest corporate finance players cut back in SA.

Matter of fact
Moneyweb reported that “shrinkage in M&A and BEE deals, plus troubles at head office, have caused foreign banks such as HSBC… to scale back, if not close their SA corporate finance office. Representatives for HSBC in South Africa say their “client has no intention of scaling back or closing its SA corporate finance offices.  The information came from other investment banks and was published in good faith. Citi South Africa would like to place on record that the comment that Citi is “to scale back, if not close their SA corporate finance offices” is factually incorrect and that Citi has no such intention. Moneyweb regrets the errors.

As corporate finance activity declines in SA, a number of the world’s major banks have withdrawn or cut back their operations.

Shrinkage in M&A and BEE deals, plus troubles at head office, have caused foreign banks, Commerzbank, Morgan Stanley and Merrill Lynch  to scale back, if not close their SA corporate finance offices.

Risk aversion and a lack of liquidity have put a big squeeze on a once-lucrative business space.

In 2006 and 2007 the investment banks could hardly cope as BEE, private equity and acquisition activity ran riot. Then came subprime, a global financial crisis and now the hangover.

Foreign investment banks have run hot and cold on SA before. They withdrew to the sidelines after the IT meltdown in 2001 but returned to take part in the boom of 2006. Now they are down, if not out and the bigger local players are doing their best to win back market share.

Rob Wessels, head of corporate finance at Nedbank (JSE:NED), said the number of failed transactions globally last year was a record 1 200.

A record number of proposed deals that failed in SA included: the Xstrata bid for Lonmin (JSE:LON), the proposed Impala-Mvela-Northam deal, two different deals between MTN (JSE:MTN) and Indian operators and Oger Telecom’s advances towards Telkom (JSE:TKG). Earlier, the Brait private-equity bid for Shoprite and the JD Group-Steinhoff proposal also collapsed.

Said Wessels: “This year will also be tough but we hope we won’t see another slump in the equity market to equal last year’s.”

David Thayser, director of Ernst & Young and the author of E&Y’s annual Mergers and Acquisitions Survey, said the value of deals for 2008 might be down by nearly 50%.

“It reflects the connectedness of the world economy. It’s like somebody turned off a tap. The US seized and stopped buying from China, China cancelled big resources orders from SA and other countries.”

Thayser says investment banks might have work right now but few deals have been announced lately, suggesting that the pipeline could dry up further. Some deals currently being handled include: MTN’s bumper BEE deal, which might be the biggest ever, Tiger’s bid for AVI and a BEE deal for Richards Bay Minerals.

The sellers of Edcon shares in 2007 have smiles almost as broad as those of ABN AMRO shareholders who were wildly overpaid in 2007 by the Royal Bank of Scotland. That purchase virtually ruined RBS. It is not known how the purchasers of Edcon are feeling in the wake of their all-cash deal.

Several domestic merchant banks reported that the scaling back of corporate finance activity by big internationals has made life a little easier for them.

RMB senior corporate finance executive, Leon von Moltke, said his team was still working on a number of deals but getting finance is more difficult and taking longer. One reason was that foreign banks were cutting back on lending in SA to protect their devastated balance sheets.

“A number of companies in defensive areas of the economy with cash are keen to make acquisitions. For them, prices of illiquid companies are very attractive but funding is an obstacle.”

One spokesperson for a foreign bank who is not allowed to be quoted said risk aversion, capital shortages and the market slide have not killed BEE deals but such deals these days are differently funded.

“They are market-funded deals that do not depend on the banks’ balance sheets. Typically the BEE beneficiary will pay a discounted price over time but he gets the benefit only at the end of the funding term and he carries the risk. Pref and debt funded BEE deals have fallen into disuse.”

He confirmed that some of his foreign rivals are cutting back.

Von Moltke said RMB has fortunately not had to “right size”.  Some people had left to further their studies, others to start a family. This natural attrition allowed RMB to appoint a few junior corporate financiers to cope with current workloads.

While the lions of the corporate finance jungle – RMB, Standard, Investec and JPMorgan and Deutsche – are faring reasonably well, the boutiques have felt the squeeze more acutely.

Corporate finance is the glamour area of investment banking. Fees are high, as are returns on capital. Profit per person in corporate finance can be stupendous, as can remuneration.

Von Moltke said corporate finance opens doors, giving the banks access to chairmen, CEOs and CFOs – but is typically not a major direct profit driver.

Rob Wessels says the corporate finance departments are more important than their direct contributions to the bottom line.

“The advisers get the mandates and that usually leads to large-scale lending, and work for other departments, such as forex and equity derivatives.”

On those grounds, the Big Four guard their corporate finance turf jealously and compete vigorously. And they will not let their highly paid stars go.

Old Mutual Investment Group’s banking analyst, Tracy Brodziak, says it’s the big retail infrastructure in times like these that really matters to the Big Four. She says possible falls in interest rates would, on balance, not be positive for banks.

While RMB’s change of fortunes from huge profits to a horrendous loss last year had a major effect on FirstRand, the catastrophe was in the dealing area, not corporate finance.

Brodziak observed: “Those positions have been closed off, so there will be no recurrence.”

She understands that bad debts on credit cards and on vehicle finance have stabilised but expects bad debts on mortgage lending to keep rising. These concerns have depressed price-to-book ratios of the Big Four well below two.

“As rates fall, bad debts will eventually decline but that will take time.”

Write to David Carte: david@moneyweb.co.za

COMMENTS   11

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Here is an oke who has 5 wives and maybe looking for more plus 20 odd kids. Not someone who banks might want to deal with as it is hard enough doing a good responsible parenting/husband job with 1 wife and 2 kids on one income so how does zuma do it with 5 wives and 20 odd kids? How does this free sex/wives/kids approach fit in with the serious global population problems? Imagine if every male accumulated wives and kids willy nilly? Disaster. He must be getting financial help and one wonders from whom? He regulalry calls for a machine gun to presumably shot his opposition. Civilisation is trying to curb these kind of people and stop genocide etc while promoting democracy/tolerance and one doubts if Obama and co will be happy with someone who very publicly and stupidly calls for a machine gun solution. He and Malema seemingly support the principle of unprotected sex with other girls even if they know they have aids. Can this really be true? Alarming indeed. Zuma is now up for fraud and corruption charges which are pending or hanging over his head in some fashion and the banks will definitely not like to deal with someone in this position particularly as he does not want to have his day in court to prove his innocence.

These Good old boy’s have been running Derivative chop shops in this Dark Pool for too long with the JSE only too happy to do their bidding and look the other way.

from these foreign banks who are pulling out – Is this not what the article is about? Which foreign banks are scaling down in SA? Which are shutting their SA corporate finance operations?

They can’t – it is not PC!

At a guess maybe a few mergers. Barclays will probably sell Absa so you might find an Absa Nedbank merger or a Standard FNB merger or something like that. Investec and RMB etc will be gobbled up as they will not survive this economic climate unfortunately. Time to get realistic about SA having too many banks. Foreign banks must also be very worried about Zuma as he is ill equipped at best to run SA.

And we really only have 4 retail banks which means we don’t have enough competition – so less would be worse for you and I, not better.

BEE, M & A, BBBEE were the cesspool where greed knew no bounds. The instigators and advisers to these processes did not grow employment opportunities ( their activities lead to dismissals), they did not add to the export base of SA and they did not grow our intellectual property base. May the grim reaper remove them from our midst

and I am sure most BEE shareholders will want to have them “repriced” to lower levels to reflect some postive equity.

The other players in the SA market mentioned for example HSBC, Citi etc don’t help the man in the street in SA, and by merely opening an office they don’t add to true FDI either – so let them go (Barclays, dependant on the deal terms for ABSA, added to FDI, so that’s great).. What the SA consumer needs is competition in areas like bonds, interest rates etc.

Look, anyone with half an education knows that Julius Malema is a self-interested populist, and probably the most dangerous thing this country has encountered since HIV.

HOWEVER, what the f–k does he have to do with the content of the article ?

Why don’t Bain just sell EDCON back to Mobius….he thought it was 50% under-valued at R46 so I am sure he would be thrilled to have his stake back at that price.

End of comments.

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