It was the first big piece of custody news to come out of South Africa for a while. In April this year, Standard Chartered announced that it was in the process of buying the South African custody and trustee business of Absa Bank.
It was the first big piece of custody news to come out of South Africa for a while. In April this year, Standard Chartered announced that it was in the process of buying the South African custody and trustee business of Absa Bank.
Absa is one of the big four consumer banks in South Africa, and a subsidiary of Barclays, which has had a 62.3 percent share holding in the bank since May 2005.
Barclay’s acquisition came under fire from governor of the South African Reserve Bank at the time, Tito Mboweni, who said he “had yet to see the benefits of Barclays’ management of Absa” and described its proprietary share in the bank as “discouraging.”
Standard Chartered’s acquisition will almost certainly be less controversial, and the bank prides itself on significant investment into its African franchise. As well as organic investment, the group acquired First Africa, an African M&A advisory business, in 2009, and Barclays’ Africa custody business in 2010.
The bank announced the opening of two new wholesale banking corporate offices in South Africa, in Cape Town and Durban, and over the past two years has sought to develop a profitable custody model across 21 sub-Saharan African countries—launching custody operations in South Africa earlier this year.
Diana Layfield, CEO of the Africa region, said at the time that the continent was an important strategic opportunity for the bank and its clients, offering excellent economic growth and increasingly strong trade links with markets in Asia and the Middle East.
“This deal will improve the range of services we offer to clients in the region. It builds our capabilities and is in line with our strategy to support our organic growth with selective acquisitions.”
Standard Chartered’s Africa business has delivered average annual growth of 15 percent for the past five years. In 2012, the region generated income of $1.6 billion, up 15 percent, with the wholesale bank generating $1.1 billion, up 16 percent. Eight markets delivered more than $100 million of income for the year, with Kenya and Ghana joining Nigeria in delivering over $200 million.
“[We] intend to maintain this overall rate of growth for the region, aiming to double revenues from Africa over the next four to five years on a constant currency basis,” said the firm. “To achieve this, the group will invest more than $100 million in new branches over the next three years, accelerate its investment in mobile payments technology, and hire new staff. It will also invest in new areas such as Islamic banking and mortgages, to improve the service we can offer to our clients.”
It is unsurprising that the region is starting to attract foreign banks. With the largest economy in Africa and a GDP of around $578 billion, it is a key investment location, both for the market opportunities that lie within its borders and for the ability to use the country as a gateway to the rest of the continent.
The country has received the largest share of foreign direct investment in the African continent, with the figure rising more than five-fold from $1.2 billion in 2010 to $6.4 billion in 2012—and representing 25 percent of Africa’s inflows last year.
“South Africa is the largest and most developed capital market in the region on par with developed market,” says Hari Chaitanya, the regional head of investors and intermediaries in Africa for Standard Chartered.
“Other countries in Sub Saharan Africa are in different stages of development in respect of their clearing and settlement infrastructure compared to the developed market, and products used in these markets are often much more limited compared to developed market or South Africa. However, local regulators are focused on developing regulation that is in line with the developed markets and Standard Chartered sees significant benefits to clients in being able help navigate these markets.”
Until just two years ago, the four domestic banks—Standard Bank, FirstRand Bank (the operators of First National Bank), Nedbank (owned by Old Mutual), and Absa Group—were the primary players in the custody market.
But, comments Chaitanya, this profile is rapidly changing with the entry of international banks. “Since the inception of Strate Ltd in 1999, the domestic market has been dominated by local players with limited global players. However this trend has changed with Standard Chartered Bank being the second global player entering the market in the last two years, and this trend is forecasted to continue. The main driver behind this is that South Africa is largest capital market in Africa and thus provides scale and a good platform for expansion into the continent. The ongoing relaxation of exchange control also increases the value proposition in servicing these clients in their respective investment destinations.”
Needs and wants
Chaitanya comments that, like so many other countries globally, South Africa’s custody needs all focus around efficiency, rapidity, and linkage.
“A custody services provider in South Africa is required to have a high level of STP, the ability to handle various financial instruments, and the ability to provide linkage with other markets in Africa and other regions. South African asset managers have been increasingly looking for investment opportunities in offshore markets and prefer to operate via single provider for both domestic and offshore assets. In comparison, other African markets are primarily dominated by global and domestic investors investing in local markets.”
These needs were first met with the introduction of Strate, a licensed central securities depository (CSD) that electronically settles financial instruments in the country. Strate handles the settlement of a number of securities including equities and bonds for the Johannesburg Stock Exchange (JSE) as well as a range of derivative products such as warrants, exchange traded funds (ETFs), retail notes and tracker funds. It has now added the settlement of money market securities to its portfolio of services.
Since its inception, the CSD has aimed to bring efficiency to South Africa’s capital markets by standardising processes in the administration of securities by market participants, and aligning these with global best practices. “The integrity of the market has also been raised by ensuring that participants contribute to the development of the market,” comments Chaitanya.
“Strate has made significant contribution in mitigating risk, bring efficiencies to the South African financial markets and improving its profile as an investment destination.” He also points to the important statistic of it being the first non-European member of Link Up Markets, a joint venture between CSDs created to improve efficiency and reduce costs of post-trade processing of cross border securities transactions.
“Recently Strate has joined the Liquidity Alliance with ASX (Australia), CETIP (Brazil), Clearstream (Luxembourg) and Iberclear ( Spain) to exchange information, identify common needs and to extend global collateral solution.”
As for whether African CSDs will play a bigger part in African securities markets, Chaitanya says that an efficient securities market infrastructure is a pre-requisite for attracting global investors.
“Capital markets will play increasingly important role in growth of Sub-Saharan African countries to mobilise savings and provide capital raising opportunities for domestic companies … African countries have been working towards this objective since last few years. Now every market has a functioning securities market infrastructure (by way of stock exchanges, securities depositories, and clearing systems). Zimbabwe—the last physical market in the region—also plans to have a central depository during this year.”
“African CSDs will play a key role in improving clearing and settlement infrastructure in partnership with stock exchanges and central banks, and enabling capabilities like securities financing, securities lending and collateral management.”
