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European banking leader HSBC Holdings PLC (NYSE ADR: HBC) yesterday (Monday) announced it's in talks to gain a controlling stake of South Africa's Nedbank Group Ltd. (PINK ADR: NDBKY). The acquisition would expand HSBC's presence in Africa's trade growing financing market.
Europe's largest bank aims to gain 70% of Nedbank's shares and plans to bid on insurer Old Mutual PLC's (PINK ADR: ODMTY) 52% stake, worth $7 billion. Nedbank is South Africa's fourth largest bank and focuses on commercial banking services, operating in 33 African countries.
The hot pursuit of South Africa's banking industry is fueled by the rapid trade growth the country is experiencing with Asia – especially China.
"Over time, the value of this deal would lie in leveraging off HSBC's strengths in Asia and the growing Asia-Africa trade links," JPMorgan Chase & Co. (NYSE: JPM) analysts wrote in a note Monday.
HSBC derives more than 80% of its profits from outside the United Kingdom and half its pretax profits in 2010's first half came from Asia. But it has struggled to compete with British counterparts Standard Chartered PLC and Barclay's PLC (NYSE ADR: BCS) in securing African business. Acquiring Nedbank would give HSBC profit potential from both ends of the strengthening trade routes.
"There are a lot of raw resources in Africa and many banks, including HSBC and Standard Chartered, have seen the advantages of financing trade flows between Asia and Africa," Bruce Packard, an analyst with Seymour Pierce, told The Wall Street Journal.
HSBC has been fiercely pursuing Nedbank to obtain the business before rival Standard Chartered, and finally looks close to winning the race.
HSBC said last month it wanted to build up business in Africa as more Asian countries trade with the continent. HSBC's Chief Executive Officer Michael Geoghegan wrote in the company's interim report published this month that "the re-emergence of China's economy will drive the biggest change to global trade patterns in the generation ahead," with trade flows hitting $5 trillion in the next five years.
The purchase also would give HSBC a gateway to expand to the rest of the continent. South African banks have been growing their businesses northward as investor interest spreads to other nations.
"This is great for the local banking industry," Chris Gilmour, a Johannesburg-based analyst with Absa Investments, told Bloomberg. "HSBC and Nedbank will be able to power their way into the rest of Africa, mainly concentrating on Chinese development deals involving multinational banks and companies. The HSBC brand will probably prevail over the Nedbank brand."
While HSBC has had a small presence in South Africa and operates five branches there now, the purchase would give it 443 retail branches in South Africa and offer significantly higher chances at securing trade financing deals in commercial banking.
South Africa: An Ideal But Difficult Entry Point
Africa is seen as an integral part in future trade deals with Asia and Latin America. The International Monetary Fund is predicting 5% economic growth for Africa this year and 5.75% growth in 2011.
China beat most emerging economies to Africa's cache of commodities, and competing nations like Brazil and India are clamoring to get a piece of what's left.
About 13% of all Africa's exports go to China, everything from gold, silver, cotton, cocoa, copper, aluminum ore, and oil. Trade between Africa and China has grown 40% a year since 2001, reaching a record-high $107 billion in 2008. That was enough for China to top the United States and European Union as the continent's largest trading partner.
Total trade value between China and South Africa was $14.29 billion in 2009. South Africa-based De Beers' 2009 diamond sales in China quintupled to 2.3 million stones, and more than 10% of South Africa's base metals exports are China-bound.
South Africa is the continent's strongest and most advanced economy, making it the ideal launch pad for foreign business to develop a solid African presence. It commands about 20% of Africa's gross domestic product (GDP).
"With 30% of exports destined for Asia, and China now its largest trading partner, South Africa's prospects are brighter than ever," HSBC spokesman Paul Harris said in a statement.
Gaining entry into Africa's banking business isn't easy since the government previously announced it wanted to limit the number of local banks that are acquired by foreign institutions. The South African government has also created complex business rules to favor its own citizens, complicating deals involving new countries entering the region.
"When Barclays bought Absa in 2005, it was a long drawn out process," Seymour Pierce's Packard told The New York Times, referring to another of the country's lenders, "and when I.C.B.C., the Chinese bank, bought a 20 percent stake in Standard Bank in 2007 it was reported that the South African authorities were reluctant to see it buy a larger stake."
Analysts report that HSBC would likely not have gone public with the deal if it were highly concerned with regulatory hurdles.
News and Related Story Links:
HSBC in Talks to Buy Control of Old Mutual's Nedbank
- The Wall Street Journal:
HSBC Takes Important Step Into Africa With Nedbank Deal
- Money Morning:
The Scramble for Africa: Profiting From World's Largest Cache of Commodities
- The New York Times:
HSBC in Talks to Buy Stake in South African Bank