HSBC is in exclusive talks to buy a controlling stake in Nedbank, South Africa’s fourth-largest bank, from insurer Old Mutual. Yet rigid controls on currency outflows and comments from an official indicate HSBC’s $8 billion bid to buy 70 percent of South Africa’s Nedbank could yet be derailed. But South African regulators and politicians have killed big cross-border deals in the past to the surprise of outsiders.
South Africa’s banking regulator has appeared open to the deal, but central bank chief Gill Marcus said on Thursday foreign ownership of local banks brought risks. “It does create a situation of complexity and that needs careful consideration,” she warned. Blocking the deal would be a negative for both Nedbank, which could benefit from ownership and investment from a strong international bank, and the rand currency, analysts reckon.
“It’s the first official comment that suggests they might not approve the deal, because (bank regulator) Errol Kruger’s comments were very positive,” said John Cairns, currency strategist at Rand Merchant Bank. “This is the first sign that maybe they are backtracking a bit.”
The worry for South Africa is that three of South Africa’s top four banks already have a substantial foreign owner. Standard Bank is 20 percent owned by Industrial and Commercial Bank of China, while Absa is majority owned by Britain’s Barclays. Only FirstRand would remain under total domestic control.
Yet most industry insiders view HSBC as a stronger foreign owner for Nedbank than Old Mutual, which has its roots in South Africa but is now based in London.
“It is swapping an ownership stake and you are actually swapping it from a life insurance company that had capital difficulties with a very well capitalized international bank,” said Johann Scholtz, an analyst at Afrifocus Securities, saying Marcus’s comments were surprising. South Africa’s Reserve Bank has strict controls on the outflow of currency to prevent capital flight. Old Mutual said it would apply for permission to the central bank to take out 1.5 million pounds ($2.32 million) of the proceeds to pay down debt. The rest of the money would remain in South Africa. The deal would be positive for the rand according to Cairns, who estimates the deal would generate a net inflow of around $5 billion.
It wouldn’t be the first time that South Africa has blocked a big cross-border deal. Almost a year ago the government waylaid a $24 billion planned tie-up between India’s Bharti Airtel and MTN Group. HSBC’s period of exclusive talks was expected to last 6 to 8 weeks, banking sources have said. After agreeing on a price, it will need regulatory approval, which may not come this year. The buyer will likely have to agree to a series of requirements, as Barclays did in when it bought a majority stake of Absa in 2005, Afrifocus’ Scholtz said.
Regulators will likely demand the bank remain listed in Johannesburg, have a South African chief executive and largely South African board and retain the Nedbank brand, he said.
HSBC has been careful to emphasize that it wants to be in South Africa for its own right, and not just as a stepping stone to the broader continent. Its chief executive had named South Africa as one of six countries with strong growth appeal. As an international bank active in emerging markets, it is also no stranger to dealing with politics.
