HSBC snub not a setback for South African banking

At first sight there seems to have been a burst of negative news coming out of South Africa. It began with Standard Bank, the country's largest, announcing it is to cut jobs for the first time in five years. Then what seemed like a done deal unravelled in the most spectacular fashion and with no explanation.

After two months of exclusive access to its books, HSBC suddenly pulled out of talks and decided not to buy Nedbank after all. Mike Brown, Ceo of the smallest of SA's "big four" banks, did not try to put a gloss over the news. He described the decision as "a clear disappointment. An acquisition by a global group could have accelerated the delivery of our strategy."

The reasons for HSBC's withdrawal from the 4.5bn deal "were not disclosed", said Old Mutual, Nedbank's parent company, in a terse statement. Rumours that due diligence had exposed serious credit risks were so rife that SA's Registrar of banks felt obliged to intervene.

"Nedbank remains profitable and soundly capitalised, - Errol Kruger pointed out. - Nothing has come to my attention that changes my view on the soundness of Nedbank or the SA banking system, both of which successfully withstood, without any government or central bank assistance, the world's biggest banking crisis in recent times."

So there. In SA, HSBC's decision is not seen as due to problems at Nedbank but more as a consequence of management changes at HSBC, as the mooted deal was very much outgoing Ceo Michael Geoghegan's baby. Earlier in the year he had personally gone to SA to negotiate it. Expectations are that Standard Chartered, which had been the favourite to snap up Nedbank before HSBC pulled the rug from under their feet, will revisit the deal once it gets its 3.3bn rights issue out of the way, as the South African bank's corporate banking and retail mix is very attractive for StanChart.

"I don't think HSBC's withdrawal reflects badly on Nedbank or the SA banking sector at all," says Phryne Williams, director of Capital Assignements, a financial services recruitment firm. "I think that it might create further opportunity for other investors to consider investing in SA. Recruitment in the financial services sector is very active and I guess this has lessened the skills shortage challenge that we are faced with, considering the new players like Absa Capital, Credit Suisse and Rencap. Less pressure from a skill perspective is not a bad thing."

Another positive appraisal of SA banking has come from a new survey by Ernst & Young, which shows that both profits and confidence are recovering. "Retail and investment banking confidence levels both moved upwards in the third quarter," says Emilio Pera, lead banking and capital markets director at Ernst & Young. "The expectation is that profits should recover to positive growth in 2011, at least for the retail banking sector."

This explains why HSBC may not be buying Nedbank but, as Williams says, "is still very interested in growing its presence in South Africa.'