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The Analysis Why Barclays is retracting from Africa

Most people are curious as to why Barclays will take such an audacious decision especially when the bank spent close to a century in making progress on the African continent.

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News of Barclays Bank's decision to sell its majority stake in Barclays Africa Group Limited came to the banking world as a surprise.

Subsequent checks by Pulse Business, however, revealed that the multinational conglomerate had been entertaining the idea of reducing its presence in Africa since the appointment of the its new CEO, Jes Staley in the last quarter of 2015.

Consequently, most people are curious as to why Barclays will take such an audacious decision especially when the bank spent close to a century in making progress on the African continent.

So we went digging along the following parameters:

Financial Performance

Barclays Africa's financial performance makes the decision to get out of Africa even more surprising because it has been above satisfactory.

 

According to the bank's financial statement for 2015, Barclays Africa Group Limited’s headline earnings increased 11% to R6 755m from R6 110m.

Diluted HEPS also grew 11% to 797,0 cents from 720,7 cents. The Group’s RoE improved to 16,4% from 16,1%, comfortably above its 13,75% CoE, due to its return on assets rising to 1,33% from 1,27%.

Barclays Africa declared a 13% higher ordinary DPS of 450 cents, given its strong CET1 and internal capital generation capacity. NAV per share increased 6% to 9 860 cents.

Group’s net interest margin (on average interest-bearing assets) improved to 4,70% from 4,56%. Loans and advances to customers grew 7% to R657bn, while deposits due to customers increased 8% to R649bn.

The Group’s cost-to-income ratio improved to 55,9% from 56,4% as operating expenses rose 5%.

Credit impairments fell 1%, despite improving non-performing loan (“NPL(s)”) cover and increasing portfolio provisions to 0,74% of performing loans from 0,70%. NPLs declined to 4,0% of gross loans and advances to customers from 4,6%.

RBB's headline earnings increased 17% to R4,7bn, as revenue growth exceeded cost growth and credit impairments fell 8%.

WIMI’s headline earnings increased 14% to R751m, with 48% growth in Short-term Insurance SA, while CIB grew 3% to R1,9bn, including 9% higher Corporate earnings.

Revenue from Rest of Africa grew 9% (12% in constant currency) and headline earnings rose 22%, to contribute 20% and 18% of the total Group respectively.

Strategic Cut Down on investments

Clearly therefore, the decision to retract from Africa  is not due to poor financial performance, at least based on the financial performance of 2014 and 2015.

The African unit is outperforming its parent. Last year, its net profits rose 10 per cent to SAR13bn, giving it a healthy return on equity of 16.7 per cent.

However, when this is converted into Barclays’ accounts, it looses its value.

This is because Barclays has to hold equity against the whole of its African business, as it is on the hook for all its liabilities if anything goes wrong. But the UK bank only includes 62 per cent of the profits in line with its shareholding.

Depreciation of South Africa's Rand

The second factor is  the depreciation of the rand against the British pound — it has fallen 25 per cent this year, dragging the good performance of Barclays Africa further down. The African unit’s return on equity at group level was 9.3 per cent last year — below Barclays’ target of 11 per cent.

 

“As a standalone business the returns of the African operation are higher than the rest of the group through the cycle,” said Chirantan Barua, banking analyst at Bernstein. “But it does not fit with the strategy, investors don’t pay you a premium for it and you don’t invest in it. So it makes sense to look at selling it.”

A reportage by the The Times newspaper in England quotes top Executives of Barclays as saying that  the move is strategic.

Jes Staley, Barclays' new Chief Executive wants to streamline the investments of the bank in order to concentrate on much narrower operational activity.  And Africa lpops up as the best sacrificial lamb, and there appears to be good enough reason.

Falling Oil and International Commodity Prices

Barclays has not  been spared the shivers of record-low oil  and international commodity prices.

Barclays is reportedly facing potentially heavy losses on an $850m loan made to two oil and gas companies, in a sign of how the dramatic slide in the price of oil is beginning to reverberate through the wider economy.

Details of the loan emerged as delegates of Opec, the oil producers’ cartel, gathered in Vienna to address the growing glut in the supply of oil. 

Repercussions from the decline in the price of crude, which has dropped 30 per cent since June, are spreading beyond the energy sector, hitting currencies, national budgets and energy company shares.

Companies are also being hit, with BP’s shares down 17 per cent since mid-June and Chevron’s down 11 per cent, according to FT.Com.

Shares in SeaDrill, one of the world’s biggest drilling rig owners, fell nearly 23 per cent on Wednesday as it suspended dividend payments. The company has suffered from an oversupply of rigs as the majors respond to crude’s slide by cancelling projects.

Now banks are also being affected, with Barclays and Wells said to face potential losses on an energy-related loan. Earlier this year, the two banks led an $850m “bridge loan” to help fund the merger of Sabine Oil & Gas and Forest Oil, US-based oil companies.

Investors, however, balked at buying the loan when it was first offered in June and slumping oil prices combined with volatile credit markets in the months since have scuppered further attempts to sell, or syndicate, the loan, according to market participants. Barclays and Wells declined to comment.

Meanwhile, With Africa being the source of about 70 percent of the world's international commodities, Barclays may find it frugal at this point to reduce its risk cover on the continent.

 

 

 

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