Absa is taking aim at Standard Bank’s fee-rich corporate and investment banking (CIB) business as it seeks to tap new growth opportunities after its unbundling from Barclays.
Retail and business banking accounted for about 51% of Absa’s R8.18bn in headline earnings in the six months to end-June, with CIB bringing in the remaining 49% along with a small contribution from head office, treasury and the bank’s other operations.
While retail and business banking focuses on individual consumers and small to medium-sized enterprises, the CIB units of lenders are typically significant income generators due to the high-margin services they provide such as project finance, cross-border trade finance and transactional banking for large corporates.
With Absa having largely completed its separation from Barclays last year, interim CEO Jason Quinn believes the bank has an opportunity to consolidate its brand and grow market share in the 12 African markets where it has a presence, thanks to the lessons its CIB unit learnt from its former parent’s Barclays Capital division.
That will put it on a collision course with 158-year-old Standard Bank, which is active in 20 African countries, with a CIB business that raked in more than two-thirds of its R15.95bn in total headline earnings in its 2020 fiscal year.
“Our corporate and investment bank is an undervalued franchise,” Quinn, who became Absa’s interim CEO after Daniel Mminele’s shock departure in April, told Business Day in an interview. “I think our business will probably look more like Standard Bank over time. We see Standard Bank as a strong competitor in CIB. In the fullness of time, we’d like to achieve what they’ve got.”
Absa’s CIB unit benefited strongly from the bank’s integration with Barclays, which first took ownership of the local bank in 2005 and then combined it with its African operations in 2013. Quinn says this enabled Absa’s CIB division to grow strongly as it benefited from UK-based Barclays’ extensive investment banking experience, as well as its technology.
“We got very good at everything Barclays Capital was good at — we got very good at debt; very good at trade finance; very good at trading and fixed income; currencies and commodities,” said Quinn. “Where we struggled was in the corporate franchises, we didn’t get particularly great at that.”
With Absa having completed its three-year separation from Barclays, a process that began in mid-2017 and ended last year, Quinn says the bank is well positioned to grow its CIB franchise after being too “internally focused” during the unbundling.
While he’s particularly keen on growing Absa’s share of the corporate banking market, he has no illusions about how challenging that will be at a time when SA is struggling to recover from the Covid-19 pandemic and recent unrest.
“I think all investment banks and corporate banks are going to struggle with one big thing, which is corporate lending appetite,” said Quinn.
“If you speak to our corporate clients ... they remain pretty defensive. Taking share in a market like this is hard if loan growth is going to be low.”
Quinn expects a slew of opportunities to arise from SA’s scramble to decarbonise its energy system by 2050 in line with the Paris Agreement.
Absa published its first Task Force on Climate-related Financial Disclosures report in March, which recognises the risks posed by climate change but also sees opportunities to help finance the transition to a low-carbon economy.
Absa’s CIB division aims to finance or arrange R100bn in environmental, social & corporate (ESG) governance-related projects by 2025, while its SA business banking operation is targeting R2.5bn in finance, or 250MW of renewable power projects, by the same year.
“Our exposure to fossil fuels and financing for fossil fuels — oil, gas and coal — is much lower than the other banks.
“It’s less than 1% of our balance sheet,” said Quinn.
“It’s going to be exceptionally rare for us to continue financing around fossil fuels.”
Quinn would not be drawn on his role as interim CEO and whether Absa had lined up a successor to Mminele after his surprise departure in April.
“That’s very much a board matter,” he said. “They’ll make an announcement in due course.”
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