Barclays Plc will reduce its interests in Africa by selling part of its $4.9 billion stake in Barclays Africa to cut the cost of compliance in the UK.
Last week, Barclays chief executive Jes Staley said the lender would sell its 62.3 per cent interest in the African business, Barclays Africa Group Ltd (BAGL), in the next two to three years. The Africa business unit offers investment banking and plastic money (Barclaycard) and has a presence in the Kenya, Uganda and Tanzania markets.
“As part of the simplification of the group, we have decided, subject to required shareholder and regulatory approval, to reduce our interest in Barclays Africa to a non-controlling, non-consolidated position,” Mr Staley said.
This represents a drastic change from September 2015, when John McFarlane, the lender’s chairman, said Barclays Plc would increase its shareholding to 78 per cent in its African business unit.
The reduction of its stake in BAGL to below 20 per cent is expected to boost its return on equity. In the 2015 financial year, the African business unit was the second worst performer after the investment banking unit, leaving Barclays personal and corporate banking and Barclaycard as the top performers.
“The London office had the option of shutting down its investment banking unit as opposed to the Africa banking unit but the former portends viable rebound options hence the decision to sell down the shareholding in Africa,” said a chief executive officer of a local bank.
Mr Staley said Barclays Plc owned 100 per cent of the risk of the business, but derived less than two-thirds of BAGL profit, suggesting the high exposure informed the decision.
The 2015 financial results show that the African banking unit’s profits after tax fell by 8 per cent to $464.5 million from $503.7 million the previous year. BAGL also recorded a drop in deposits, loans and advances to customers and a return on average equity.
Despite the fall, Africa made up about a fifth of the bank’s profit, as the earnings from the region stood at 11 per cent of total earning last year. In terms of return on tangible equity, the Africa business stood at 11.7 per cent in 2015 compared with 6 per cent for the investment bank, which the board felt will turn around in the medium term.
Tushar Morzaria, Barclays Plc Group finance director, said during the financial results presentation that African business recorded a rise in bad assets to 11 per cent, driven by an increase in risk concentration and additional coverage on performing loans.
“The operational costs also increased by 5 per cent reflecting inflationary impacts, partially offset by savings from strategic cost-cutting programmes in the branch network, technology savings and property rationalisation,” Mr Morzaria said.
In 2005, Barclays Bank paid $3.8 million for 56 per cent stake in Absa, one of South Africa’s top tier banks. In 2013, the two combined their African operations in a $1.17 billion deal.
Maria Ramos, Barclays Africa’s chief executive, said the sell down was mainly driven by the United Kingdom’s regulatory environment.
“Africa’s growth is still very positive, so we should not look at this as driven by economic sentiments within the continent,” Ms Ramos said.
Barclays Plc is also looking at disposing off its separate operations in Egypt and Zimbabwe. BAGL has been running these two units on behalf of the parent company.
The Barclays Plc scale-down of its interest in Africa has also brought in focus the cost of doing business in the continent, which Mr Staley alluded to as being one of the reasons it is exiting the market.
“Despite the recognition that Africa is one of Barclay’s genuine growth areas, it is becoming a costly distraction owing to the devaluation of the South African rand, and extra risks of corruption and misconduct in Africa, which would tarnish the entire African operation if something were to go wrong,” Mr Staley said.
Now the focus turns to the likely buyer with Chinese banks being mentioned despite the slowdown in that country’s economy. In February last year, the Industrial and Commercial Bank of China, a Chinese government-owned banking group, bought 60 per cent of South Africa’s Standard Bank London subsidiary for $690 million.
China has been an important player in Africa’s infrastructure projects, providing funding in almost all of them, but the Barclays Africa business model, however, has not been big on infrastructure funding.