HSBC Has Its Eye on South Africa

by Tony D'Altorio

HSBC Has Its Eye on South Africa

by Tony D'Altorio, Investment U Research

Friday, August 27, 2010

Global banking giant HSBC Holdings ADR (NYSE: HBC) has long focused on Asia, and China especially. That makes sense considering its 1865 start as the Hong Kong and Shanghai Banking Corporation.

And while it hasn't forgotten about its key market there, it has its eye on another piece of the world right now.

In exclusive talks with Old Mutual ADR (PINK: ODMTY) and minority shareholders of the South African Nedbank ADR (PINK: NDBKY), it's willing to pay as much as $8 billion for up to 70% of that company.

HSBC beat out its longtime rival, Standard Chartered (PINK: SCBFF), to do that. It just needs to now examine the smaller financial's assets and liabilities, and work to obtain the necessary approval from the government and regulators.

If all goes well, HSBC can finally really call itself the world's "local" bank, as it gains a long-coveted presence in Africa's largest economy.

Previously, it has had little luck there. It launched in South Africa in 1995 and acquired a banking license about five years later. But it never managed to build any meaningful presence there.

Investors may wonder why HSBC wants to break into the African banking industry while trying to get out of the U.S. at the same time.

But it knows exactly what it's doing...

Why Africa?

Of South Africa's four major banks, Nedbank is the smallest, with 440 branches and about $77.3 billion in assets. Yet a controlling stake in Nedbank would give it a foothold in a growing Asian link.

10 years ago, South Africa sent a mere 1% of exported goods to China. Now it sends about 10%. And nearly a third of its exports - mainly commodities such as minerals - go to Asia.

HSBC's Asian clients are increasingly doing business in South Africa and the larger continent. And since Asia provides over half of the bank's earnings, it wants to accommodate those clients as much as possible.

With 20% of Africa's GDP, South Africa has the strongest and most advanced economy there, which makes it an ideal starting point.

In addition, if it doesn't build a presence there, South Africa's own Standard Bank ADR (PINK: SBGOY) could easily threaten HSBC. 20% owned by Chinese banking giant Industrial and Commercial Bank of China ADR (PINK: IDCBY), it is positioning itself as a full-service corridor to Africa.

And the afore-mentioned Standard Chartered wants in as well.

Dominic Chan, an analyst at BNP Paribas in Hong Kong, notes, "Trade between Africa and China has been growing very rapidly, and HSBC doesn't have the same presence there as Standard Chartered, which makes this buy especially crucial if it wants to continue expanding there."

Standard Chartered ranked third in investment banking and led in syndicated lending fees for the first half of 2010 in sub-Saharan Africa. HSBC didn't make the top 10 in either.

But Mr. Chan believes it needs Africa in order to truly focus on emerging markets.

HSBC agrees wholeheartedly, which is why it's getting out of the U.S. That's also why its CEO has moved full-time back to Hong Kong.

Exploiting Africa's Rapid Growth

Aside from warding off competition, HSBC also wants to exploit Africa's rapid growth.

The continent's population should rise to 2 billion by 2050. And over 36% of its population is younger than 25, an age group it's already targeting in Asia.

With Nedbank's expertise in the frontier markets of Africa and its partnerships with other banks there, HSBC should find it easier to expand there as it wants to.

It won't be easy though. Foreign banks have a mixed record in South Africa. While ICBC's into Standard Bank has paid off, Barclays Bank ADR's (NYSE: BCS) 60% stake in Absa Group ADR (PINK: AGRPY) has not.

HSBC understands the negative possibilities. But it sees South Africa as a necessity if it wants to continue its Asian success.

And if it succeeds with Nedbank, it should end up being an African success story over the long-term.

Good investing,

Tony D'Altorio

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