GlobalCapital: Where are the biggest opportunities for growth for Africa and thus, Standard Bank?
Fihla: We operate in 20 African countries. Four of those are still small operations and 16 of those are good quality markets where our businesses are performing well. When you look at growth from these markets we see opportunities in West Africa driven largely by oil and the modernisation of the agricultural sector.
In Uganda, the construction of the oil pipeline that will connect its oilfields to the export markets via Tanzania has already begun, and we think that will act as a massive stimulus for infrastructural development in the forms of roads and housing, as well as a whole range of other industries around it. In Uganda last year, they were estimating that at the peak of the construction period there would be about 6,000 trucks on the road. You can imagine how that can act as a catalyst to stimulate local businesses, as well as to the construction industry overall.
The second area of massive growth is Mozambique and its gas opportunities. With oil prices having improved, gas projects have become viable once again, and we are seeing final investment decisions being taken. We are expecting investments of more than $48bn for the first two gas areas in the development of infrastructure both offshore and onshore — roads, accommodation and plants that are required to convert gas into liquid form, and the expansion of the harbours. To give you a sense of scale, the prediction is that when it reaches about 70% of its potential, it will quadruple the GDP of Mozambique. It’s transformational for Mozambique, and will also be a stimulus for neighbouring countries, as a lot of the companies benefitting are in South Africa and Zimbabwe.
The third area of potential growth is in the restructuring of the energy sector in Nigeria. Ten years ago Nigeria’s oil production was dominated by local players with a lot of the oil majors having retreated from that market. Conditions were not conducive for multinationals. We are seeing a reversal of that because of recognition by government that they need much more stable companies that have upstream operations and that can weather the worst of the oil prices. They’ve restructured the sector by introducing the oil majors and partnering them with the Nigerian Oil Company. There has been good progress, and we see that as a massive catalyst for the stimulation of oil production. Again, that will trickle down into infrastructure, as well as to the overall development of the Nigerian economy.
The fourth driver of growth is more general: the political stability that we are starting to see in some of the major economies. South Africa is the most prominent where under the previous government there was regulatory uncertainty. There was a lot of noise around land expropriation without compensation, mismanagement of state-owned entities and consequently the leakage of a massive amount of money from state-owned entities.
With President [Cyril] Ramaphosa now in office concrete steps are being taken to strengthen the governance of these state-owned entities and the tightening of financial management. And that gives us hope that longer term these entities will return to profitability and return to spending and therefore, will be able to assist in supporting those sectors of the economy that are driving growth.
GlobalCapital: So investment is needed, but given the US rate rises and increases in African spreads, where is that financing going to come from?
Fihla: Yes, we’ve seen the widening of credit spreads and the massive depreciation of the rand. But the fundamental issues driving that have nothing to do with a deteriorating environment within the continent or within South Africa. It’s a consequence of what is happening everywhere else. The tightening of monetary policy in the US, fears of an escalating trade war between the US and China, and the consequent flight to safety from investors. We do not believe that it will go on for a very long period of time. Sanity will prevail, we hope.
There’ll be a recalibration of risk appetite with certain funds scaling down and others picking up that slack. The risk profile of sub-Saharan Africa will start to fall outside of investment criteria for some, but other funds or portfolios will have a slightly higher risk appetite. That reallocation of money between portfolios will get Africa over this transitional period.
We also don’t think Asia’s investment appetite is going to change. It’s not just China — we’re starting to see increased appetite from Japan as well. If anything, we suspect that the heightened trade tension with the US is likely to increase that risk appetite.
We co-funded the Ugandan oil pipeline with ICBC. In Mozambique, we are co-funders to the Eni consortium with ICBC — for every $1 that we put into the project ICBC is able to put in $10. The size of their balance sheet and the deal ticket sizes are substantially larger than ours. That’s the case for ICBC and a few other players in Asia. We need to ensure that we tap into that and bring them much earlier into the conversation so that people have a sense of what these assets are all about, and they can front-run their own internal approval processes, so that by the time of funding they are ready to participate.
Because we’ve been working with ICBC for the last 10 years or so, they have wrapped their minds around African risk. They know exactly what type of assets they’re looking for, and they’ve been working with us in preparing many of these projects. For them, it’s very easy to make those decisions. I suspect that the escalation of the trade war is going to make donor states even more attractive because ultimately it’s going to increase commodity prices.
GlobalCapital: ICBC owns 20% of Standard Bank. How does that joint venture work?
Fihla: We treat them like any other shareholder. But we’ve got a cooperation agreement with ICBC. We look at areas where we can support Chinese companies that are doing business in Africa and, likewise, ICBC looks at African companies that are looking to access capital from Chinese investors. We would jointly market to those clients with ICBC, and the examples I’ve given are a consequence of that partnership. There’s a whole range of other projects we’re jointly funding or jointly marketing to clients.
GlobalCapital: Is the increased interest from other Asian banks putting downwards pressure on loan margins in Africa?
Fihla: Yes. The margin compression at the moment has been largely driven by delays in the finalisation of investment decisions though.
Although recent positive developments give us hope for a huge economic turnaround, we haven’t as yet seen a flood of deals being activated to a point where there’s an actual spike in the demand for capital. So we are competing for still very limited deals, and that’s what is driving margin compression more than anything else.
We don’t know how long that will last, but we have to respond appropriately and price to market, which we are doing. In addition, we’re also proactively looking at those complex projects that are not easy to execute and partnering in plans to help them prepare those projects.
For example, the Mozambican gas development that I was referring to — we started working on that about eight years ago, but it was only three years ago that we started to see a bigger movement towards investment decisions. Now with higher oil prices, those projects have become viable and we’re seeing an acceleration. But being involved early has put us in a very competitive position because we built a relationship with the participants when the operations for this were very small. We were able to provide banking services to them then and now that they’re growing, capital markets activity is now with us.
GlobalCapital: What do the difficulties that Africa is currently experiencing in the financial markets do to your own loan book and balance sheet? Are you feeling the pressure in terms of the risk that you’re bearing with regards to Africa?
Fihla: We’ve got a diverse business in terms of products. We’ve got a very strong transactional banking business, old style corporate banking business, a large investment banking business which houses both our term lending as well as our advisory fee-earning businesses. And we’ve also got a very strong global market business where our derivatives, interest rate, FX, as well as the other structured complex structures sit. It is the portfolio of those businesses that provide us with the natural hedge. If you combine that with a strong geographic portfolio then it is extremely powerful in helping us mitigate some of the risks.
Last year, for example, when there were dollar shortages in Angola and Nigeria, our local market business struggled because we needed the volume. We need clients to transact for us to be able to have a buoyant FX business and to be able to hedge at the back of that. So that business has struggled.
Our transactional banking business meanwhile did exceptionally well. They had massive deposit balances which we were able then to leverage to effectively grow our assets but, more importantly, take advantage of opportunities that were presented by higher yielding government bills. And so, as one business was doing exceptionally well because of market dislocation the other was struggling.
Now we’re starting to see a shift to our global markets business doing well while our transactional banking business is starting to struggle because suddenly deposit balances are coming down as companies are starting to plan their capex .
Of course, we hope that at some point the stars will align perfectly where the economies will be growing and the transactional banking business will be growing at the same time as the global market and investment banking business, but that isn’t here just yet.
GlobalCapital: In Europe it is very hard for transactional banking to make money because of regulations. In the US, they charge a lot so they make money on transactional banking, but it is not very kind to customers. So where does Standard Bank’s model fit?
Fihla: Our transactional banking business is profitable, but that’s not because we charge exorbitant fees to our customers. We get cheap liabilities from clients from the transactional banking business, and we can then use those liabilities to build the asset book. If we did not have that access we’d have to raise funds through the wholesale market and the margins there tend to be higher. That’s the first advantage of a big transactional banking business.
The second is that when we have a transactional banking relationship with the client, it gives us a reason to see the client on an ongoing basis and when they decide to do something else we are the first to know. Chances are they’ll be asking us to execute on that, as the relationship is already there.
Thirdly, we are able to price competitively when it comes to additional business because we look at total client profitability.
GlobalCapital: Have Eskom’s very public problems had any effect in terms of the attracting of loan financing to South Africa?
Fihla: With their increasing governance woes, Eskom was struggling to tap into bank funding, even though Eskom is still a very large business that generates a decent profit. Banks are reluctant to lend to an entity where we don’t know that our funding will be applied to appropriate uses. Our support was very guarded.
More broadly, it has dented the appetite of banks for other South African names too. Nearly all banks have constrained their appetite to state-owned entities as a consequence of some of the governance noise, and in some instances blatant corruption. A few state-owned entities continue to be well run, but unfortunately, those are the smaller, insignificant ones. It’s the bigger ones that really require funding that have tended to be characterised by mismanagement.
We are starting to see steps being taken by the government to correct that, with board changes and investigation of allegations. We’re also seeing a completely different attitude by the government to engaging with funders — both banks and bondholders — explaining what progress is being made and being more transparent about the financial position of these entities.
GlobalCapital: And with these changes having been made, has the money tap turned back on yet for South Africa?
Fihla: It’s more of a trickle. We back entities because we believe that they are financially viable, and where they’re not financially viable we back them because we believe that there are a strong plan and a strong management that can execute on a plan. We haven’t seen enough of that yet in some of these entities — we still need to get confident that they can execute on the plans that they’ve put in place.
GlobalCapital: South Africa’s syndicated loan market is considered to be fairly well serviced by domestic banks. Do you see that continuing or will there be greater reliance on international lending as growth returns?
Fihla: The amount of capital that is required cannot be fully met by domestic banks, especially given the infrastructure backlog that South Africa has, and the backlog in investment.
The last couple of years has actually seen government capital expenditure surpassing private sector capital investment, and that trend needs to reverse. So there’s a massive deficit of private sector investment and that cannot be wholly met by the domestic banks — we’ll have to tap into other pools of capital outside of South Africa and the continent.
That requires government, private companies, state-owned entities and everyone to understand that we need to attend to issues that are critical to investors, otherwise we’ll never be able to tap into these pools of capital.
It is the same for elsewhere in Africa too. For the development of the gas areas in Mozambique for example, that cannot be met in Mozambique, or within Africa, by any stretch of the imagination. That money must come from abroad. If you throw in Uganda, Kenya, Nigeria and you add South Africa’s own capital requirements, the numbers are huge. Africa in general and sub-Saharan Africa, in particular, must position itself such that it is able to tap into other pools of capital outside of the continent.
GlobalCapital: How concerned are you about defaults on debt that is already out there?
Fihla: We set risk appetite within a specific band and at the moment we are comfortable at the bottom end of our band. As we see opportunities materialising we’re likely to increase our funding to projects and companies that we consider to be viable.
We have come through probably one of the worst economic performance periods in South Africa and possibly in Sub-Saharan Africa, yet our credit loss ratios still remain well within range. In part, this is because of the rigour that we employ when accessing or when making lending decisions.
Secondly, it’s because we support clients and we lend to projects in markets where we have a presence. When you have a team on the ground you’re able to pick up things that you otherwise wouldn’t. We are able to get early indications of clients that are underperforming or companies that are struggling, and we can proactively engage with them, and in some instances have forced management to take corrective action.
We did an assessment of our losses over the last seven years and there was a very strong correlation between our losses and markets where we didn’t have a presence. To us, it’s pretty obvious why that was the case. We didn’t know the client well because we’re not there. We are unable to pick up signs of deterioration because we’re not there. By the time we started to interact it was too late, other lenders have come in, restructured their debt and had taken the assets to effectively mitigate their risk. So then we were left with an exposure that couldn’t be secured because everyone else had already taken whatever that was available to secure their positions.
This is why we’re focusing almost exclusively now on supporting companies or clients in our present countries. If we support a client in a non-present country it must be a client that we know very well already.
GlobalCapital: We gather ABSA is setting up a DCM team in London. Are you worried about them becoming a stiff competitor?
Fihla: No. The separation from Barclays is going to occupy them for quite a while. Their decision-making processes, management, IT, governance and so on was so intertwined Barclays that to separate the two is a mammoth task. They’ll be internally focused for quite a while. They are potentially a good business that can be a big competitor, and we continue to look out for them, but immediately there is nothing to worry about.
We’re an old bank, so we are much more worried about whether we are modernising ourselves fast enough so that we can become more competitive and put ourselves in a position where we can add scale without a similar growth in our cost numbers.
And we also worry about whether we are continuing to be relevant to our clients. We constantly ask whether we are doing certain things because of habit or because it adds value. Traditionally banks have not been good at that. We’re trying to be more solutions driven, but it means changing the entire institution to be orientated that way. But we don’t want to wake up one day and realise that we’ve missed the boat completely and there’s a new player reshaping the landscape.
GlobalCapital: South Africa has been a very early proponent of green bonds. Is it a focus for Standard Bank and is it something you are pushing for the rest of Africa?
Fihla: Over time it will be appropriate for the rest of the continent, but capital markets for the continent are in their infancies. South Africa will always front-run these initiatives. If one looks at just the development of the electricity supply, South Africa has electrification levels that are above 90%. The rest of the continent has electrification levels that are below 50%, so it’s easy then for South Africa to start placing more emphasis on clean energy, to be far more selective in what new investments they fund.
You can’t say the same for a country that has half the population still reliant on candles, paraffin and wood. South Africa, from that point of view, is seen as a developed country as opposed to a developing country, which would largely be the rest of the continent.
GlobalCapital: There is an increasing focus within international banks on employment equality. Standard Bank is held in high regard in this respect, with its all-black executive team and focus on promoting women. What do you think other banks should be doing differently to make their ambitions in this regard a reality?
Fihla: I’d attribute the progress that the bank has made to leaders like Jaco Marais, our former chief executive. He was truly committed to employment equality and put steps in place to ensure that it actually happens — investing in leaders across the spectrum and ensuring that they’re given responsibilities and exposure to complex parts of the business so that people can then hone their skills and grow within the business. Many organisations talk about employment equality, but they don’t implement tangible plans to make that happen.
If you parachute someone in and put them in charge of a complex business without having exposed them in a protected environment, you’re setting them up for failure and it is unlikely that you will retain them. So that’s one thing that Standard Bank did differently.
The current leadership team has all been in the bank for between 12 to 20 years, with the exception of the CEO for South African business who is fairly new, but he’s also a very seasoned leader, previously head of the finance ministry.
The success in diversity for Standard Bank is the result of that early investment in talented individuals — giving them responsibility and allowed those people to grow rapidly, stretching them at the first available opportunity in an environment that is slightly protected so people can fail. But that failure can be appropriately managed because they’ve got the infrastructure around them. That really has been the trick.
GlobalCapital: But then are you saying that if we start now, we’ll have to wait 12 to 20 years to get a female CEO in London? That feels like a long time.
Fihla: No, not at all. You enact this long-term plan because that allows you to create that wealth within the organisation. But it doesn’t mean that there aren’t good individuals already available if an organisation looks hard enough.
For example, in areas where we’ve got serious challenges with regard to gender parity when there’s a senior executive appointment to be made, I want people to come and explain why they can’t find an appropriate woman to run that function. When you force people to do that suddenly they take longer to look and the places where they look changes. They start to stretch their networks wider. When you force people to do that, they can bring unbelievable talent to the fore. It’s amazing how, by just getting people to think and act differently, what can come out of the woodwork.
But parallel to that, I want to ensure that the path deep into the organisation is developed so that next time around when we have a vacancy and I put out that request, it’s fairly obvious who it should be.