South African banks borrowing more in foreign currency

Foreign Borrowing SA BANKS

The picture above shows how SA banks have increasingly relied on foreign currency and foreign sector funding in the last year. (The increase is significantly larger in Rand terms due to the recent rand depreciation). I don’t know the reason for the increase, but research from the US suggests that such borrowing is a consequence of banks extending new loans at a faster rate than their deposits increase. In such circumstances the bank must borrow from domestic money markets, or from international markets to fund their lending (ie, they become increasingly market based). This is a sign that SA banks are eager to lend, whilst the supply of savings in South Africa is lacking.

About half of the rapid increase was retraced in the second quarter of 2013. The question now is whether this reversal will continue, or will these liabilities return to levels seen in the first quarter? If the foreign liabilities remain high, it suggests an increased demand for credit which is generally considered to be a bullish sign for the SA economy. That said, rapid increases in foreign liabilities have been a leading indicator of past financial crises in emerging markets. So, no matter how you interpret it, this will be an important indicator to follow in the coming months!

Cross-Border Banking: ABSA now Barclays Africa Group Limited

It is an important event for anyone following cross border banking flows in Africa (for all I know, I am the only one), when Barclays proposes to increase its stake in one of the largest banks on the continent to 62.3% in return for most of its other current African operations (where its stake will drop from 100% to 62.3% through its ABSA stake). With this increased ownership they will also change the name from ABSA Group Limited to Barclays Africa Group Limited. In the transaction, ABSA will take full ownership of what is now Barclays Africa Limited and thus take over Barclays’ current operations in n Botswana, Ghana, Kenya, Mauritius, Seychelles, Tanzania, Uganda and Zambia and the Barclays Africa Regional Office in South Africa. As such, the transaction does not immediately imply a predictable change in capital flows between London and Africa. However, the strategic implications of the deal indicate a clear vision for future growth of Barclays’ African portfolio.

The strategic reasoning behind the transaction is to strengthen Barclays’ and Absa’s goal of becoming the “Go-To” bank in Africa as part of their “One Bank in Africa” plan. The ABSA announcement states

Investors will gain exposure to several attractive countries, where high forecast GDP growth and under-penetrated credit, capital and insurance markets should produce strong growth in their banking-related revenue pools. The combined operations will also be able to leverage an integrated operating model across the continent, while enhancing collaboration on product innovation.

A question of interest in this regard is to what extent Barclays Africa Group intend fund its operations through customer deposits in the host country, or through cross-border lending from South Africa or the UK. This of course depends on the rate of growth of deposits and credit in the respective African countries, which will be the ultimate determinants of the volume and direction of future cross-border bank flows.

The frontier academic models of cross-border bank flows (largely developed by Prof. Shin at Princeton University), would suggest that such flows are sensitive to monetary policy and money market rates in the UK, in addition to risk appetite (or the price of risk). Flows into African countries should have the expected appreciating pressure on their currencies, which makes the current loan portfolio less risky (in Sterling terms) and may induce further flows as the marginal loans become profitable. Thus, increased foreign bank presence (through subsidiaries or directly) in Africa should therefore see the African currencies strengthen in response to cheap money in Europe and the US and / or low price of risk.

Read more about the proposed transaction here:

MoneyWeb: Barclays and ABSA to combine most African operations

Bloomberg: Barclays agrees $2.1 billion ABSA deal

The full announcement from ABSA is available here.