Industrial and Commercial Bank of
China’s acquisition of a 20 percent stake in Standard Bank was one
of the most significant banking deals in 2007. COO Peter
Wharton-Hood tells William Cain that while the
main focus of the partnership remains on corporate banking, retail
banking benefits will accrue in due course.

Standard BankStandard Bank COO Peter Wharton-Hood believes the bank’s
partnership with China’s ICBC will result in retail banking
benefits over the longer term.

ICBC, China’s largest bank, paid ZAR36.7 billion ($5.6 billion)
for a 20 percent stake in the South African lender in October 2007
in the biggest overseas transaction by a Chinese company. While the
cooperation deal is structured to promote synergies between the two
businesses primarily in the corporate and investment banking
sectors, Wharton-Hood suggested the banks’ retail banking
franchises may benefit too.

Wharton-Hood, the bank’s former retail banking head, told
RBI: “We have got to build a relationship and once the
success in the corporate and investment banking comes, we can start
to expand the cooperation into retail banking opportunities. Retail
banking benefits will follow in the longer term: it extends its
reach into the insurance market at some stage, so there is lots of
excitement but we just have to go at this one step at a time.”

ICBC, with 16,582 branches in China, 23,420 ATMs and $1 trillion
in assets, is now beginning to grow its overseas portfolio. Its
focus on Africa will inevitably be strong because of Chinese
trading relations with the continent. And it may have found an
ideal partner in Standard Bank, the largest South African bank by
assets and deposits.

Wharton-Hood says the bank is “the only pan-African bank of
consequence with a South African home base”, although Absa, through
its parent Barclays, also has a solid presence. Standard has 746
branches in South Africa and around 240 across the rest of the
continent. The deal with ICBC looks, in the words of one senior
banker, to have made Standard Bank “an even more formidable
competitor” in the African market.

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Nigeria, Kenya and Argentina too

Standard, as well as getting to grips with its new Chinese
partner, is also focusing on bedding down acquisitions in Nigeria,
Kenya and Argentina.

The bank bought control of Nigeria’s IBTC Chartered in August
2007 and merged it with its Stanbic Bank subsidiary in the country
to form Stanbic IBTC bank. The merged entity, with 61 branches, was
launched in March this year with a capital base of over NGN60
billion ($509 million).

Although principally a corporate and investment bank, Standard
plans to roll out a full retail banking product offering in the
country over the next three years.

The bank considers Nigeria a key market because of its size,
population and the potential of its banking sector. But there are
concerns from analysts that the economy is showing signs of
overheating, particularly following vast increases in the price of
oil, an expanding middle class and large increases in corporate

The bank is also waiting for the resolution of a series of legal
hearings to complete a deal to merge its Stanbic banking subsidiary
in Kenya with CFC, which would become Kenya’s fourth-largest

In Argentina, Standard Bank acquired most of Bank of America’s
assets in BankBoston at the end of 2006.

Wharton-Hood says: “From a retail point of view, Nigeria and
Kenya offer us significant upside. We are in the process of growing
and developing our Argentinian business, which is well on

“That is the extent to which we have got the blinkers on. It is
not about a whole host of new countries, it is about management
finishing what it started – that is how we see the franchise.”

An increasingly tough domestic market

Growth in markets beyond the domestic sphere is becoming
increasingly important for the major South African banks now that
the economy looks threatened. Bankers in South Africa have been
warning for some time that an increasingly tough economic climate
was putting customers under severe strain. In RBI 591,
Louis von Zeuner, head of retail banking at Absa, one of Standard
Bank’s key rivals, questioned how much more the consumer could take
after a series of interest rate hikes.

Clearly, the industry is bracing itself for tough times ahead,
and Standard Bank recently became the first in South Africa to
report to the market it was unlikely to hit its earnings
predictions for 2008. It cuts its normalised headline earnings
figure estimate from CPIX – a measure of inflation – plus five
percentage points to a figure closer to CPIX itself, according to
Wharton-Hood. That translates to earnings growth of around 10
percent if the inflation figure remains stable.

Absa’s von Zeuner warned that debt serviceability rates were
reaching an unhealthy level and his warning appears to have come
true. Wharton-Hood himself says Standard Bank was experiencing an
increase in “arrears persistency”.

The situation in South Africa has been created by a dangerous
mix of soaring interest rates, which have increased by 300 basis
points in the last 18 months, rising fuel and transport costs,
recurring power outages and the increasing price of food.

Wharton-Hood says it meant “the outlook was strained”. The
capacity of banks to deliver shareholder returns would be
determined by the ability of banks to maintain profitable customers
and keep up a good level of customer service, he says. After seven
years of strong growth, the banking industry in South Africa will
now have to show some resolve.

He says: “You have to work out what leverage you can pull. It is
largely a matter of managing capacity for reduced volumes and the
prosperity measures without franchise damage, which can also be a
key differentiator. Cost controls are receiving a disproportionate
amount of attention but you have to be careful that you are not too
short term about the way you review cost-control measures and make
sure you strike the right balance.”

M-banking improvements

South Africa has been a hotbed of innovation in the retail
banking sector, particularly regarding distribution. Programmes
range from the functional – driving trucks into rural towns to
extend banking services – to more hi-tech initiatives in the form
of mobile banking and internet schemes.

South Africa – market share of depositsStandard Bank has made steady progress in internet
banking; it has around 750,000 customers signed up to the service
so far, with subscriptions increasing 23 percent in 2007. But one
of its most interesting programmes is its mobile banking offering,
which currently is running in second place behind rival FirstRand’s

It is a pet project of Wharton-Hood, who says he uses the scheme
“but maybe just because I want to prop up the customer numbers”.
The bank has a 50-50 joint venture with telecoms business MTN, the
largest cellular provider in Africa. The service has around 300,000

Uptake, though, has been relatively slow in the early phases of
the programme, and improvements in the service are planned.
Wharton-Hood says there is a perception problem with mobile
banking, because people have felt it is less trustworthy than
internet banking.

It is possible the prevalence of ATMs and easy availability of
cash means the service is not as popular as it might be. People who
are interested in using the service tend to be heavy users of
internet banking, and tend to prefer to do banking on their home
computer rather than their phone.

Wharton-Hood says: “Our success in the ATM world has become our
Achilles heel in the mobile world. We have got a competitor in the
form of FirstRand which has been more successful than we have.

“We are busy unpacking the challenge and shortfall to work out
how we can make it better.”

Improvements to Standard Bank’s m-banking service will include
improving the human- to-machine interface by making it more
attractive and easier to use.

Wharton-Hood adds: “We can work on it; it will happen. The
detractors were calling it the downfall of internet banking in
2001, and they were wrong. I think once we get past the early
adopter phase I am sure it will take off quite dramatically, but
not yet.”

Elastic and inelastic fees

One of the big issues in the South African retail banking market
is fees, particularly after a Capgemini survey last year revealed
South Africans pay more than double the international average for a
current account. Banks in the country reacted angrily to the
survey, claiming its methodology was flawed and that average costs
to customers were significantly lower.

There is also an ongoing banking investigation into banking fees
by the country’s competition commission. It is examining whether
charges including ATM fees, interchange and payment cards and
access to the national payment system thwart effective competition
for consumers. Standard Bank says it was positioned third out of
the big four on fees, although its overall fee structure was
complicated. Wharton-Hood says it had a different policy for
different market segments.

He says: “There is a very price-sensitive piece of the bank
where you have to be very careful, and there is a portion where you
can price it at the market-clearing price, which says you will
price it to the extent that the customer gains utility, which you
will find more in the high net worth, private banking and priority
banking segment.

“There is not an average approach to these prices and fees,
there is a segment approach to it.”


Liberty Holdings move

Standard Bank has announced its intention to take full control
of Liberty Holdings, the insurance and wealth management business
in which it currently has a 60 percent stake.

The bank has made an offer to minority shareholders which, if
accepted by all, would cost around ZAR4.4 billion ($568 million) in
cash, funded by capital from the ICBC deal. Standard Bank clearly
takes the asset seriously, and said it will be increasingly
important as it develops its business outside of South Africa.

Wharton-Hood said: “The level of cooperation between Liberty and
Standard Bank encapsulated in our bancassurance agreement can
certainly deliver some more upside to us as we continue our
development plans beyond just South Africa, and we felt it was
appropriate to have more than a 30 percent economic interest in the
joint development of Liberty’s prospects.

“This deal gets us through 50 percent economic interest, it
solidifies our intention to go and develop the market and go and
develop Liberty.”

Liberty contributed around 7 percent to headline earnings in
2007, and would constitute over 11 percent if it takes full
control. The business has started to diversify its product mix, and
has expanded into a broad-based wealth management company. It has
also been looking to expand its operations abroad, and there are
undoubtedly bancassurance opportunities in some of the other
markets Standard Bank operates in.

Standard Bank – earnings by business unit