HSBC mulls South African exit as European banks pull back

HSBC is reported to be exploring the sale of its business in South Africa as the global investment bank continues to reduce its exposure to Africa in order to focus on its core target markets in Asia.

It is not yet clear which bank will purchase HSBC’s business and securities unit in South Africa, but it has been widely reported that several financial institutions from China and the United Arab Emirates (UAE) are interested in an acquisition. Last week, it was reported that FirstRand, the biggest bank in Africa by market capitalisation, is also interested in agreeing a deal for HSBC’s South Africa business.

Part of the reason for the move is likely to be that HSBC has been committed for some time to an Asian “pivot.” The London-based lender has deep historical roots in Asia and its new CEO, Georges Elhedery, has pledged to simplify the bank’s global structure in a bid to cut costs and maintain a sharp focus on target markets in the Far East.

To this end, in July, HSBC agreed a deal with Absa for the South African bank to acquire HSBC’s domestic wealth management, and personal and corporate banking businesses in Mauritius. HSBC has also been selling non-African international businesses. Last year, the bank agreed to sell its Canadian business to the Royal Bank of Canada for $9.8bn and in 2021, HSBC exited the US retail banking market. By contrast, in August this year, HSBC agreed to buy Citigroup’s retail wealth management business in mainland China.

M’khuzo Mwachande, an investment banker in Cape Town, tells African Business that “Asia contributes nearly 70% of HSBC’s group earnings, making it imperative for the board to prioritise this region.”

However, he also adds that “HSBC’s decision to withdraw from South Africa raises questions about whether this move is specific to HSBC or indicative of broader trends within the UK banking sector’s approach to Africa.”

European lenders retreat

While HSBC’s decision to reduce its exposure to Africa is in line with its Asia-focused vision, the sale comes at a time when other British and European banks are also selling off their African businesses.

In August last year, London-based Barclays announced it had sold its remaining 7.4% stake in Absa, marking the end of almost a century’s presence on the continent. In 2021, British financial conglomerate Atlas Mara exited the continent after noting that “currency volatility and drying up of liquidity in African markets [had] adversely impacted its operations.”

French banks, including Société Générale and BNP Paribas, have taken similar steps to exit the African market in recent years.

This is partly because of the increasingly high regulatory burden that British and European banks are facing at home, which is making it increasingly difficult for the banks to invest in higher-risk markets such as Africa. Mwachande says that “HSBC’s exit from South Africa can be attributed to internal strategic decisions, but it is also influenced by increased regulatory scrutiny.”

Indeed, international regulators are increasingly forcing financial institutions to strengthen their capital reserves, reducing the amount of money they have to invest in emerging markets. Following the global financial crash of 2008, the Bank for International Settlements started working on “Basel III” reforms that are intended to improve regulation, supervision, and risk management in global banking.

Under Basel III regulations, banks will need to bolster their capital buffers to ensure that they are better positioned to handle any possible shocks or crises in the future. 2.5% of their total risk-weighted assets and a further 4.5% of liquid bank holdings will need to be held as capital reserves.

“The UK’s Financial Conduct Authority has also heightened focus on prudential banking and anti-money laundering measures,” Mwachande says. “To streamline operations, improve regulatory compliance, and focus on core markets in Europe, Asia, and the US, banks like HSBC are withdrawing from peripheral regions such as Africa.”

While the regulators see this as a necessary move to protect the global banking sector from a 2008-style financial crash, such developments nonetheless raise questions about whether British and European banks are missing out on opportunities in Africa because of regulatory obligations and other requirements.

Mwachande notes that in the case of South Africa, “despite challenging trading conditions, the country’s banking is showing strong fundamentals. Headline growth earnings increased by 13.8% to a record 113bn rand ($6.5bn) in 2023. Return on equity in the 2023 financial year was 17.6%, with a net interest margin up by 6.51% in FY23.”

Further positive short-term trends in the African banking sector also include the fact that the US Federal Reserve has just cut interest rates by 50 basis points and is expected to cut rates by a further 25 basis points by the end of the year. The European Central Bank has similarly embarked on a cycle of monetary easing. These trends should encourage a greater risk appetite amongst global traders and investors, leading to increased capital flows into Africa and potentially high levels of debt issuance.

Looking longer-term, Mwachande also points out that “there are significant opportunities for global banks in sustainable financing and addressing the large infrastructure deficit, which requires about $170bn and grows annually by $50bn. Africa’s population is expected to reach 2.5bn by 2050, presenting further opportunities in the banking sector.”

JP Morgan Chase bucks the trend

In October, Jamie Dimon, the CEO of America’s largest bank JPMorgan Chase, is due to make his first visit to Africa in around seven years. Dimon is expected to visit Kenya, Nigeria, South Africa, and potentially Côte d’Ivoire. with officials at the bank describing Africa as an “amazing growth opportunity.”

JPMorgan has also been building its stake in Capitec, the largest retail bank in South Africa, and is now one of the lender’s biggest single shareholders.

Mwachande tells African Business that “we’ve seen the likes of JPMorgan take on additional stakes in Capitec, for example, and it now owns 8.37% of the group. Capitec has seen growth in its headline reporting and now has plans to expand internationally. This shows that with local knowhow, there is a proposition for financial services in the region.”

“It is not all darkness – there is light at the end of the tunnel – but African stakeholders need to collectively turn on the light through stable regulation and policy decisions,” he adds. “Risks remain, of course, but there remains a strong investment case for Africa.”