[DEBATE] : ABSA in banking crisis shadow

[Berend Schuitema]

Banking shadow

THE global banking crisis, which has its roots in the subprime mortgage
market and has brought former financial services giants such as Lehman
Brothers, Merrill Lynch and Citigroup to their knees, may be felt more
acutely in SA than previously thought. 

While South African banks have certainly felt the effect of tight capital
markets — despite efforts by governments and central banks around the globe
to pump liquidity into the system — they have remained in a relatively
comfortable position due to their strong balance sheets, high capital
adequacy ratios and strict regulation. Their share prices have also held up
reasonably well in the face of the plummeting market capitalisations of
banks across the US and Europe. 

Now there is the prospect that Barclays, the once impressive international
bank that evoked huge excitement when it bought a majority stake in Absa
just four years ago, may be forced to resell that investment. 

As the second wave of the banking crisis hit world markets late last week,
speculation grew that the UK government may be forced to stand in and
nationalise more of that nation’s banks. And it has been suggested that
Barclays and Lloyds TSB should also be nationalised. This has drawn Absa’s
future into question.

If nationalised, Barclays could be forced to sell of some of its
investments, including the 59% stake it bought in Absa in 2005. Indeed, a
number of US and European banks have been selling the nonstrategic stakes
they own in other banks as they try to supplement their flagging capital
levels. 

However, it is unlikely that Barclays would be nationalised. Firstly, the UK
government is keen to promote an effective commercial banking sector and
owning all the large banks would not achieve this. S econdly, Barclays
remains profitable (partly due to Absa) and recently raised £7bn from
investors in the Middle East rather than participate in the government’s
£50bn bank bail-out programme. 

That is not to say Barclays may not sell its Absa stake on its own volition.
If it took that route, the treasury and Reserve Bank would ensure the
process was handled in an orderly fashion to prevent any large destruction
of value. Other banks, such as emerging market specialist Standard Chartered
— which was keen on Absa even before Barclays bought it — may still be
waiting in the wings. However, the government is likely to be loath to allow
another foreign partner to own such a significant stake in a South African
bank given the current instability in the global banking sector. If
anything, the banking and economic crisis has illustrated that it sometimes
pays to be as conservative as SA has been. 

Hopefully it doesn’t get to that though. Following the failure of the US
government’s Troubled Assets Relief Programme to stem the crisis so far, it
looks like Timothy Geithner, President Barack Obama’s nominee for treasury
secretary, could take the action that is needed to restore health to the US
and — as a result — the global financial system. 

One plan that has been mooted, and may materialise if Geithner takes the
reins, would be to remove illiquid assets of banks books to get them lending
again. Until that happens, the future of banks around the world will remain
under question.

http://www.businessday.co.za/articles/dailymailer.aspx?ID=BD4A923956