South Africa regulators could play spoiler for HSBC

Stringent controls on currency outflows and recent wary comments from an official indicate HSBC's $8 billion bid to buy 70% of South Africa's Nedbank could yet be derailed.

HSBC is in exclusive talks to buy a controlling stake in Nedbank, South Africa's fourth-largest bank, from insurer Old Mutual, to give the world's biggest bank outside China a major foothold in Africa.

But South African regulators and politicians have scuppered big cross-border deals in the past to the surprise of outsiders.

South Africa's banking regulator has appeared open to the deal, but central bank chief Gill Marcus said on Thursday foreign ownership of local banks brought risks.

"It does create a situation of complexity and that needs careful consideration," she warned.

Blocking the deal would be a negative for both Nedbank, which could benefit from ownership and investment from a strong international bank, and the rand currency, analysts reckon.

"It's the first official comment that suggests they might not approve the deal, because [bank regulator] Errol Kruger's comments were very positive," said John Cairns, currency strategist at Rand Merchant Bank.

"This is the first sign that maybe they are backtracking a bit."

The worry for South Africa is that three of South Africa's top four banks have a substantial foreign owner. Standard Bank is 20% by Industrial and Commercial Bank of China, while Absa is majority owned by Britain's Barclays.

Only FirstRand would remain under total domestic control.

Yet most industry insiders view HSBC as a stronger foreign owner for Nedbank than Old Mutual, which has its roots in South Africa but is now based in London.

"It is swapping an ownership stake and you are actually swapping it from a life insurance company that had capital difficulties, with a very well capitalised international bank," said Johann Scholtz, an analyst at Afrifocus Securities, saying Marcus's comments were surprising.

South Africa's Reserve Bank has strict controls on the outflow of currency to prevent capital flight.

Old Mutual said it would apply for permission to the central bank to take out £1.5 million ($2.32 million) of the proceeds to pay down debt. The rest of the money would remain in South Africa.

"A deal would definitely be very positive for the rand," said RMB's Cairns, who estimates the deal would generate a net inflow of around $5 billion.

It wouldn't be the first time that South Africa has blocked a big cross-border deal.

Almost a year ago the government scuppered a $24 billion planned tie-up between India's Bharti Airtel and MTN Group.

HSBC's period of exclusive talks was expected to last 6 to 8 weeks, banking sources have said. After agreeing on a price, it will need regulatory approval, which may not come this year.

HSBC will probably have to agree to a series of requirements, as Barclays did when it bought a majority stake of Absa in 2005, Afrifocus' Scholtz said.

Regulators will likely demand that the bank remain listed in Johannesburg, have a South African chief executive and largely South African board, and retain the Nedbank brand, he said.

HSBC has been careful to emphasise that it wants to be in South Africa for its own right, and not just as a stepping stone to the broader continent. Its chief executive had named South Africa as one of six countries with strong growth appeal.

As an international bank active in emerging markets, it is also no stranger to dealing with politics.

"That this is going to be complex, there's no doubt. We're talking about a bank here," said one veteran South African banker.

"I would think that Gill Marcus' comments are probably more along the lines that they need to hammer out a whole lot of conditions before this is finalised," the banker said.