Two large global banks dump South Africa

Banking giants BNP Paribas and HSBC have exited their South African operations as the country struggles to regain its attractiveness as an investment destination. 

Europe’s largest bank, BNP Paribas, was the first to pack its bags when it announced its exit on 8 May 2024 after receiving regulatory approval in April 2024. 

London-based HSBC is the latest to confirm the disposal of its South African operations, concluding deals with Absa and FirstRand on 26 September. 

These exits come at a time of renewed optimism regarding the future of the South African economy, with some thinking it might break out of a decade of minimal economic growth. 

However, it will take a lot more than optimism to repair South Africa’s image as an investment destination for international companies. 

So far this year, seven international companies have left South Africa completely or scaled back their local operations, including Shell, Rolex, AngloGold Ashanti, TotalEnergies, and BP. 

The exits of BNP Paribas and HSBC are set to have a significant impact on the local economy as the presence of international banks is vital for investor confidence and as conduits for foreign capital to come into the country. 

“It is sad, it is really sad because Africa and South Africa need capital to grow. We do not have enough capital ourselves,” executive director and portfolio manager Kokkie Kooyman said following BNP Paribas’ exit. 

“To create jobs and economic growth, we need offshore capital to come into the country via our stock market or by international banks lending to companies in South Africa. It is a net negative when international banks leave.” 

While local banks can fill the gap left by international banks, they can only do so temporarily until the need for capital outstrips the amount they can supply. 

Kooyman also said the increased reliance on local banks can result in a higher risk of financial instability as they all become exposed to a common risk – sovereign debt. 

This is because the government’s issuance of new debt on such a large scale over the past decade has crowded out private demand for borrowing. As international banks leave, local banks have to fill this gap. 

Why international banks leave South Africa

Both BNP Paribas and HSBC said their decision to leave South Africa was based on a review of their global operations and a need to dispose of non-core assets. 

Their exits come as international banks scale back their operations in Africa more broadly, with Barclays, Standard Chartered, and Societe General cutting their footprints on the continent. 

HSBC said that leaving South Africa is part of its strategy to shed businesses around the world, boost investment in Asia, and focus on fast-growing economies. 

The bank has also recently sold off its Canadian operations to a local player as part of this strategy. 

While BNP is not pivoting to Asia, it has also sold businesses in other parts of the world, such as the US, to focus on its home market in Europe. 

Kooyman explained that this is all part of a global trend that began after the Great Financial Crisis (GFC) in 2007 to 2009, with banks cutting costs and boosting capital reserves. 

In response to the GFC, banking regulators increased the capital requirements for banks, forcing them to keep more cash on hand as a buffer against external shocks. 

Furthermore, many forced banks to keep additional cash on hand if they operated in global markets and not just in their home jurisdictions to minimise the potential for contagion spreading in the event of a crisis. 

As a result, global banks had to hold more cash and be selective about the markets in which they operate, as a greater return on investment was needed to justify expansion. 

Kooyman also said it is difficult, in general, for a bank to operate in multiple jurisdictions as the compliance requirements tend to compound. 

Thus, banks began selling their global operations to local players and focused on their home markets. 

“And so, banks began to ask themselves, ‘Can we use this capital that is currently deployed in South Africa better and get a higher return on investment in our home market?’,” Kooyman said. 

Unfortunately, the answer for both BNP Paribas and HSBC was yes as it greatly simplified their businesses and South Africa’s stagnant economy limited any real return on capital deployed in the country. 

“I think we have shot ourselves in the foot. I think we are a lot less attractive than we were five, ten, or fifteen years ago as our growth flatlined and government debt grew.”

Kooyman also flagged the consistent anti-capitalist sentiment from some members of the ANC and other political parties as a hurdle to investment in the country as foreign investors need certainty before committing capital across borders. 

“So when they sat in Paris, in the case of BNP,  they said, “What do we do? How much is South Africa going to grow? What can we do to generate better returns? Let’s rather focus on where we have more certainty and better opportunities.’”