UAE lender moves one step closer to SA market

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JIMMY MOYAHA: First Abu Dhabi Bank [FAB], which is the largest bank in the United Arab Emirates, has confirmed with us that they are going to once again continue down their path to obtain a banking licence in South Africa and set up shop here.

We know that previous efforts by the FAB were halted when a court case was brought before one of South Africa’s courts, looking to protect against trademarks related to the banking space.

We’re going to look at this. We are going to look at how this could impact the South African banking landscape with our resident banking specialist, executive director and portfolio manager at Denker Capital, Kokkie Kooyman.

He joins me on the line now to see what we make of these developments. Oom Kokkie, lovely having you on our show, as always. Thanks so much for taking the time.

What was the initial conversation around the FAB’s inability to come to South Africa? What was the court case around?

KOKKIE KOOYMAN: Thanks for having me. This is indeed an interesting one.

The court case was basically that FNB or First National Bank felt that the first Abu Dhabi Bank trademark would be too close to or infringe on them.

But interesting in the court, case they [FNB] actually alleged that First Abu Dhabi Bank wasn’t serious about registering the trademark – which to me was strange – and rather alleged that the trademarks were too close together.

Regardless, the strategy worked and the toing and froing went on for nine years until the Supreme Court of Appeal basically ruled in Abu Dhabi Bank’s favour and against First National Bank.

Just by the way, a quick background. The First Abu Dhabi Bank is the result of a merger of two other banks – both almost the same names – in 2017, but its acronym, under which it trades and is known, is IFAB. Now, IFAB is quite close to FNB, and I think that would have been a better case for FirstRand to have used – that proximity.

The court ruled a couple of things. But one thing it did say as well is that because FAB is easy to refer to, and it operates in a lot of African countries – in fact, it operates in five continents and the African countries – basically Saudi Arabia, Kuwait, Oman and Iraq, as well as in UK and France. It is international, quite big, and its loan book is one-and-a-half times the size of FNB.

But in those countries it is known as FAB or as First Abu Dhabi Bank. So the court dismissed the appeal.

So yes, the next step will be for them now to apply for a banking licence and to start thinking about banking operations, which do take time.

You’re not going to get that that quickly, and you obviously have to propose directors, your top team, who have to be vetted by the South African Reserve Bank.

But in terms of competition, it’s interesting at this bank that 80% of its loan book is corporate and investment banking.

And only 20% is retail banking – what we would normally know as almost a Capitec bank with internet banking, mobile phone banking, home loans and obviously Shari’ah-based products.

So I would imagine that initially they would try to compete more in the corporate space, wanting to also do business with South African corporates or Middle East corporates who are doing businesses in both of those jurisdictions.

JIMMY MOYAHA: Oom Kokkie, can we look at what this development means for the South African financial services landscape? This is not a small bank. We’ve already established the size of this bank in its own territories, including its home territory.

The bank currently marshals a little over $406 billion – or around R6.6 trillion – in assets. Clearly this is going to be a serious competitor if we look at everything from capital adequacy to the size of loan book, as you alluded.

What does this do for the South African financial services landscape if we’re talking competitiveness, but also attractiveness?

KOKKIE KOOYMAN: Well, firstly in terms of attractiveness in how banks – in terms of return on capital – rank more or less with the US banks, their return on capital is 15-20%, depending on which bank.

That’s more or less where a lot of the US banks trade as well. The regional banks also have 18%, 19% return on capital.

Interestingly, the Brazilian banks and Mexican banks have much higher returns on capital, so it’s interesting that they [IFAB] come here.

But I think it’s also the African continent – because they are on the continent.

But our banks are very well regulated, thanks to the South African Reserve Bank and the bank supervision. The country is politically stable. It is a good economy. Sadly, it’s not growing, but it’s a good economy. We have a good, stable banking system. So it is attractive.

But importantly, the track record of international banks coming here and competing and being successful is zero – all the way back. You can go back to ING Bank. Commerzbank, Deutsche Bank and Barclays Bank – I can name lists of banks.

They all came and left, as did BNP Paribas. It’s not such a big market and it’s a very competitive market, despite what a lot of people think.

Paul Harris, the ex-CEO of First National Bank, used to say that the mistake banks make – and they themselves made when they went out to Australia – is that when we send, we don’t open up somewhere else. We send junior guys; we send the B-team. When we go and play cricket against Australia, we send our A-Team, not the B-Team. So it [should be] the same here in doing business.

So I think if First Abu Dhabi Bank comes and tries here initially with the B-Team they’re not going to succeed against our A-Team. I think that’s often the case.

But also bear in mind that the clients who get attracted to a new bank are often the ones who don’t get good facilities or loans or rates at the SA banks because they are higher risk.

Normally a newcomer attracts the higher-risk clients.

So what does it do for the South African banks? It brings a new competitor, and it means they will have to sharpen their pencils and make sure – especially with a big and a good bank.

But it will take time, I think. I can’t see them writing loans even in the space of two years, with having to do all the licences, getting a presence, doing marketing.

So it will take some time before they really become competitive.

JIMMY MOYAHA: It comes down to strategy where it relates to financial services, because that strategy is how you build trust in a new market that you are entering, especially if you’re entering that market for the first time and looking to stick around where other competitors have already established their businesses.

We’ll see how that shapes up. For now it seems that we’re moving ahead in the right direction, and that will only bode well for South Africa in terms of its banking environment and other financial services.

Kokkie Kooyman, executive director and portfolio manager at Denker Capital, joined us to look at First Abu Dhabi Bank’s decision to come into South Africa and how that’s going to move forward.