Barclays consolidates African presence
The Absa deal enhances the bank's position in the region as it is looking to benefit from the high growth potential of the underdeveloped nations.
In October, Barclays had unveiled plans of strengthening its core banking services in the U.K. with the acquisition of ING Direct UK (read on Trefis), while reorganizing the top management (Trefis link) -- decisions aimed at appeasing investors, regulators and customers who were not pleased with Barclays' involvement in manipulating the LIBOR.
We are in the process of revising our $15 price estimate for Barclays stock, in view of the recently announced changes to its business model.
The deal has a strong rationale
Barclays has been optimistic about the sub-Saharan region for quite some time now, something it demonstrated when it acquired a majority stake in the Absa Group in 2005; a significantly calmer period for the banking industry. And Barclays is still looking to maintain a strong presence in the region to benefit from the high growth potential of the underdeveloped nations.
According to Barclays' annual reports, its revenues from the Africa Retail & Business Banking division have grown sharply over the years; jumping from £934 million ($1.5 billion) in 2005 to £3.77 billion ($6.06 billion) in 2011. To understand the importance of this figure, it must be remembered that Barclays' cornerstone U.K. Retail & Business Banking division roped in £4.66 billion ($7.5 billion) in revenues for 2011. Things are further broken down into perspective when we compare the net incomes for the two divisions; the U.K. division contributed £1.02 billion ($1.64 billion) to the bottom-line, whereas the Africa division contributed £910 million ($1.46 billion).
The deal presents significant upside potential
As Barclays takes control of the combined business spread across South Africa, Botswana, Ghana, Kenya, Mauritius, Seychelles, Tanzania, Uganda and Zambia, it should be able to record faster growth in the volume of loans handed out over the years to come. The African operations contributed to only £36.7 billion ($59 billion) of the group's £266 billion ($427 billion) in outstanding loans for 2011.
Barclays has been forced to reduce its focus on investment banking operations due to stringent regulatory requirements as well as high investor pressure. It has hence been working on beefing up its core banking business in a bid to make up for the revenue loss.
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Serious issues like drought and the deterioration of the developed world spell opportunity for this industry leader.
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