Emerging markets dealer of the year: Standard Bank

Standard Bank is a big player in its home market, with good international ties - now, the idea is to use those strengths to support the development of sub-Saharan Africa

Steve Barnes

As 2013 drew to a close, Standard Bank was in talks to sell a controlling stake in its London-based global markets business to one of its major shareholders, the Industrial and Commercial Bank of China – the latest sign that Africa’s largest lender is refocusing on opportunities closer to home.

The strategy makes sense. The bank has offices in 18 African countries, from Nigeria to Lesotho, and sound relationships with governments and decision-makers across the continent make it a vital intermediary for sub-Saharan institutional clients, central banks and public companies.

“The development we’re seeing across sub-Saharan Africa is hugely encouraging,” says Steve Barnes, global head of structured sales and distribution at Standard Bank in Johannesburg. “But if Africa is to realise its enormous growth potential, it has to have deep and liquid capital markets. We’re leveraging our footprint to help that happen in as wide a number of countries as possible.”

One of the lender’s most eye-catching deals last year was a cross-currency swap for one African central bank. The client needed dollars to boost its foreign-currency reserve requirements, but faced a shortage of the currency onshore. Standard Bank’s presence in the country via a local subsidiary meant it was able to offer dollar liquidity on more favourable terms than its international competitors, says Barnes. “We have a long-term view on the country – and an in-depth understanding of the local market through our franchise on the ground – that distinguishes us from a lot of our peers. That allows us to price risk in dollars more efficiently. Others would look for a higher return on their investment, and price on the basis of a one-off deal,” says Barnes.

The bank was able to bring dollars into the country by providing funding to its local subsidiary in the form of a structured cross-currency repo trade, complying with the state’s foreign exchange controls by structuring the repo as a pledge, rather than transferring the underlying collateral.

If Africa is to realise its enormous growth potential, it has to have deep and liquid capital markets

Collateral helped mitigate the risk to some extent, but the value of those assets was reckoned to be correlated with the value of the trade, leaving Standard Bank with wrong-way risk. With the central bank’s blessing, the firm was able to parcel out some of the risk to international investors by selling credit-linked notes tied to the trade. Each ticket was of between $5 million and $15 million, with total sold exposure nearing $40 million, Barnes says. “If you look at these markets for that specific type of risk, they’re highly illiquid. It’s very difficult to move non-standard deliverable obligations. But because we’ve positioned our international franchise as the go-to bank for Africa, the continual dialogue we have with investors in other parts of the world about inward investment into these countries means we were able to identify pockets of liquidity and parcel the risk out pretty quickly,” he says.

But if such deals are to become a sustainable flow, many sub-Saharan markets require some basic building-blocks to be put in place, such as trading and settlement facilities (Risk October 2012, pages 46–50). More elemental than that, says Barnes, is the need for a stable market environment – a message the bank has had to stress in its home country, too.

For instance, the firm has played a big role in the South African government’s Renewable Energy Independent Power Producers Program. The ambitious plan to build 28 solar, geothermal and wind energy farms required $5.4 billion in debt financing, all of which needed hedging in the rand rates market.

“The risks of getting something like this done were clearly articulated to and understood by the government. We made them aware you couldn’t bring all these projects to market at the same time for a number of reasons, including the inability to hedge all projects simultaneously. They saw that bidding for the projects had to be staggered and provided the regulatory framework that allowed us to put these hedges on effectively,” says Barnes.

On each of the two bid dates so far – the first in placid conditions in November 2012, the second in May 2013 amid an intense period of volatility for the country’s money markets – Standard Bank secured around 30% of the foreign exchange and interest rate hedging business up for grabs, says Barnes.

Most of the required interest rate hedges were 15–17 years in tenor – although many of the average lives were closer to eight to 10 years, because a lot of the debt has an amortising profile, says Barnes. With the rand rates market relatively illiquid beyond 15 years, executing so many deals at that end of the curve simultaneously was a major challenge.

“The quantum of deals going through around the first bid date was roughly 27 billion rand ($2.6 billion) in debt financing, with almost all of it hedged simultaneously. That is several times larger than the average daily volume in that market. It’s a massive amount of risk to be going through in that kind of tenor, even in a more liquid market,” he says.

It helped that the bank could distribute some of the risk to overseas investors, but it had to sit on some, too. “Given the scale of our balance sheet, we were also able to warehouse some of that risk and put on proxy hedges in the bond markets,” Barnes says.

That is one side of the bank’s capabilities, but its clients highlight advice and execution, as well as risk-taking muscle. “I’d say its pricing has been very consistent across its entire product range, even in illiquids, while some of its competitors have been more erratic this year,” says Eben Mare, head of absolute return at Johannesburg-headquartered Stanlib Asset Management. “That’s one thing we really value from them. The sales guys are also very good. They go out of their way to highlight trading opportunities where others don’t.”