By John Helmer, Moscow
Standard Bank is close to selling out its Russian bank interests, along with its 36.43% stake in Moscow-based Troika Dialog, to Sberbank, the Russian state savings institution and dominant retail bank in the country.
Standard is the largest financial institution in South Africa, and a powerful one throughout Africa. It has been South Africa’s first and largest investor in Russia, principally in financing Russian mines and gold and other metal exports; although the value of its stake was subsequently overtaken by Russian paper and pulp sector and media investments by other South African corporations. Since 2008, Standard’s international investment banking business, based in London, has been under de facto control of the Industrial and Commercial Bank of China (ICBC). The exit from Moscow also indicates a loss of confidence on the Chinese part.
On Standard Bank’s latest financial figures, 88% of its earnings come from South Africa; 8% from operations in other parts of Africa; and just 4% from non-African business. No comparable geographical measure for its liabilities is available.
A report issued this week by Renaissance Capital, a Moscow investment house, told clients that a Troika Dialog sale to Sberbank is likely once price talks are completed. “Escaping Russia with some experience, a minor gain for its troubles, and the ability to redeploy capital and focus its low credibility international strategy, getting it back on track, would be a positive outcome for Standard Bank, in our view,” reports Renaissance Capital’s banking analyst, David Nangle.
Russian press reports this week anticipated the deal announcement on Thursday, but that has been put off amid hints of disagreements over price by Troika Dialog’s chairman, Ruben Vardanyan.
He has reportedly claimed that Troika Dialog is being valued in the negotiations with Sberbank at $1.2 billion, although it isn’t clear whether this is his asking price, or Sberbank’s buy-out offer. According to Nangle, “if the Sberbank transaction were to go ahead, we believe Standard Bank will be offered a similar price for its stake, as part of the process. We don’t really see Standard Bank as sticking around as an ultra-minority shareholder in Sberbank, and we believe Sberbank has no need for Standard Bank at this stage of its development.”
Asked yesterday about the Troika sale and purchase, Sberbank’s chief executive German Gref didn’t deny the negotiations, but cautioned: “There is no transaction yet, and I cannot give any comment.”
In Johannesburg, Standard Bank spokesman Erik Larsen declined to confirm the sale reports; but he added in partial confirmation that the management of Troika Dialog is better placed to comment on whether they are negotiating with Sberbank. Standard Bank’s last financial report, issued for the six-month period ending June 30, 2010, reports that its Troika stake was a “non-current liability [asset] held for sale”. The valuation of the asset, according to this report, is R2,054 million ($283 million) – that, reported the bank, was a 100% reduction from the previous year. The current carrying value of the Standard Bank stake in Troika has been estimated this week by Renaissance Capital at R2.37 billion ($330 million).
Standard Bank, working through its Standard Bank London (SBL) affiliate, bought into Troika Dialog in 2009, paying $200 million in cash, plus all of its commercial banking business in Russia structured at the time as ZAO Standard Bank; in return, Standard Bank received a 33% shareholding in Troika Dialog, with two seats on the Troika board. The deal closed in September of that year, and at that time Standard reported its stake in Troika was up to 36.43%. A London banker close to SBL claimed that ZAO Standard Bank and Troika Dialog were facing serious losses and investment write-downs stemming from their exposure to the crash of autumn 2008. “The merger deal allowed them to bury their liabilities in the same black hole”, the source claimed.
What this week’s Renaissance Capital report refers to as SBL’s “troubles” may have started in 2007 when there were conflicts over deal strategy and Russian risk between Russian and British executives of the bank.
SBL’s deal announcement at the time said: “Standard Bank will merge its Russian business into Troika, leaving both companies strongly capitalised and able to deploy balance sheet strength for the benefit of their clients. Both companies will now operate under the Troika Dialog brand in Russia, creating Russia’s leading financial services provider, with a broad range of products and global reach.”
It is difficult to track the performance of Standard Bank’s Russian business in the consolidated financial results of the group. According to Standard’s interim results for the financial year ending June 30, 2010, “global markets’ income earned outside South Africa was particularly impacted by the translation effect of the strong rand, and by income earned in Russia previously reflected under trading income, now accounted on a net basis as earnings from associates following the acquisition of Troika Dialog. Adjusting for these two impacts, global markets income is down 5%.”
This financial report indicates that accounting for the venture with Troika Dialog on the basis of the equity stake, Standard Bank booked income of $24 million for the first half of 2010. This implies that Troika earned a total of $67 million in the same period. There is no comparable report from Standard Bank for 2009. According to Renaissance Capital, Troika was loss-making that year.
Reports from South Africa indicate that when Standard reports its full-year results for 2010 next month, consolidated group-wide earnings are expected to be down between 3% to 12%, compared to 2009.
The price Sberbank will agree to pay should indicate, retrospectively, how much damage both ZAO Standard Bank and Troika Dialog, along with SBL, suffered from the 2008 crisis, and how well they have been able to recover. If the reported $1.2 billion price report is confirmed, that would assign Standard Bank $437 million for its stake. This is $154 million more than Standard considered it was worth seven months ago.
Nangle reports that Standard Bank “should come out of the adventure with some experience and a little money for its troubles, which is better than many have fared in this space. Profits aside, this may point the way to a much smaller international operation (ex-Africa) for Standard Bank. Crucially, we hope it should eventually lead to a much smaller operation in London, with a dramatically reduced capital/liquidity requirement, boosting Group returns, as the Group re-focuses on the African continent…. While Standard Bank has pointed to a re-think on its international operations, we still think a drastic slimming of its international – read, London – operations is still not yet a feature of management thinking.”
Renaissance Capital, which originated in Moscow, has been expanding its reach for Africa-wide business, and is a competitor of Standard Bank in several African markets.