Bob Diamond’s African journey is off to a promising start. His mission is to build the leading pan-African bank and shake up the continent’s existing banks. Progress so far includes the purchase of three banks in strategic locations and the recruitment of a team of African banking experts.
Further acquisitions are expected – some of them bolt-ons to make the acquired banks among the top four players in their markets. Then there is the challenge of both modernising and integrating them.
There are plans for specialised lending units and capital markets platforms designed to provide tailored products for small businesses and consumers in Africa. All this will be powered by the latest cloud-based IT systems.
Remaking the model
The aim is to remake the classic African banking model that has often consisted of taking deposits, investing in high-interest government bonds and living off the margins.
In the process Mr Diamond, the former chief executive of Barclays who was forced to resign over the Libor fixing scandal, is also hoping to reinvent himself. In response to a question about whether he had any regrets about the end game at Barclays, he says only: “That was two years ago. I’m looking forward.”
There is no question that Mr Diamond has taken the energy and drive that made him a leading figure in the capital markets boom of the 1990s (as well as its subsequent bust in the late 2000s) and reapplied them to sub-Saharan Africa at an astonishing speed.
He quit Barclays in July 2012 and, under the terms of his departure, was prevented from setting up a business until after mid-2013. By December 2013 his investment vehicle Atlas Mara had carried out an initial public offering on the London Stock Exchange raising $325m and by March 2014 it announced its first deal, agreeing to buy BancABC for $265m. BancABC is based in Botswana and has operations in Mozambique, Tanzania, Zambia and Zimbabwe.
A month later there was an agreement to acquire a majority share of state-owned Development Bank of Rwanda (BRD) in a deal that closed in October giving Atlas Mara a 77% share.
An African education
In-between those dates another $300m was raised in private equity, allowing Atlas Mara to go on and purchase 29.9% of Union Bank of Nigeria for $270m from the Asset Management Corporation of Nigeria, the bad bank created to rehabilitate institutions hit by the Nigerian financial crisis in 2009. In an ironic twist, Union Bank is the former Barclays bank in Nigeria that was nationalised in the 1970s before being sold back into the market in 1993.
When asked if he has designs on any other former assets of Barclays in Africa, Mr Diamond replies: “My sense from everything I have seen both when I was with Barclays and since is that [Barclays is] very committed to its operations in Africa, so I wouldn’t see that as even a possibility.”
He does agree that his time at Barclays gave him an opportunity to learn about Africa, however. When the UK bank bought South Africa’s Absa in 2005, his role was to integrate its corporate business with that of Barclays’ investment bank, then known as Barclays Capital. His charitable family foundation is also active in Africa.
Spending spree
However, a core part of the investment philosophy of Atlas Mara is based on the idea that with global banks such as Barclays, Citi and HSBC under huge regulatory and commercial pressures, they are either holding steady or discarding assets, and this provides buying opportunities.
Eurozone banks have €1400bn of core business assets they want to sell, while Barclays sold its Spanish business at half the book value, says Mr Diamond. Most definitely global banks are not in expansion mode, a situation that has enabled Atlas Mara to be the sole bidder for its three acquisitions and to buy them at around or slightly below book value – a state of affairs that would have been unimaginable before the financial crisis.
Couple this with the undisputable opportunities in Africa, given the region’s demographics and high growth, and Mr Diamond’s venture appears to have winning credentials. However, there are clearly challenges, such as managing credit risk and operating in countries that suffer from rudimentary infrastructure and inadequate legal systems.
“When I think about Africa, I think about the opportunities,” says Mr Diamond. “The demographics are phenomenal. The average age in sub-Saharan Africa is 18; the average age in the US is 38. There will be more babies born this year in Nigeria than in all of western Europe. There are 52 cities in Africa with more than 1 million people; that’s the same [number] as in western Europe. Over the next 20 years we will see more than 50% of sub-Saharan Africans living in cities.
“So the opportunity in Africa is great, but when you pair that with the opportunity in financial services it changes [even more] dramatically. China is a great economy as well but financial services in China are consolidated, they trade at very high multiples and, quite frankly, they are closed to foreign investment. In Africa financial services are disaggregated, they trade at reasonable valuations and they are looking for foreign investment. In fact, majority positions are welcomed. So it is a very different environment in Africa for financial services than it is in virtually any other of the emerging economies.”
Positive disruption
Mr Diamond makes the contrast between South Africa and the rest of sub-Saharan Africa. “[South African banks] have very sophisticated product offerings… It’s a bit of an overstatement but the [main] business model in sub-Saharan Africa is to take a deposit and buy a Treasury bill.
“From a bank’s point of view and from a shareholder’s point of view, that’s not all bad. We were very surprised to realise sub-Saharan Africa banks have the highest return on equity of any banking segment anywhere in the world (see chart). But they also have the highest cost-to-income ratio. More importantly from a public policy point of view, if you want to get lending to small businesses and consumers, then investing in Treasury bills doesn’t work.
“But when domestic interest rates are 12% to 15%, it’s very difficult, when you are paying 1% on a deposit, to do anything other than buy a Treasury bill. Why take the risk – the business risk, the organisation risk or the credit risk?
“So we feel we are being incredibly ‘positively disruptive’ because one of the things we are doing is bringing products – from capital market products and specialised agricultural lending units – to drive lending to consumers and small businesses. It is what public policy dictates and why we have been this welcome.”
The right stuff
Key to managing the risks is to have both the right partners and the right team. Mr Diamond originally set up Atlas Merchant Capital. This then went into partnership with the Mara Group of Ugandan businessman Ashish Thakkar to form Atlas Mara with Atlas Merchant Capital holding 80% and the Mara Group 20%.
Mr Thakkar is only 34 – Bob Diamond is 63 – but after dropping out of school aged 15, he started his company with a $5000 loan. It now has 20,000 employees working in businesses from manufacturing to IT services in 20 countries. Crucially for Atlas Mara, Mr Thakkar is well connected with African heads of state and central bank governors. The two businessmen met at a World Economic Forum meeting in Cape Town, they both have charitable foundations and they each put $20m of their own money into Atlas Mara.
As far as his team goes, Mr Diamond has recruited the former chief of Barclays Middle East and north Africa and Absa Capital John Vitalo to be the CEO of Atlas Mara and Arina McDonald, the former chief financial officer of Standard Bank, to take up the same role at Atlas Mara. Chairman of the board is Arnold Ekpe, who as chief of Ecobank was the driving force behind establishing the bank as the first indigenous pan-African financial institution with operations today in 36 countries. David Schamis, the former managing director of financial services investor JC Flowers, is a founding partner and head of the investment committee at Atlas Merchant Capital. Former US Treasury secretary Larry Summers is an advisor.
Intelligent technology
Mr Diamond believes that successful management of credit risk in Africa will come from having the right IT system and this will look very different from the technology used to build a bank such as Ecobank. This new bank needs to take advantage of the cloud and to fit with another key plank in the Atlas Mara investment philosophy – the development of trading blocs in Africa and the opportunity to run services across multiple countries from a single location.
Mr Diamond talks about putting an intelligent layer of technology across the Atlas Mara banks to improve information quality and speed up credit decisions. It will be easier to do in Africa because of the absence of legacy systems.
He says: “One of the great things about Arnold [Ekpe] is that he recognises that in the world today, with cloud-based technology and with the emergence of trading blocs, the model they used to build Ecobank will not be the model that we use today.
“Francophone west Africa is a good example because we don’t have any banks there yet but it [consists of] eight countries. When Ecobank 10, 12, 15 years ago was developing in that region, it bought a bank in each of the eight countries and spent $50m to build a data centre to integrate the [operations in] eight countries.
“Today there is one central bank and they are about to emerge with a single currency and a single set of banking laws. So if you buy one bank in one country in Francophone west Africa, you can operate in the region, and with cloud-based technology you would never spend $50m on a data centre; it can be done for $2m.”
Strategic thinking
The thinking behind Atlas Mara’s acquisitions is that BancABC will cover the 15 countries of the Southern African Development Community region, although an acquisition in the south-west country of Angola is a possibility. BRD will be the entry point for the countries of the East African Community. Rwanda was preferred over Kenya because Kenyan banks trade at multiples of book value, whereas BRD was available at book value. Also, Rwanda’s capital Kigali is a strong centre for technology. Union Bank of Nigeria was considered vital because of the importance of the Nigerian market. With a population of 177 million people, Nigeria will at some stage overtake Brazil to become the fifth most populous country in the world, says Mr Diamond.
He adds that Atlas Mara has faced very little competition moving into African banking because global banks, including his former employer Barclays, are preoccupied with other things such as conforming to Basel III and new regulations on resolution.
“Because of Basel III, and a lot of other issues, money is being pulled back to the home market by banks in the UK, banks in Europe, banks in the US. More than 50% of trade finance in sub-Saharan Africa pre-crisis came from European financial institutions. Today it is virtually zero. The banks that are on the ground operating have their challenges as well from Basel III, while the global banks that are not in Africa are not looking at it at all. Chinese financial institutions are very active but appropriately they are active with Chinese companies,” says Mr Diamond.
“So the people getting squeezed out of the market are the African consumers and the African small businesses. If you put yourself in the position of policymakers, you want innovation, you want investment, you want product, you want the business model to change… What we are doing in Africa is an incredibly powerful intersection of both doing good and doing well. The better we focus on this business plan, the better our investors do, but the better it is for public policy as well.”
In it for the long haul
The original idea for Atlas Mara was to go into Africa via a conventional private equity structure with limited partners, but this was switched to a London listing with permanent equity. This sends out the message that this is a long-term venture. Mr Diamond says the preference is to retain a single London listing but he does not rule out listing portions of the equity on African stock markets.
“We are not just investors, we are operators; we know how to run businesses," he says. "But here’s the thing: the valuations are down, so they are enticing. There is a massive supply of businesses available and yet the strategic investor for financial services for the past 20 or 30 years has been the big global banks. Virtually anything that moved was snapped up by the big global banks. Now they are completely off the stage. In fact they are sellers and [because of the regulatory environment] they can’t be buyers. So there are opportunities in financial services that there have not been for 20 or 30 years.”
But the regulatory fallout from Mr Diamond’s time at Barclays has yet to run its full course. Could it catch up with him in Africa?
In 2005 Mr Diamond was appointed president of Barclays plc and joined its board of directors, while remaining chief executive of the investment bank. He became chief of the entire bank on January 1, 2011, but was forced to resign in mid-2012 due to the bank’s role in the Libor fixing scandal.
The UK’s Serious Fraud Office (SFO) is still investigating the terms under which Barclays raised money from Qatari investors back in 2008. The SFO website says simply: “On August 15, 2012, the director of the SFO formally opened an investigation into certain commercial arrangements between Barclays Bank and Qatar Holdings in 2008.”
Mr Diamond was also at the centre of hostile media and political attention in the UK at the height of the debate over the causes of the banking crisis. But from his point of view, Barclays worked vigorously to come through the crisis without needing government support.
He told a UK Treasury Select Committee: “Let me be clear. Being Barclays or being HSBC in this country, where a number of banks did fail, there is little differentiation between banks that failed and those that didn't... We are very, very proud that we managed through this period, profitably... and with the interests of our clients."
