Fast-rising inflows of investment capital to the African markets are spurring an increase in the banks offering custody services. But global players are held back by differences in infrastructure and legal structure in the different markets and the need to reach economies of scale in a low-margin business.
Custodians are responsible for safe-keeping assets. For instance, if a global fund manager wants to invest in different African markets, it might appoint a bank to keep its local holdings of equities or bonds registered in the name of the bank’s local nominee company and to ensure that all is correctly registered and administered including purchases and sales, dividends, voting rights and other actions. They are essential to the progress of institutional investors into Africa.
According to a excellent article by experienced journalist Liz Salecka for FinancialNews.com, the custodians that dominate are “the two pan-African banks”. She writes that demand for custody services is growing fast driven by two factors:
• international institutional investors flocking to take advantage of the region’s growth prospects.
• the rise of pension and unit trust investments as investors grow wealthier and domestic savings institutions increase.
Standard Chartered Bank says capital inflows to sub-Saharan Africa grew 4 times from $13.2 billion in 2003 to $48.3bn in 2012. They are hunting equity, fixed-income and money-market investments in markets such as Kenya, Nigeria, Ghana, Mauritius, Tanzania and Zambia. The article quotes Hari Chaitanya, regional head, investor and intermediaries, Africa, transaction banking at Standard Chartered Bank: “Portfolio equity investment in the region is focused on the most active and liquid stock markets in South Africa, Nigeria, Kenya, Mauritius and Zimbabwe, which the Johannesburg Stock Exchange continues to dominate, accounting for 83% of total market capitalisation in the region in 2012.” He added that, although South Africa will continue to dominate in terms of size, the fastest growth is in other countries. Several African countries are among the fastest growing in the world, with GDP growth rates experienced and foreseen of over 7% a year.
She also quotes Mark Kerns, head of investor services at Standard Bank as saying international investor demand will spur capital markets development: He added: “Domestic demand is also growing as a result of insurance expansion, growth in retail savings and increased pension fund investment in unit trusts and other vehicles as pension systems develop. This, supported by the emergence of a middle class, is further driving stock market growth.”
Who are the African custodians?
Standard Bank, the bank with the biggest operation in African markets, offers custody services in 15 sub-Saharan markets. Standard Chartered Bank, which launched a custodian services business in 7 African markets in 2010 after buying Barclays Bank’s custody business in Africa, has since expanded its network to 11 markets since then.
Global bank Barclays used to have a African custody operation but in line with the rest of its confused Africa strategy decided to sell that off in 2010 to Standard Chartered, according to a 2010 press release. Earlier this year, Standard Chartered also entered into an agreement with South Africa’s Absa Bank (also part of Barclays) to acquire its custody and trustee business.
According to the article, Standard Chartered and Standard Bank are expanding and introducing new services in a major movement to service foreign and domestic investors.
Newer global custodians entering Africa start in South Africa – Societe Generale in 1991 and Citibank in 2011 – and are expanding into new growth markets.
Writer Salecka cites Andy Duffin, head of sales, emerging markets at Societe Generale Securities Services: “If you look back at custody business in Africa, the bulk of it was focused on the South African market, which generated the most significant revenue in the region. However, there is now growing demand for custody products and services in other markets such as Ghana, Nigeria and Kenya, and it is no longer the view that South Africa will generate the most significant revenues.” He says believes existing providers branching out into new markets will drive market development more than new players entering.
Societe Generale Securities Services started operating in Ghana in June 2013, according to a press release. It offers custody services for Ghanaian equities and bonds, foreign exchange and cash-management services to local and foreign investors, frontier-market funds and other players looking for increased exposure to Ghana. “Clients benefit from the local knowledge and expertise of a dedicated SGSS team located within SG-SSB, a subsidiary of Societe Generale group, which is directly linked to the pan-African integrated services platform developed by SGSS in South Africa. This platform will be deployed in other African countries in due course. SGSS already operates in Tunisia and Morocco and was reported to be talking to authorities in Mauritius about access to the local central securities depository, where it also wants to offer custody services. Societe Generale is predominately a provider of securities services in this region, and has increased staff by nearly 50% since 2007.
A key feature of institutional investment and African capital markets development over the last 20 years has been sub-custody service for international custodians who want to offer their clients services in different markets without actually setting up operations in each country. This provides a significant component of Standard Bank’s business.
State Street is a leading example of a bank which offers fund administration services from its South African offices in Johannesburg and Cape Town but relies on a network of sub-custodians across the region to service the needs of its global and regional institutional clients. Its partnership with Standard Bank was instrumental in bringing American-regulated institutional investors into many African markets in the 1990s.
He also believes international banks cannot come into Africa just to do custody business.
According to Rod Ringrow, senior vice-president and head of official institutions for EMEA at State Street: “At the moment we are seeing significant inflows into sub-Saharan Africa from large institutional investors – and the flows from our clients will help determine where we want to be.”
Custody and capital markets development
Salecka writes: “The ability of new competitors to enter sub-Saharan Africa continues to be hindered by the challenge of building sufficient scale to operate profitably in a region characterised by diverse, small markets with different regulations… The scope for new entrants to offer custody services in sub-Saharan Africa is also hindered by the complexities involved in meeting the regulatory requirements of individual markets.” She points out that infrastructure is improving, and says there are now 26 central securities depositories across the region, but they all evolve at different paces and a couple of markets including Zimbabwe and Namibia still use outdated paper settlement. Different national regulatory, tax and capital market practices complicate the provision of standardised services.
She cites Standard Chartered’s Chaitanya who says providing custody services in sub-Saharan Africa should be part of a global bank’s wider strategy for the region. New entrants have to prove that they can provide a regional presence and commit to ongoing investment in technology and other infrastructure: “Apart from South Africa, many markets in Africa are still considered too small by many global custodians to establish a physical presence in the region. Hence, the domestic custody market is dominated by regional and local banks. Custody is about scale because it is not a high-margin business.”
Dirk Kotze, Africa banking advisory leader at Deloitte (in Johannesburg) told her many banks should consider whether the market is big enough for them to operate profitably: “They must also consider who are the dominant players and what they would provide to differentiate themselves. Potential new entrants must also look into whether they have clients from other markets that need services in this new market. In addition to providing basic services, custodian banks must be able to help clients understand and navigate their way through local regulatory market environments, which are evolving in line with broader economic growth.”
Standard Bank’s Kerns said: “Emerging and frontier markets are characterised by a number of challenges including the fact that many of them are still in the developmental phase. New entrants need to obtain a banking licence and be familiar with local regulatory and other infrastructure as well as the social and cultural dynamics of each country.”
Where African capital markets want to step up the involvement of international and domestic institutional investors they need to work to provide harmonized technical and regulatory environments for custodians, including information flows. Whether CSDs will eventually be able to take business from custodians remains to be seen, but for the meantime global custodians are key strategic partners for the development of the institutional investors that drive capital markets development.