Audi

The analysis of the banks’ sample, whose results are shown in table 4.1, reveals 5 out of 6 indicators to be statistically significant and all six indicators’ means of efficiency are decreasing in value, which is equivalent to an increase in efficiency for ABSA. This result suggests that significant cost cutting objectives were achieved. In addition,

total expenses to total assets is statistically significant as well as total expenses to total revenues but just at 19% level. This result proves that the bank made significant cuts in non-interest expenses during the three-year period after being acquired. Non- interest expenses involve personnel costs, operations costs at the branches and transaction systems.

An ABSA representative reported for this study (interview 4) that “ABSA benefited from Barclays’ systems” meaning that Barclays’ system migrated to ABSA to be implemented and processes and procedures were upgraded. ABSA confirms (Interview 4) “it benefited from Barclays’ products, management skills, procurement scale and policies”. It can be inferred that ABSA reduced its interest expenses, which means that it attracted deposits in a cheaper way. It could be that the Barclays international exposure provided the opportunity of more sources of funding as “ABSA benefited from Barclays strong global investment bank” (Interview 4). The variable, non-interest expenses to total assets, confirms cuts in non-interest expenses, which is statistically significant.

Table: 5.1: T-Statistic (Two-tail) for the banks sample

Source: Banks annual reports

Note: (***) Statistically significant a 1% level, (**) Statistically significant at 5%, (*) Statistically significant at 20% level.

Variables Pre

Post

ABSA The Standard Bank

Mean T-Statistics (Two-Tail)

P-Value Mean T-Statistics (Two-Tail)

P-Value Total Expenses over Total Assets Pre 0.107

2.597* 0.060

0.077

0.272 0.798

Post 0.089 0.075

Total Expenses over Total Revenues Pre 0.826

1.558* 0.194

0.775

0.536 0.620

Post 0.807 0.765

Non-Interest Expenses over Total Assets Pre 0.035

2.553* 0.063

0.026

1.841* 0.1394

Post 0.029 0.022

Non-Interest Expenses over Adjusted Operating Revenues Pre 0.613

0.855 0.440

0.540

1.312 0.259

Post 0.580 0.489

Operating Efficiency Pre 1.165

3.590** 0.022

1.141

2.459* 0.069

Post 1.000 0.898

Index Efficiency Pre 0.734

2.498* 0.066 0.577 -2.367* 0.077 Post 0.624 0.630 ROA Pre 0.095 -1.608* 0.183 0.019 20.554*** 0.077 Post 0.135 0.012 ROE Pre 0.185 -1.344 0.250 0.323 4.368** 0.012 Post 0.244 0.210

The variable, non-interest expenses to adjusted revenues, is not statistically significant but shows a decrease after the acquisition event. And finally general ratios of operating efficiency and index of efficiency are both highly statistically significant confirming the general idea that a cost cutting programme was achieved.

Decreasing non-interest expenses is particularly critical for ABSA because from feedback with some professionals, keeping jobs at ABSA was one of the conditions of the acquisition. So decreasing non-interest expenses without cutting personnel was found to be challenging. This aspect of conditionality could not be verified from the ABSA/Barclays and the SA Treasury. In addition, feedback (interview 4) says that ABSA did not lay off any personnel or put in place any voluntary redundancy policy. However, the press (Mail & Guardian, 2012) revealed in early 2012 that in 2011, the new ABSA CEO, Maria Ramos had to make cuts in the bank’s costs. They reported that Ramos said “this organisation is going to have to become more efficient, and I have to keep a close eye on costs while serving our customers better”. Union representative, Sasbo added “retrenchments were inevitable”. The same newspaper also reported what an anonymous analyst said regarding job losses citing “it’s concerning that there’s been such a high turnover of the top people”. But this turnover is not only limited to the top management but also to the entire organisation as reported, “ Although Ramos is not talking about retrenchments but rather about restructuring, there has been a significant number of staff leaving the bank because of unhappiness over regional departments being moved to and integrated with Johannesburg city centre offices. These effects that people were talking about in early 2012 suggest that deliberate policies regarding efficiency were put in place well before this date.

In the ABSA case, there was a significant improvement in efficiency three years after the event of acquisition, confirming that a programme of cost reduction was achieved. The results for the Standard Bank contrast with that of ABSA as only two indicators show improvement in efficiency with statistical significance: non-interest expenses to total assets and operating efficiency. An example of cost reduction is illustrated by a

newspaper (Financial Times, 2010), which reported that Standard Bank cut 2100 staff. This was written three years after the event of minority participation took place. This may be a coincidence as the global economic downturn occurred in 2008. The reason provided by the bank CEO to justify this redundancy policy was that the bank was losing in terms of revenues and ROE (as table 5.3 shows).

In contrast, total expenses to total assets and total expenses to total revenue indicators are not statistically significant, and nor is the non-interest expenses to adjusted operating revenues. The difference between the non-interest expenses and total expenses, as explained in the ABSA case above, is that the variable, total expenses, takes into account both the non-interest and the interest expenses. But all four indicators that are not significant show a decrease after the minority participation event took place. This suggests that in comparison with ABSA, the Standard Bank put more emphasis on the non-interest expenses and not much on interest costs. The index efficiency indicator shows a small but significant decline in efficiency (5.3%). This signifies that Standard Bank had a clear objective to cut non-interest expenses after it experienced a change in ownership. It suggests that the Standard Bank may not have had the same capability as ABSA to reduce costs on interest expenses. The difference between Barclays and ICBC is that Barclays is internationally more exposed than ICBC, although ICBC remains one of the largest worldwide financial organisations. In fact Standard Bank offers an international exposure to ICBC through its more advanced investment banking (Interview 3). ABSA then may have found it easier to get deposits at lower costs on international markets thanks to Barclays. Furthermore, feedback (Interview 3) from Standard Bank provides limited evidence of knowledge transfer in terms of process, procedures and methods that could translate into significant gains in efficiency in its SA operations, although ICBC implemented an ICBC transaction card system in Standard Bank to optimise some banking operations. In the Standard Bank case there is a suggestion that improvement in efficiency was achieved three years after the event of foreign participation but on a small scale and mainly in the area of noninterest expenses.

The findings from table 5.1 show the scale in percentage of the cost reduction but not in value. Table 5.2 below shows an interesting aspect of the cost reduction scheme for

both banks that may explain the weak amplitude in decrease of the non-interest costs of Standard Bank. With an important decrease (from 81% in T-3 to 60% in T+2), the index of efficiency confirms ABSA’s commitment to cost cutting. On the other hand, the table does not suggest any significant shift for the Standard Bank strategy, as costs were already very low. This may be the explanation.

Table 5.2: Value of Index efficiency for ABSA and the Standard Bank

Source: Banks’ Annual reports, author calculation

Before 2005 ABSA had a low level of efficiency around 70% on average whereas the Standard Bank had a much higher level of efficiency prior to 2007 at around 57% (and even 54.8% in T-1), which represents a very good score. The benchmark in the profession suggests that a score of 50% is generally regarded as the maximum optimal ratio. In the period pre-post 2005, ABSA reduced its index of efficiency from a maximum of 81% to a minimum of 60%. Clearly there had been room for improvement. This close look at the figures suggests that Standard Bank had already a culture of keeping costs down (at least the non-interest costs). From this point of view, it can be inferred that this culture of keeping costs down, helped Standard Bank to continue to lower its overall costs and gain some efficiency but not on the same scale as ABSA, which had ample room for further improvement and did so after Barclays took over in 2005.

From table 5.1 it would be possible to conclude that the difference in ownership could influence the scale of the cost reduction and therefore the level of efficiency. This assumption could perhaps validate the case of ABSA and the question would be a counterfactual: what would have happened if no change had occurred. Similarly, one might assume that the weak decrease in the efficiency index in the case of the

Bank Name

Variable name Before change in

ownership (%)

T=0

After change in ownership (%)

T-3 T-2 T-1 T+1 T+2 T+3

ABSA Index Efficiency 81.80 71.00 67.55 64.45 60.84 62.00 STD 59.10 59.20 54.80 60.50 62.50 66.3

Standard Bank is due to the limited participation of ICBC in the Standard Bank shareholding. But the value of the indicator suggests that with or without ICBC, Standard Bank would continue to keep its costs down. It can therefore be concluded here that only majority ownership (as is ABSA case) led to increased efficiency and knowledge transfer. This finding is in line with Blomstrom and Sjoholm (1999) and Demelis and Louri (2002).

Before analysing performance, it is important to note that even when banks have similar revenues, different business models can generate different efficiency ratios. Assuming for instance that a bank puts more emphasis on customer service, this might lower its efficiency but improve its net profit. On the other hand a bank that focuses more on cost control may have a higher efficiency ratio but may have a lower profit margin. And this is the case for ROA and ROE indicators of ABSA and Standard Bank. The ABSA ROA is statistically significant at 18% level and shows some improvement after the period post acquisition (4.18% increase on average). Although ROA is highly statistically significant (at 1% level) for Standard Bank, it shows however a consistent decline after the ICBC minority participation (3.36% decrease on average). Here again it is important to have a look at the value of both ROA and ROE presented in table 5.3 below.

Similarly to the index efficiency indicator, before the events of acquisition and minority participation took place, Standard Bank had on average a higher level of performance than ABSA. It can been seen that its performance after the event did not change dramatically, with an ROA average of 1.93% before and 1.28 after the event; compared with ABSA that had a 0.95% on average before the event and 1.35% after, ABSA came close to the Standard Bank level. It is also noticeable that by T+3 Standard Bank ROA is higher than that for ABSA.

This is equally observable for the ROE indicator. ABSA ROE is not statistically significant despite an improvement in the post-event period. At the same time there is a decline in the Standard Bank ROE. But before the events of acquisition and minority participation in shareholding, Standard Bank ROE on average was 1.75 time

higher than the ABSA ROE. And both ROEs are almost at the same level after the events, despite a decline for Standard Bank.

Table 5.3: Value of performance indicator for ABSA and the Standard Bank

Source: Banks’ Annual reports, author calculation

Finally, on this aspect of performance it seems that both Standard Bank and ABSA put emphasis on controlling costs successfully but were less successful in keeping performance high.

On both indicators of performance and efficiency it seems that the Standard Bank represented some kind of benchmark for ABSA as indicators reached similar levels after the events.

The results show that after the events of change in ownership, both banks improved their efficiency. The medium cost cutting coupled with the culture of keeping costs down may illustrate the type of management or relationships between Standard Bank and the Chinese ICBC, which is described as smooth and translates into a mutual understanding. It does not seem that ICBC, unlike Barclays, which has a majority of ownership in ABSA, had a strong influence on Standard Bank strategy.

The case of ABSA is different. ABSA was committed to preserve jobs as part of the deal when negotiating the acquisition deal with the Treasury, and confirmed that no plan for redundancy was implemented. In practice, ABSA did not cut any jobs but as some claimed, has been freezing recruitment, and many unhappy staff left. This has helped to keep the costs relative to staff under control. ABSA improved its performance and enhanced its efficiency after Barclays became its main owner. Both

Bank Name

Variable name Before change in

ownership (%) _T=0 After change in ownership (%) T-3 T-2 T-1 T+1 T+2 T+3 ABSA ROA 0.50 1.20 1.17 1.42 1.47 1.17 STD 1.96 1.89 1.95 1.23 1.31 1.29 ABSA ROE 10.17 23.34 22.02 25.10 26.40 21.80 STD 31.90 30.90 34.2 25.50 17.30 20.30

interest and non-interest expenses went down after 2005. These results suggest that knowledge has been passed on from the mother foreign bank Barclays to its domestic subsidiary ABSA. The feedback from the ABSA representative (interview 4) confirmed that new systems and procedures (explicit knowledge) were implemented at ABSA. To some extent, some very limited information systems were transferred from ICBC to Standard Bank, but that knowledge was not strategic enough to contribute to any form of efficiency improvement.