Separation from Barclays PLC
Since 1 March last year, we have worked with Barclays PLC and our regulator in preparing for the separation. During this time we have taken into account a number of key considerations:
- The impact on our technology architecture, resilience, and competitiveness
- Our approach to rebranding
- Our leadership structures, remuneration arrangements to retain key skills and additional hires to support the separation
- Transitional services arrangements
- Alternative shareholding structures
- Risks arising from the sell-down
- The financial implications of the separation payments from Barclays PLC
I am pleased that we have agreed the terms of the transitional services arrangements and separation payments with Barclays PLC subject to regulatory approval. The proposed terms include contributions totaling £765m (R12.8bn1), primarily to fund the investment required for our separation. These are expected to leave us broadly capital and cash flow neutral after the required investments are made. There are three main components. Firstly, a £55m (R0.9bn1) payment to cover separation related expenses, of which £27.5m was received in December. Secondly, a £195m (R3.3bn1) payment to terminate the existing Master Services Agreement, and lastly, a £515m (R8.6bn1) contribution to fund investment in our operations, technology, rebranding and other separation projects. We will pay Barclays PLC to provide certain technology and operational services during the transitional period of up to three years. We believe these leave us well positioned to successfully separate and ensure our ongoing sustainability thereafter.
The separation process will impact our results for a number of years, most notably by increasing our costs, but also our capital base and endowment revenue thereon in the near-term. Consequently, we will report normalised numbers that better reflect our underlying performance once the process starts. In addition, Barclays has agreed to contribute an amount equivalent to 1.5% of our market capitalisation towards the establishment of larger broad-based economic empowerment scheme. The current value of their contribution is R2.1bn2. We will provide more detail on this and our separation in due course, once regulator approvals have been obtained.
In South Africa, we expect a modest economic recovery and forecast GDP growth of 1.0% for 2017. Inflation should return to within the South African Reserve Bank’s target band in the second quarter, resulting in flat interest rates for some time. We expect 4.5% average GDP growth in our presence countries in the rest of Africa.
Against this backdrop, and barring any regulatory and macroeconomic developments, we continue to expect low to mid-single digit loan growth, with CIB growing faster than RBB and South Africa lagging the Rest of Africa in constant currency. Our net interest margin is expected to decline slightly this year. Slower revenue growth, in part due to regulatory changes, is likely to produce negative Jaws near term, despite continued cost containment. We expect the strong rand and regulatory pressures to dampen our growth in the first half. At the same time, our credit loss ratio should improve in 2017, in part due to the large single name provision in the base, while last year’s reduction in our retail early delinquencies in South Africa also bodes well. Our Common Equity Tier 1 ratio is likely to remain above Board targets, and we continue to expect that our dividend cover is likely to increase slightly medium term, while our normalised return on equity should be broadly similar to 2016’s. While separating from Barclays will impact
our near-term returns, we still believe that our stated longer-term targets remain appropriate for our Group, including an
18% return on equity and low 50s cost-to-income ratio.