LONDON -- Suddenly HSBC's decision to jump into South Africa doesn't look like such a great idea. London investors who bought into the bank's stock on Monday sold it off the next day, sending its shares down by 1.2% on Tuesday after the bank confirmed it was in talks with Old Mutual to buy its 52% majority stake in Nedbank, South Africa's fourth largest financial services company, for an estimated $7 billion. (See "HSBC Wants In On Africa.") Taking control would boost HSBC's presence in South Africa from five retail bank branches to 433.  HSBC's move into this fast-growing emerging market is being billed as an opportunity to capitalize on the booming trade between South Africa and Asia, where the bank gets half its profits.  Given the benefit of a day's hindsight, the deal is starting to look expensive. "The transaction would look good on a PowerPoint slide with arrows pointing from China/Asia to Africa," Citigroup analyst Ronit Ghose said in a note Tuesday. But HSBC is so large that Nedbank would only make a small impression, he added.  Nedbank would represent about 3% of HSBC's ( HBC - news - people ) assets, and while the purchase would be manageable, Ghose works out that the return on investment would be a value-destroying 8-11%, depending on the final price paid.  So what about opportunities to underwrite booming trade finance between China and South Africa? Ghose points to ICBC, China's largest bank, which spent $5.6 billion in cash on 20% of Standard Bank, South Africa's largest bank, in 2007. The Asia/Africa connection drove that deal, but three years later, that connection generated less than 1% of Standard Bank's revenues in the first half of 2010.  Speaking of other banks in Africa: Standard Chartered, a British bank with a significant presence in the region, held discussions with Old Mutual back in 2007 about buying its Nedbank stake, and reportedly again in May this year. Now StanChart seems to be out of the picture and Old Mutual is singing the praises of HSBC's intentions; HSBC may have (unwisely) offered more than a rival that is better acquainted with African banking.  To be sure, South Africa offers good prospects for investors who want to capitalize on trade with Asia, where it sends 30% of all exports. But to reach that goal HSBC must first successfully manage Nedbank's retail operations in South Africa, which will see it face the country's sluggish economic and bad loan problem, Ghose says.  Citigroup is forecasting real GDP growth of 3% in 2010 and 2011 for South Africa, compared to 5%-6% in many other emerging markets, let alone the 8-9% of India and China. Meanwhile South African household debt relative to disposable income is close to its all-time high, while unemployment has been rising since late 2008 and remains high at around 25% of the workforce.
The Nedbank deal sounds good on paper but there are multiple reasons why it's not a great one for HSBC.