FirstRand courts UK lender
As SA banks look to Africa for expansion FNB owner eyes the developed world
While South Africa’s mainstay banks have banked their future expansion on the African continent, FirstRand, the owner of FNB, is in talks to purchase UK lender, Aldermore, increasing its footprint in the developed world. Should it be completed, the deal is likely to be worth more than R19-billion.
Aldermore is a specialist lender which targets market subsectors that are underserved by the mainstream banks and is counted among Britain’s challenger banks.
But as low interest rates and slow economic growth and regulatory issues in the UK have put pressure on the earnings of challenger banks, they are becoming increasingly attractive to buyers.
The company’s London-listed shares shot up 18.5% on Friday, indicating that the market was reasonably confident that the deal was likely to happen, said PSG Wealth portfolio manager Adrian Cloete.
“It sounds like a really sensible deal from my point of view. [FirstRand] won’t have to raise a significant amount of capital.
“They are very focused on shareholder returns, so FirstRand will only make an acquisition if the price is right.”
Rivals focus on continent
FirstRand’s rivals have chosen in recent years and in the aftermath of the global recession in 2008 to refocus their energies on South Africa and the rest of the continent. Standard Bank, which had the most ambitious expansion plans outside the continent, has had to scale back those operations.
Insurer Old Mutual, which was listed in London at the turn of the century, has also had to dramatically scale back its plans over the past decade and is in the throes of a restructuring plan that puts Johannesburg and the continent at the centre of its operations.
FirstRand had tried to acquire businesses in Africa but could not find them at the right price and also discovered they weren’t clean businesses, Patrice Rassou, chief investment officer at Sanlam, said. So going back to developed markets seemed a sensible move.
“From that point of view I would commend the management on their discipline.”
With its large exposure to South Africa, where economic growth remains low, FirstRand needs to find other avenues to grow its business, Cloete argues.
“They want to grow in markets that are attractive, and sub-Saharan Africa is an attractive market for them in the longer term. But I don’t think it matters too much what the jurisdiction is. [Aldermore] made sense because they already are present in [the UK] market.” Not obvious buyer The International Monetary Fund said this week that economic growth in sub-Saharan Africa would accelerate to 3.4% next year.
Portia Patel, an equity researcher for diversified financials at UK-based investment bank Liberum, said FirstRand wasn’t “an obvious buyer for Aldermore or any of the specialist banks”.
“We’ve been watching the Aldermore share price go up over the past week and a half, and it’s been ramping quite noticeably, and [we’ve been] wondering what the story is behind it,” she added, saying consolidation has always been a talking point in the specialist banks space.
Asked whether the UK financial services market has appetite to accommodate a relatively unknown bank, Patel said: “There have been more entrants into this space, particularly in the space occupied by challenger banks, because it’s not the kind of business that the High Street banks want to write anymore, and that has created more opportunity for the more speciality players.”
Shailesh Raikundlia, a banks and specialist financials analyst at Panmure Gordon & Co, a British corporate and institutional stockbroker and investment bank, said that the bid by FirstRand was based on Aldermore’s growth in the UK banking sector.
While the big UK banks grapple with high capital requirements in the buy-to-let, residential mortgage market and SME markets, Aldermore had grown in this space.
We’ve been watching Aldermore share price go up Portia Patel Liberum investment bank researcher
Raikundlia said that overall, the banking sector in the UK was undervalued to some extent because of wider economic concerns. The traditional investor base failed to recognise that challenger banks such as Aldermore were growing from a low base and could continue to grow even in a recession.
“They are just eking out very small market share and also they are specialising in certain parts of the market that are not being served very well by the big banks at the moment, so you could say there is low-hanging fruit for these banks to perform very well despite what happens to the UK economy,” Raikundlia said. Brexit uncertainty Patel said in a note, however, that Aldermore’s ability to grow its loan book and its quality of underwriting had been called into question by the market.
“These concerns are not unfounded in our view given the uncertainty around Brexit and the prospects for the UK economy and also since the company is still relatively young.”