CURRENT FLOW Capitec should buy Mercantile
BUSINESS BANKING: SPACE IS HOTTING UP
A successful bid will be the best for competition in the space, and for small and medium businesses.
The four-member shortlist of financial services groups in the running to buy Mercantile is almost exactly what one would’ve expected: one from the “old school” establishment; the state; an African investment company owned by European banks and funds and a bidder that actually makes sense.
One of the traditional “big four” full-service banks was always going to be on this list. Here, any acquisition of smaller Mercantile would be a simple customer building exercise.
At the end of 2017, Nedbank’s business banking unit, which targets similar-sized customers as Mercantile, had deposits of R126 billion and total advances (assets) of R66 billion. It reported headline earnings of R1.4 billion. Mercantile, by comparison, had deposits of R9.3 billion, assets of R13.4 billion, and reported a 20% increase in net profit after tax of R213 million. Mercantile would increase the size of Nedbank’s business banking unit by from 10% to 15%.
The state, via the Public Investment Corporation (PIC), was also always going to be on this list. Generally, the PIC tends to bid for assets it wants to operate as part of a consortium.
The PIC is already the largest shareholder in the local banking sector and one could argue it has a number of more pressing issues, mostly involving governance.
The Africa-focused investment fund Arise is part of a consortium including Grindrod Bank. Grindrod is not a dissimilar size to Mercantile; it has a loan book totalling R6.9 billion, and a deposit base of R15 billion. On paper, Mercantile seems a good fit, but these new owners are hardly likely to move the needle.
Capitec Bank has shown it can disrupt the cosy oligopoly that existed in SA’s banking sector. It has tiptoed into business banking by offering point-of-sale (POS) services and salary payment solutions to small and medium-sized businesses.
Already with these limited products, it is chipping away at the incumbents. The fee structure is far more competitive than other banks.
On salary payments, Capitec’s solution runs alongside a current business account. A single transfer is made to an account and then payments are made. The bank illustrates an example of a business that has to pay 300 employees monthly. At worst, using Capitec to pay salaries will save a business paying 300 employees R25 000 a year. At best, the number is over R65 000.
So far, it’s chosen to only play in these two limited areas. Could it do more? Absolutely. Does it want to do more? Yes.
If Capitec succeeds with its bid, the business banking space is about to become hotly contested. Already, former FNB executives Michael Jordaan and Yatin Narsai want to shake up the sector with Bank Zero.
A successful bid by Capitec will be the best outcome for competition in the space, and for small and medium businesses.