Nedbank faces Ecobank poser
Group looking good, but it needs to grow
BANKING giant Nedbank is in the best shape it has been for more than a decade.
Customer finances are more stable than they were two years ago, it has been able to reduce provisions for bad debt and there is some deal-making activity across its divisions.
But its headline earnings growth of 16% for the six months to June is misleading.
Much of that boost is due to the 30% reduction in its bad-debt charge. Equally, Nedbank’s noninterest revenue, which comes from fees and commissions, was flat, indicating pressure on those fees. But on the other side of the coin, the growth in lending — as well as the 75 basis point rise in interest rates this year — bolstered its net interest income by 9%.
Strip away the noise and in real terms, concedes CEO Mike Brown, Nedbank is pretty much just keeping up with inflation.
So while the bank is in good shape (especially compared with African Bank, or even Barclays Africa), Nedbank needs urgently to find new growth opportunities to justify the record level at which its stock is trading. In the past year, its share price climbed 28%, putting pressure on the bank to keep expanding.
What makes this task even trickier is that the South African economy is projected to grow slower than 2% this year — and the problem that Brown and his peer group face is that the domestic market is pretty much tapped out.
This week, while African leaders were attending the US-Africa Leaders Summit in Washington with promises aplenty of American investment destined for the continent, Brown had to make the biggest business decision of his corporate life.
Nedbank has had a strategic alliance with Togo-based panAfrican lender Ecobank Transnational since 2008.
It’s a big deal: Ecobank has the largest branch network on the continent — about 2 000 branches in 35 countries. But by November, Nedbank must decide whether or not to exercise an option to convert a $285-million (R3-billion) loan, used to fund the acquisition of Nigeria’s Oceanic Bank, into a 20% equity stake in the pan-African bank.
Of course, the temptation for Nedbank to do a deal is enormous.
Rivals Standard Bank and Barclays Africa have long-established networks on the continent, but neither operates in more than 20 countries.
Governance at Ecobank is better than it was, but Brown won’t commit
Errol Kruger, former South African banking regulator, was particularly averse to local banks taking minority stakes in other lenders as it meant management would be unable to control what happened in the boardrooms of those banks. But this tough approach appears to have softened in recent years. In the past six months, Nedbank concluded its acquisition of an initial 36.4% stake in Banco Unico in Mozambique, for example.
Ecobank is headquartered in Togo and listed in Nigeria and Ghana and on the West African regional bourse BRVM.
On the surface, the deal is enticing for Nedbank investors.
Parent Old Mutual has a strong emerging-markets strategy. Ironically, 15 years after its demutualisation, London listing and lofty developed-market growth strategy, Old Mutual still earns about 80% of its profit in emerging markets, primarily in its home market, South Africa.
Julian Roberts’s Old Mutual would surely relish the prospect of accessing the distribution footprint of a business such as Ecobank.
Nothing is ever that simple, however. Nigeria’s Securities and Exchange Commission launched an investigation last year into corporate governance standards at Ecobank.
Then CEO Thierry Tanoh was dismissed in March.
South Africa’s state-owned Public Investment Corporation (PIC), which is the biggest shareholder in the bank with a holding of just under 20% of the shares and has a board seat, demanded Tanoh’s head amid allegations of mismanagement.
In a letter, the PIC expressed concern earlier this year that the bank was undercapitalised and was being used as a tool for the now ex-CEO’s personal enrichment. But the board was divided on the CEO’s future.
The PIC prevailed at the time, but nonetheless, the fracas suggests that Ecobank may be fraught with a degree of complexity that Nedbank might eventually choose to avoid.
For now, Brown is noncommittal. The deal will be done if it is deemed to be appropriate, he says — but the clock is ticking.
Governance at Ecobank is better than it was, he says, but he won’t commit to what decision will be taken. And every CEO wants to leave a positive legacy.
For Brown’s predecessor, Tom Boardman, it was his back-tobasics strategy that provided the groundwork for the group’s current performance and recovery from its 2004 nadir.
Four years into his tenure, Brown needs to decide whether to do the Ecobank deal. It will define his legacy — even if that means walking away.