Nedbank ambitious plans

2/3/2012 1:20:00 PM

Old Mutual’s sale of its Skandia life assurance interests at the end of last year makes it less likely that it will dispose of its majority stake in Nedbank soon. The Skandia transaction was greeted positively by the market, as there is now less urgency for Old Mutual to redeem its huge offshore debt. In January Old Mutual’s share price reached R18,34, its highest level in three years. And Nedbank, of which Old Mutual owns 52%, was the best-performing local big bank in 2011. It climbed nearly 10% last year to R145 at end-December. It has since risen a high of R157. Old Mutual’s plan to sell Nedbank to HSBC failed at the end of 2010. But it has not changed its intention to get rid of the bank in the long term. It might opt for a buyer in a merger operation closer to home, such as with Ecobank, which operates only in Africa, rather than global players HSBC or Standard Chartered A few years ago Nedbank began an informal alliance with Ecobank, which has an extensive distribution network in West Africa and is listed on the stock exchanges of Ghana, Nigeria and Côte d’Ivoire. In a bold move last year, Nedbank strengthened its links with Ecobank by providing a three-year lending facility of US285m to the group. The money is earmarked for expansion in Nigeria, notably the acquisition of Oceanic Bank The arrangement gives Nedbank the right to convert the loan to equity and become a 20% shareholder in Ecobank. It further provides for Ecobank to eventually acquire a similar shareholding in Nedbank. If the loan is converted, Nedbank would become the biggest single shareholder in Ecobank. Nedbank CEO Mike Brown described the loan to Ecobank as an important step towards the provision of a one-bank solution to clients, particularly to SA corporates, which are doing much more business in Africa. It could boost Nedbank Capital’s activities considerably, especially relating to mining deals, and give Nedbank a sought-after entry into the fast-growing Nigerian market, where FirstRand is struggling to gain a foothold. Standard Bank is the only local bank with a sizeable presence there. Afrifocus Securities banking analyst Johann Scholtz says Nedbank’s transaction with Ecobank may well be the first step to a future merger. “The conversion of the loan into equity will represent a significant step for Nedbank [as it will thereby] obtain a new foreign shareholder.” But Sanlam Investment Management (SIM) banking analyst Patrice Rassou cautions that for Ecobank a merger could be out of reach. Buying control of Nedbank would cost at least 4,9bn, just more than half of Nedbank’s present market value of R78bn. “HSBC may have burnt some bridges in SA, but Standard Chartered remains in the running and I would not rule out one of the major Chinese banks,” he says. At present even a 20% stake in Nedbank would cost Ecobank $2,4bn. Its assets total $8,5bn. Nedbank has also become a much more polished outfit than it was when HSBC abruptly walked away from the transaction at the end of 2010. That means a new suitor would not get the bank cheaply. Nedbank’s better market rating last year rested on lower impairments and its strategy to grow noninterest revenue with fee and transactional growth in the middle- to lower-income levels. It has traditionally relied on net interest income — with lending at times strongly focused on mortgages — for earnings growth. It has the lowest noninterest revenue ratio of the big four local banks. But Scholtz believes Nedbank could be fully priced at present. It is set to release its yearly results at end-February. “I would be surprised if they outperformed [their] revenue [forecast].” Rassou says Nedbank could still be the best banking performer this year if it manages to turn the retail division around. There is room for improvement in home loans, though Scholtz says all the big banks, with the exception of Standard Bank, are moving away from less profitable home loan lending. Rassou also warns that Nedbank Capital is experiencing a tough year, with activity being subdued and private equity under pressure.

Financial Mail