Why Nedbank is betting on East Africa

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DUDUZILE RAMELA: Nairobi Securities Exchange-listed NCBA Group is now a subsidiary of Nedbank, with the latter announcing that its acquisition of a 66% shareholder stake in the East African giant is now complete.

The deal is set to see Nedbank adding 60 million clients across Kenya, Uganda, Rwanda and Tanzania.

This will contribute some 11% to the lender’s earnings, with the rest of its Africa operations offering 14% of earnings that would come from outside South Africa.

Read:

Kenya’s NCBA ‘worth paying for’ – Nedbank finance chief
Nedbank’s R13.9bn NCBA East Africa deal complete

Craig Metherell is an equity analyst with Denker Capital. He joins us now for more. Thank you very much, Craig, for your time.

So this is the lender’s first expansion into East Africa. Maybe let’s start with some context – and you can tell us how it actually got here.

CRAIG METHERELL: Hi, Dudu. Thanks for having me on the call today. Yes, it is Nedbank’s first expansion into East Africa. In the past the bank had exposure in West Africa through its just over 21% interest in Ecobank – and that didn’t play out as expected.

They thought they’d get access to cross-country Pan-African flows there, which would open up opportunities as South African multinationals looked to expand in the African content – and other multinationals as well.

But it didn’t play out as expected. Nedbank arguably didn’t have control over that stake, although it had a seat on the board. Things didn’t play out as wished.

So it exited that stake, and as part of its strategy it has had exposure to other southern African regions.

But part of the strategy then became to diversify what was essentially a concentrated South African business into an attractive growth area or region – being East Africa.

So that essentially brought it to the NCBA deal, which ultimately led to acquiring a controlling stake in NCBA – or roughly around 66%, as you pointed out.

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DUDUZILE RAMELA: What do we know about the governance structure and how this will actually play itself out?

CRAIG METHERELL: It has all been approved at this point. Nedbank released an announcement yesterday that all regulatory hurdles had been passed.

A while back the bank announced that it had received support from the appropriate percentage of shareholders – of NCBA shareholders – to accept the deal in order to acquire the 66%.

So those hurdles have all been passed, and from a regulatory point of view the appropriate regulatory organisations have all passed that. So that would factor in all the different countries in which Nedbank has exposure and operations.

DUDUZILE RAMELA: You mentioned the West Africa deal that didn’t work out so well. One can only assume that, as Nedbank increases its exposure to faster-growing regions, it is hoping to see this reflected in the earnings.

CRAIG METHERELL: Management is on record saying that they’d like to achieve an 80:20 split; that’s 80% South African-generated earnings and 20% outside South Africa. But this is Southern and Eastern Africa.

So, as you mentioned in the introduction, acquiring NCDA – or the 66% interest in NCBA – equated to about an 11% contribution at its earnings level. Add the other 3% to get to the 40% that they currently would report on a pro forma basis.

Now, in order to get to 20%, at current growth rates you would expect that to take about 50 years or so – just rough calculations that I’ve done myself which obviously could pan out differently.

It’s all part of Nedbank’s strategy to diversify its earning base as mentioned, and obviously to try and cut into what is a high-growth region.

So from a GDP point of view you are looking at GDP growth rates in excess of 5%, whereas in South Africa we struggle to deliver a 1% growth.

Generally the banking sector is able to grow at a multiple of GDP growth. So it’s really attractive from that point of view.

From a demographics point of view, East Africa is a large market – I’m speaking across the area with a growing population. So there is essentially increasing demand for things like payments, savings products, credit obviously as well, insurance and wealth management.

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There is the trade connectivity angle to this because of the region linking the African economy and the East to the Middle East and India and the rest of Asia, for example. So you’ve call it cross-border opportunities.

And then NCBA itself brings what we understand to be really strong digital capabilities and technology.

That certainly could complement Nedbank’s offering – and vice versa. Nedbank obviously brings the scale of its balance sheet and its extensive corporate investment banking expertise across the continent already.

So there is opportunity there, and NCBA is a tier one in the region – and in Kenya in particular. It is large by [African] standards and is profitable. From a return on equity point of view it generates returns on equity of around 19-20%.

If you look at its past track record, it has grown earnings flattered by benign credit losses in recent years.

It has grown earnings comfortably in the double-digit region – I think almost around 20%, maybe even higher.

If you take a look at pre-provision growth, you are looking at lower than that, so that may be something better to look at from an investor’s point of view because of the noise in credit losses.

But it certainly is an attractive growth opportunity for them as it stands.

DUDU RAMELA: What then would be the role of Nedbank’s Corporate and Investment Banking unit in those regions?

CRAIG METHERELL: I think there will be a lot of collaboration.

NCBA will have a lot of trade links, obviously benefitting from its extensive footprint in East Africa. And I think Nedbank brings established DIB [Dubai Islamic Bank] expertise in that place.

It obviously has excellence in cross-border structuring capabilities already and, as I mentioned, a very strong balance sheet.

So I think it’s really about collaborating, offering a sort of client-led strategy. This is something that we’ve seen the likes of Standard Bank do well across the African continent.

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So it’s really to collaborate and try to find synergies and then learn off the expertise that NCBA does have from a technology and digital point of view in East Africa.

DUDU REMELA: You mentioned diversification. Nedbank is heavily exposed to the South African e-economy. I wonder if this acquisition signals appetite adventure into the rest of the continue.

I think at last count they were in like five countries in the rest of the continent – or is this purely a South-to-East connection?

CRAIG METHERELL: Look, if we take management at its word – and certainly it has proved itself in the past – I think it has been quite clear that this is not a Pan-African strategy. Nedbank is looking to expand into Southern and Eastern Africa at this point.

Read: Nedbank resets Africa strategy as Ecobank sale trims earnings

I think it’s a far more attractive growth region. I think the lessons they’ve learned in the past from a West African opportunity, through Ecobank ultimately, as we started the discussion, have not played out as expected.

Those West African economies are heavily linked to the oil economy, and the concentration risk that you’re exposed to there is obviously an issue.

East Africa is more diversified. Arguably there are similarities between East Africa and Southern Africa that Nedbank is probably more comfortable with – and able to build a better relationship with.

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Ultimately it has acquired control here, so that gives it more say, call it, at the board discussions and so on.

But yes, I think, as I started off this part, I think this is Eastern and Southern Africa strategy, and I don’t see this going a Pan-African route at this point.

DUDUZILE RAMELA: Okay. Thank you so much, Craig, for your time this evening. Craig Metherell is an equity analyst with Denker Capital.

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