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You can also listen to this podcast on iono.fm here.<\/p>\n
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.<\/p>\n
The deal is set to see Nedbank adding 60 million clients across Kenya, Uganda, Rwanda and Tanzania.<\/p>\n
This will contribute some 11% to the lender\u2019s earnings, with the rest of its Africa operations offering 14% of earnings that would come from outside South Africa.<\/p>\n
Read:<\/p>\n
Kenya\u2019s NCBA \u2018worth paying for\u2019 \u2013 Nedbank finance chief
\nNedbank\u2019s R13.9bn NCBA East Africa deal complete<\/p>\n
Craig Metherell is an equity analyst with Denker Capital. He joins us now for more. Thank you very much, Craig, for your time.<\/p>\n
So this is the lender\u2019s first expansion into East Africa. Maybe let\u2019s start with some context \u2013 and you can tell us how it actually got here.<\/p>\n
CRAIG METHERELL: Hi, Dudu. Thanks for having me on the call today. Yes, it is Nedbank\u2019s first expansion into East Africa. In the past the bank had exposure in West Africa through its just over 21% interest in Ecobank \u2013 and that didn\u2019t play out as expected.<\/p>\n
They thought they\u2019d 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 \u2013 and other multinationals as well.<\/p>\n
But it didn\u2019t play out as expected.\u00a0Nedbank arguably didn\u2019t have control over that stake, although it had a seat on the board. Things didn\u2019t play out as wished.<\/p>\n
So it exited that stake, and as part of its strategy it has had exposure to other southern African regions.<\/p>\n
But part of the strategy then became to diversify what was essentially a concentrated South African business into an attractive growth area or region \u2013 being East Africa.<\/p>\n
So that essentially brought it to the NCBA deal, which ultimately led to acquiring a controlling stake in NCBA \u2013 or roughly around 66%, as you pointed out.<\/p>\n
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DUDUZILE RAMELA: What do we know about the governance structure and how this will actually play itself out?<\/p>\n
CRAIG METHERELL: It has all been approved at this point. Nedbank released an announcement yesterday that all regulatory hurdles had been passed.<\/p>\n
A while back the bank announced that it had received support from the appropriate percentage of shareholders \u2013 of NCBA shareholders \u2013 to accept the deal in order to acquire the 66%.<\/p>\n
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.<\/p>\n
DUDUZILE RAMELA: You mentioned the West Africa deal that didn\u2019t 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.<\/p>\n
CRAIG METHERELL: Management is on record saying that they\u2019d like to achieve an 80:20 split; that\u2019s 80% South African-generated earnings and 20% outside South Africa. But this is Southern and Eastern Africa.<\/p>\n
So, as you mentioned in the introduction, acquiring NCDA \u2013 or the 66% interest in NCBA \u2013 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.<\/p>\n
Now, in order to get to 20%, at current growth rates you would expect that to take about 50 years or so \u2013 just rough calculations that I\u2019ve done myself which obviously could pan out differently.<\/p>\n
It\u2019s all part of Nedbank\u2019s strategy to diversify its earning base as mentioned, and obviously to try and cut into what is a high-growth region.<\/p>\n
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.<\/p>\n
Generally the banking sector is able to grow at a multiple of GDP growth. So it\u2019s really attractive from that point of view.<\/p>\n
From a demographics point of view, East Africa is a large market \u2013 I\u2019m 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.<\/p>\n
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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\u2019ve call it cross-border opportunities.<\/p>\n
And then NCBA itself brings what we understand to be really strong digital capabilities and technology.<\/p>\n
That certainly could complement Nedbank\u2019s offering \u2013 and vice\u00a0versa. Nedbank obviously brings the scale of its balance sheet and its extensive corporate investment banking expertise across the continent already.<\/p>\n
So there is opportunity there, and NCBA is a tier one in the region \u2013 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%.<\/p>\n
If you look at its past track record, it has grown earnings flattered by benign credit losses in recent years.<\/p>\n
It has grown earnings comfortably in the double-digit region \u2013 I think almost around 20%, maybe even higher.<\/p>\n
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\u2019s point of view because of the noise in credit losses.<\/p>\n
But it certainly is an attractive growth opportunity for them as it stands.<\/p>\n
DUDU RAMELA: What then would be the role of Nedbank\u2019s Corporate and Investment Banking unit in those regions?<\/p>\n
CRAIG METHERELL: I think there will be a lot of collaboration.<\/p>\n
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.<\/p>\n
It obviously has excellence in cross-border structuring capabilities already and, as I mentioned, a very strong balance sheet.<\/p>\n
So I think it\u2019s really about collaborating, offering a sort of client-led strategy. This is something that we\u2019ve seen the likes of Standard Bank do well across the African continent.<\/p>\n
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So it\u2019s 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.<\/p>\n
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.<\/p>\n
I think at last count they were in like five countries in the rest of the continent \u2013 or is this purely a South-to-East connection?<\/p>\n
CRAIG METHERELL: Look, if we take management at its word \u2013 and certainly it has proved itself in the past \u2013 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.<\/p>\n
Read: Nedbank resets Africa strategy as Ecobank sale trims earnings<\/p>\n
I think it\u2019s a far more attractive growth region. I think the lessons they\u2019ve learned in the past from a West African opportunity, through Ecobank ultimately, as we started the discussion, have not played out as expected.<\/p>\n
Those West African economies are heavily linked to the oil economy, and the concentration risk that you\u2019re exposed to there is obviously an issue.<\/p>\n
East Africa is more diversified. Arguably there are similarities between East Africa and Southern Africa that Nedbank is probably more comfortable with \u2013 and able to build a better relationship with.<\/p>\n
Read\/listen:<\/p>\n
Exclude Ecobank and Nedbank\u2019s underlying business looks strong
\nNedbank\u2019s turnaround is taking shape \u2013 now comes the credit test<\/p>\n
Ultimately it has acquired control here, so that gives it more say, call it, at the board discussions and so on.<\/p>\n
But yes, I think, as I started off this part, I think this is Eastern and Southern Africa strategy, and I don\u2019t see this going a Pan-African route at this point.<\/p>\n
DUDUZILE RAMELA: Okay. Thank you so much, Craig, for your time this evening. Craig Metherell is an equity analyst with Denker Capital.<\/p>\n
#Nedbank #betting #East #Africa<\/p>\n","protected":false},"excerpt":{"rendered":"
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