Mergers and Acquisitions Hold the Next Growth Story for SSA Banks

By George Bodo, Director, Callstreet Research and Analytics

After nearly a decade of business boom for sub-Saharan Africa (SSA) banks, characterized by double-digit annual balance-sheet growth, the boom cycle appears to have run its course, largely courtesy of the pass-through effects of undesired economic events across the region. Earning risk-assets are recording tepid annual growth rates. Data from the International Monetary Fund (IMF) shows that between 2004 and 2015, annual private-sector credit growth in SSA averaged strongly at 15 percent. In 2017, that growth slumped to just 3.5 percent. In 2018, growth in a basket of four powerhouses in SSA printed at a measly 4 percent, barely expanding. Since 2016, and as a countermeasure to the slackening in economic output, commercial banks have opted for a more risk-averse approach to asset allocation—instead buying more of the low-risk weighted debt securities issued by the treasuries of national governments.

For instance, in 2017, we noticed that banks’ asset growth was being driven by the purchase of these debt securities to the extent that their share of total assets during the year rose sharply by a staggering 300 basis points year-on-year to stand at 21 percent. But this risk-off strategy can only go so far as far as shareholder-wealth creation is concerned. Banks in the region have had to find a new balance-sheet growth story. And they appear to be finding it in mergers and acquisitions (M&As), driven by both market and regulatory pressures. Indeed, the region has seen an increase in M&A activities in its banking sector, ostensibly driven by the need to gain market power in existing markets.

The transaction list keeps growing, with Kenya dominating the list so far. In the fourth quarter of 2018, NIC Bank and Commercial Bank of Africa (CBA), both large banks in Kenya, announced merger talks. It is a merger that, while baked with patches of synergy, could help the two banking heavyweights build critical mass in their balance sheets. In April 2019, KCB (Kenya Commercial Bank), the largest bank in East Africa by total assets, announced its intention to acquire all of the ordinary shares of the state-owned National Bank of Kenya (NBK). It’s a liability game for KCB. Indeed, NBK’s strong public-sector franchise could prove to be a valuable addition to KCB’s own liability strategy, especially the domiciliation of public-sector-related liabilities (as the bank has one of the largest tax-collection platforms). Additionally, this acquisition, if consummated and coming hot on the heels of KCB’s acquisition of the good bank that survived the now defunct Imperial Bank (which collapsed in October 2015), will designate KCB as a resolution vehicle.

In early May 2019, Kenya’s Equity Bank Group announced that its board had agreed to enter into a binding term sheet with Atlas Mara through a share swap to exchange Atlas Mara’s banking assets in Zambia, Tanzania, Mozambique and Rwanda in the following manner: 62 percent of the share capital of Banque Populaire du Rwanda (BPR); 100 percent of the share capital of Atlas Mara Zambia; 100 percent of the share capital of BancABC Tanzania; and 100 percent of the share capital of BancABC Mozambique. In exchange, Equity Bank will swap approximately 252,482,300 shares representing 6.27 percent of its issued and fully paid share capital, valuing the transaction at approximately US$05.4 million. We are not ruling out more transactions, either in Kenya or by Kenyan-domiciled banks, in the coming months.

Further across West Africa, in Nigeria, Access Bank, the country’s third-largest bank by assets, in December 2018 announced merger talks with Diamond Bank, the seventh-largest bank. The merger, which has been consummated, created the largest bank by assets in both Nigeria and SSA excluding South Africa, with total assets in excess of US$14 billion (or Sh1.4 trillion), surpassing Zenith Bank and First Bank, the previous largest banks. In the French-speaking West Africa economic zone (commonly referred to by its French acronym of UEMOA for West African Economic and Monetary Union), a merger involving Bank of Africa’s Benin operations and a local name was completed in February 2018.

However, regulatory pressures have also contributed to the rise in M&A activities in the region, more so in Ghana. In September 2017, Ghana’s central bank, the Bank of Ghana, hiked its minimum core-capital regime for commercial banks to GH¢400 million (US$83 million based on the 2018 average exchange rate) from GH¢120 million and gave banks until December 2018 to comply, a compliance period of just 15 months. At the time, we at Callstreet estimated that the directive affected some 18 banks—which were not only below the GH¢400-million target but lacked sufficient capitalizable reserves—that would need to raise a total of GH¢5.0 billion (equivalent of US$1 billion) in order to comply, an amount that was too deep for the local capital markets. In effect, that quantum had the effect of triggering mergers and acquisitions. And so it did. By the close of the fourth quarter of 2018, there were three merger talks, out of which only one, involving First Atlantic Bank and Energy Bank, was consummated. The merger in itself was triggered by the failure of Energy Bank to raise, through an initial public offering, the requisite US$66 million it needed to comply with the minimum core-capital requirements. The fate of the two other merger talks remains unknown. However, while these mergers are largely a compliance race to meet prudential capital requirements, they will also help build a fresh critical mass and create a new balance-sheet growth story for Ghanaian banks. In Tanzania, the country’s central bank, the Bank of Tanzania, approved a relatively less high-profile merger between TPB (Tanzania Postal Bank) and Twiga Bancorp early in 2018. The bank also explicitly stated its openness to considering more mergers in the sector.

Broadly, we believe that in the absence of a tangible growth story, mergers and acquisitions can help banks strengthen their deposit franchises and achieve efficient funding, bolster balance sheets for both business and regulatory purposes, tweak asset allocation by opening up new pools of customers, build efficient distribution systems and even bring down costs of risk, all in the long-term. However, we also caution that forging acquisitions to gain market power in existing markets is sometimes an admission of failure to grow. The upside, in our assessments, lies in the optimization and “synergization” of balance sheets. But our caution notwithstanding, as 2019 slowly rolls towards 2020, mergers and acquisitions will be a key theme to watch out for in SSA’s banking scene.