Pundits are unanimous that the recent acquisition of Mainstreet Bank Limited by Skye Bank Plc holds significant positive prospects for the bank. Capital market editor, Taofik Salako reports that the consensus of most analysts can build considerable momentum for the bank as it progresses with the post-acquisition processes
There is a consensus hanging in the air; in the financial markets; that Skye Bank Plc is a bank to watch. As details unfold about the recent acquisition of Mainstreet Bank Limited by Skye Bank, immediate analysts’ reactions and evaluations appear to be generally positive. Most wager that the acquisition is a game-changer and, if executed with the same crispness and swiftness that characterized the transaction, will create significant values for all stakeholders. Across the broad spectrum of investment pundits – Nigerian and foreign, the inference is positive for Skye Bank; the acquisition will leapfrog the bank to the first-tier level of the topmost players in the Nigerian banking industry and enhance both dividend and capital appreciation to shareholders. Already ranked, prior to the acquisition, as one of the eight systemically important banks, a euphemism for Nigeria’s “too-big-to-fail” financial institutions, Skye Bank is expected to move the ladder up in all measurable indices – size, spread, strength, resistance, profitability and returns.
Skye Bank had on October 31 paid the 80 per cent balance for the full acquisition of the entire issued shares of Mainstreet Bank to the Asset Management Corporation of Nigeria (AMCON), thus making Skye Bank the new owner of Mainstreet Bank. Confirming the depth of its balance sheet, Skye Bank paid some N100 billion to AMCON on Friday October 31 as balance for the acquisition, which was valued at some N120 billion. The deadline for the payment of the balance was November 3, 2014. It had earlier on October 9 paid the mandatory deposit of 20 per cent for the acquisition of Mainstreet Bank. The payment of the 80 per cent balance to AMCON wholly fulfilled the terms of the Share Sale and Purchase Agreement earlier signed by both AMCON and Skye Bank and now put the latter in ownership of Mainstreet Bank.
Kato Mukuru, Partner and Head of Equity Research at Exotix Partners LLP, thinks the deal is a major positive step for Skye Bank.
The Mainstreet Bank’s transaction was a highly competitive sale process, a transaction that was seen by many as a test not only for AMCON but also the integrity and depth of the Nigerian financial services industry. The largest of the three acquired banks by AMCON, Mainstreet Bank emerged from the rubbles of Afribank Nigeria Plc, a quoted bank that was once Nigeria’s fourth largest bank. The rigorous and competitive bidding process involved 25 Nigerian and foreign bidders and was coordinated for AMCON by Barclays Africa Group Limited and Afrinvest West Africa Limited as Financial Advisers and Banwo & Ighodalo as Legal Advisers. In the end, Skye Bank Plc, Cedar One Investment Partners Limited and Fidelity Bank Plc emerged as preferred bidder, first and second reserve bidders respectively. No one has raised a finger on the transaction process, it was a transaction adjudged by many as transparent and credible.
Mukuru, who oversees equity research for Exotix, a global finance and investment firm with offices in major global financial centres and significant imprints in Africa, noted that while it may be too early to fully review the financial impact of the transaction, there is no doubt that the acquisition represented a major leap for Skye Bank. Exotix coordinates its global operations through five major offices in London, New York, Lagos, Dubai and Nairobi.
“While we do not have enough detail on the transaction to comment on the financial impact, but I can safely say that this deal is nothing short of transformational for Skye Bank and if executed well, it could put them in a position to enter the elite group of tier 1 banks,” said Mukuru in a response to email enquiry on analyst’s view of the transaction.
Femi Ademola, head of research and intelligence at BGL Plc, a top Lagos-based investment firm, shared the positive sentiment citing the potential gains in terms of spread and reach and deposit assets.
“I think the acquisition is very positive for Skye Bank Plc,” Ademola said.
Sadiq Waziri, group head of Research at Lead Capital Plc; Sewa Wusu, head of Research and Investment Advisory at Sterling Capital Markets and Akinkunmi Popoola, head of Trade Execution at Securities Africa Financial Limited among others, also shared the same positive outlook.
The potential impact will be big on Skye Bank’s reach and assets. The acquisition leapfrogged Skye Bank as one of the biggest and largest banks in the country in terms of branch network. Mainstreet Bank has nine subsidiaries and a large distribution network comprising of 201 branches across 35 out of 36 states in Nigeria and the Federal Capital Territory, Abuja. It equally has nine cash Centres and 205 Automated Teller Machines (ATMs).
“Scale is critical to banking in Nigeria and we all know that this acquisition fills a major regional gap – the North, in Skye Bank’s current distribution,” said Mukuru.
Skye Bank, with dominant operations in the Southwest, is also banking on Mainstreet Bank to deepen its penetration of the South-East and South-South regions where it is currently less represented. Some 26 per cent or 54 branches of Mainstreet Bank’s network are located in the two regions. These two regions also accounted for 28 per cent of Mainstreet Bank’s over 1.9 million customers, second only to Lagos with 37 per cent.
With smooth and seamless integration, Skye Bank will be able to make valuable in-roads into these two regions without the need to incur huge expenditure while the acquisition would bring valuable concurrence and synergies from the mutual focus areas of commercial and retail banking of the two entities in a larger Skye Bank. Skye Bank focuses on retail and commercial banking, also the main focus areas of Mainstreet Bank.
According to Waziri, the most significant gains to Skye Bank would come in terms of the expanded branch network and the resultant increase in customers, particularly savings and current account depositors, which are the cheapest form of deposits. “Mainstreet Bank was formally Afribank, which was established in 1959; the bank is endowed with a lot physical assets – properties in prime areas, which Skye Bank would benefit from,” Waziri said.
Latest audited report and accounts of Mainstreet Bank for the year ended December 31, 2013 showed that retail and commercial banking contributed 78 per cent, 36 percent, and 18 per cent of total deposits, total loans and profit before tax respectively. Also, Mainstreet Bank’s savings and demand deposits accounted for 21 per cent and 43 per cent of deposit mix, which also demonstrated its focus on these two segments. A second generation leader, Mainstreet Bank has a large pool of loyal institutional and corporate customers, which in spite of its status as an AMCON-owned bank, ensures that the bank’s retained almost its two million customers after the takeover.
Also, Mainstreet Bank Limited has a history of successfully managing agricultural loans, with agric loans accounting for 12.6 per cent and 16.9 per cent of its loan portfolio in 2012 and 2013, second only to ‘general’ sector. Analysts have said Mainstreet Bank’s expertise in managing agric loans made its non-performing loan ratio to be very negligible at 0.01 per cent, where Skye Bank saw a significant opportunity to improve its expertise in this area, and therefore raise its market share in the agriculture sector. This will position Skye Bank very strategically to partner with and participate in the Federal Government’s short and medium term planned strategic investment and budgetary allocation to the agriculture sector.
Popoola pointed out that the bigger branch network would enable Skye Bank to mobilize more low cost deposits and enhance its lending capacity. This will translate to improvement in loan-deposit ratio as the Bank can rely more on its own deposits to grant loans to its customers. “This is helpful at a time like this when liquidity of banks generally is threatened by the raising of Cash Reserve Requirement (CRR) on public funds by the Central Bank of Nigeria (CBN),” Popoola said.
While some analysts would like to be availed details of the transaction, which at this time the institution is still not allowed to make public by reason of restrictions under the Purchase Agreement with AMCON, there is considerable optimism that the acquisition would improve the fundamentals of the bank. Wusu said the acquisition would improve the operational performance of the bank and as such enhance direct and indirect returns to shareholders.
According to him, the acquisition is a game-changer for Skye Bank given the possible synergies and the impact on the balance sheet and profitability of the bank. The acquisition will increase the bank’s market position in the banking industry and at the stock market.
“The acquisition will improve the bank’s capital adequacy and liquidity ratios since most of the Mainstreet Bank’s assets are invested in very liquid assets. Consequently, it is expected that the acquisition will also help to boost the bank’s profitability, going forward,” Ademola said.
Besides driving growth with its inorganic strategy, Skye Bank, organically, has been witnessing a notable upturn in its performance. The Bank recorded a pre-tax profit of N12.3 billion on a top-line of N97.13 billion in the third quarter. “Investors and shareholders should expect to see value creation in form of capital appreciation and improved dividend because ultimately the bigger Skye Bank should be able to post decent profit going forward. The banking sector will also benefit as the development is expected to emphasize the banking sector as the preferred sector by prospective investors,” Popoola said. The benefit, he said, will also spread to the larger Nigerian capital market in terms of trading activity and capitalisation.
The potential impact, analysts however noted, will depend on the execution strategy for the acquisition and integration. With the management of Skye Bank still holding some details to its chest pending the completion of the post-acquisition regulatory process, analysts said the degree of uncertainty on some issues could be a temporary dampener on the stock. Ademola noted that the bank needs to make public its strategy to appropriate value from the acquisition. This strategy, according to Popoola, should include cost control measures as bigger branch network is sometimes associated with increased overheads which can erode the profit. “But how all these transform Skye Bank will depend on execution,” said Mukuru.
But history and experience are on the side of Skye Bank. There is a deep in-house experience on seamless integration and post-acquisition transition of mergers and acquisitions. Skye Bank emerged from the merger and integration of five banks in 2006, following the first phase of the banking industry consolidation. It intends to harness this wealth of experience from earlier successful mergers and acquisitions to drive efficiency, increase market share and ultimately ramp up stakeholder value from the acquisition of Mainstreet Bank. Timothy Oguntayo, who took over in the second quarter as the Group Managing Director, has been with the bank since the 2006 consolidation and had directly anchored the consolidation exercise at the time. He is reputed as a dependable multi-skilled financier and financial strategist.
“Timothy Oguntayo has got all round competence both in commercial banking and investment banking. He started his career in United Bank for Africa (UBA) so he has strong commercial background. He had worked at Prudent Bank. He has the thinking of an investment banker and the skills of a commercial banker and nothing can be better than that. He has sound judgement which is key for decision making,” said Kehinde Durosinmi-Etti, immediate past Group Managing Director of Skye Bank.
While the management of the bank has kept itself to general statement on the import of the acquisition, obviously due to regulations and ongoing post-acquisition process, the acquisition dovetailed into the bank’s medium and long-term growth strategy, which had earlier been made public. This corroborated mManagement’s assertion that the acquisition was a deliberate strategy and it was well prepared to extract the most significant benefits from the transaction.
In 2013, the bank had outlined a three-year short-term plan that is expected to double its balance sheet and customer deposits by the end of the plan in 2015. The bank is also expected to significantly improve its profitability in tandem with the targets for total assets and customer deposit. The bank then retooled its growth model into a more assertive and forward-looking option that sought to consolidate its historical value-based organic growth strategy with expansionary and competitive verve with a view to leapfrog and sustain the bank into a top tier bank within the medium to long term. Focused on internally-driven value creation, Skye Bank had raised comparatively lower capital and did not make any acquisition in the rush for large capital and acquisitions by several banks.
Thus, with this new growth model, while the bank is expected to drive growth largely internally through increased capitalisation and market-facing initiatives, it would also seek to acquire value-adding commercial banking assets that could leverage its balance sheet, spread and customer base. Thus, the acquisition of Mainstreet Bank fits perfectly into Skye Bank’s growth strategy.
“In 2014, the Board assures shareholders that all efforts would continue toward implementing the bank’s plans in the medium term and well into the future. The quest to provide the most efficient customer service, as espoused in the service charter, remains unchanged,” Olatunde Ayeni, Chairman, Skye Bank Plc, had said at the recent General Meeting of shareholders where N3.96 billion was distributed as cash dividends.
The story of the acquisition may not now be one that is fully told, but most will wager that the acquisition of Mainstreet Bank is a masterstroke from Skye Bank; that will change the face and phase of the Nigerian banking industry. Investors and other stakeholders have so much to look forward to as the integration gathers pace and the value-additions become increasingly evident.
