While 2017 was not the banner year for M&A in the Middle East and Africa that 2016 was, headline-grabbing deals were still being struck, notably FirstRand Limited’s acquisition of Aldermore. James King reports.


Though merger and acquisition (M&A) activity by Middle East and African banks in 2017 may not have reached the dizzy heights of the previous year, there were nonetheless a number of standout transactions. Chief among them was the acquisition of UK challenger bank Aldermore by South Africa’s FirstRand Limited. The deal, which was announced in November 2017, was valued at $1.4bn. Not only does it represent one of the largest acquisitions in the UK made by an African lender, it is also one of the largest deals executed by a South African financial institution outside its home market in recent years.

But the acquisition is notable for more than just its size. First, it indicates that non-European banks still have an interest in the UK market despite rising uncertainty around the country’s Brexit negotiations. It also adds to the gradually increasing number of mergers and acquisitions in the UK banking market in recent years. This includes Spanish lender Banco de Sabadell and its £1.7bn ($2.37bn) acquisition of TSB in 2015, as well as a private equity buyout of Shawbrook Bank in 2017 by BC Partners and Pollen Street Capital.

Aldermore, which was established in 2009, had about 230,000 customers at the time of the acquisition and specialises in funding small and medium-sized enterprises. The bank has no branch network and instead reaches its customers online and through phone channels, as well as via nine regional offices. The transaction is expected to provide Aldermore with additional scope, as well as updated digital offerings, to help it compete in the UK market.

Bridging a gap

The deal, which is expected to completed in the first half of 2018, will be executed via a cash offering from FirstRand Limited, the group holding company. To achieve this, an intra-group bridge loan will be extended between subsidiaries FirstRand Bank (FRB) and FirstRand International Limited.  

“The immediate financing of the deal, any transaction-related expenses and other potential contingencies, such as legal and advisory fees, will be covered by a £1.3bn intra-group bridge loan facility that FRB will extend to FirstRand International Limited,” says Nondas Nicolaides, vice president and senior credit officer at ratings agency Moody’s.

But over the longer term, the transaction will ultimately be financed by capital movements between these units. As Mr Nicolaides notes, a large percentage of the group’s excess capital sits on FRB’s balance sheet and is there to fund this kind of acquisition. “We expect the acquisition’s permanent financing to be through capital reshuffling within the group, reducing FRB’s strong capital base,” says Mr Nicolaides.

This will see a large chunk of capital upstreamed from FRB to the holding company FirstRand Limited, which in turn will downstream the sum to FirstRand International Limited in order to repay the bridge loan. According to estimates from Moody’s, about £500m of capital will be transferred in this process, with the remainder of the financing being raised through alternative instruments.

For FRB, the outcome will be a reduction in its common equity Tier 1 (CET1) ratio, which is expected to drop by about 1.3 percentage points, leaving the bank with a still-strong CET1 ratio of 12.8%. This figure is above many of its market peers, including Nedbank, which had a ratio of 12.2% in June 2017.

Vehicle finance

Faced with heightened political and economic risk in its home market of South Africa, the deal will help FRB to diversify its earnings. It will also contribute to the development of its existing UK operation, a vehicle financing unit known as MotoNovo Finance (MNF). This will bring benefits to MNF in terms of raising local currency funding.

“As part of the agreement, FRB will integrate into Aldermore its vehicle finance business in the UK, booked through its MNF franchise in its London branch,” says Mr Nicolaides. “FRB will retain existing business on its balance sheet, but future business will be booked by Aldermore once the integration has been completed. Consequently, Aldermore’s cheaper deposit-based funding in the UK, compared with FRB’s more costly hard-currency market funding, will support MNF, resulting in a more sustainable funding model.”

Research from Moody’s indicates that FRB’s existing UK vehicle and asset finance business line, through MNF, accounts for about 3.7% of its total loans. Accordingly, the acquisition of Aldermore will release much of the hard currency funding it used to apply to the business, which it can instead direct towards its operations in Africa.

Israel’s market makers

Elsewhere, the merger between Israel’s Mizrahi-Tefahot Bank and the Union Bank of Israel was the other headline deal announcement for the Middle East and Africa region in 2017. This resulted in the formation of the country’s third largest bank, Mizrahi-Tefahot – which has a market capitalisation of about NIS15.3bn ($4.5bn) – announcing a $400m acquisition of its much smaller market peer, which has a market capitalisation of NIS1.4bn.

The rationale for the deal is that it will offer Mizrahi-Tefahot an improved platform to compete with Israel’s two largest banks, Bank Hapoalim and Bank Leumi. Cumulatively, these two lenders control about 60% of the country’s banking market. In January 2018, the Israeli competition regulator announced that a decision on whether the deal will be approved would be ready in four months.

The transaction currently has the support of the Bank of Israel, though senior figures in the country’s political class oppose it. According to Reuters, these include the finance minister and the economy minister, who both believe the deal will negatively affect competition across the wider banking sector. In a sign of the depth of feeling surrounding the deal, the head of Israel’s parliamentary finance committee threatened to begin legislative proceedings to remove the Bank of Israel’s banking supervisory function for its support of the deal.

Should the merger receive the green light from the regulators, the combined entity will control about 44% of Israel’s mortgage market, according to some estimates. Moreover, the combined branch network will amount to about 200 locations, potentially giving Mizrahi-Tefahot Bank the second largest distribution in Israel’s banking market.

Kenya a hotspot

Meanwhile, intra-African banking M&A deals increased in number over the 2017 review period (see feature, page 70). Kenya was once again a source of significant activity, even if the overall deal sizes were low. In May, the State Bank of Mauritius (SBM), Mauritius’ second largest lender, acquired a 100% stake in Kenya’s Fidelity Commercial Bank. Though Fidelity is one of Kenya’s smaller banks, with about 14 branches, the deal nevertheless provides SBM with a foothold in the market. 

In addition, according to a statement issued by the Central Bank of Kenya in January 2018, SBM is expected to progress with the acquisition of another Kenyan lender, Chase Bank, which has fallen into receivership, in the coming months.

SBM’s activity in the Kenyan market is part of a trend for Maurtius’s largest banks to push beyond the domestic market and into larger, higher growth markets. SBM, for example, became the first foreign financial institution to be granted a wholly owned subsidiary licence by the Reserve Bank of India in December 2017. According to SBM, this approval will help it achieve its objective of facilitating capital flows along the India-Africa corridor. East Africa, in particular, is an important component of this strategy.

“Kenya is an important financial centre. For most banks expanding in east Africa it’s a market they can’t really ignore,” says Eric Musau, head of research at Kenya’s Standard Investment Bank. “So it is important to get a foot in the door. Even if they don’t develop a big presence they can grow organically over time.”

Ripe for consolidation

Kenyan lender Diamond Trust Bank (DTB) announced the acquisition of the in-country operations of Pakistan’s Habib Bank in March 2017. Under the terms of the deal, Habib Bank Kenya was acquired for Ks1.82bn ($18m). According to local press reports, DTB’s market share was about 6.1% with 61 branches across the country before the acquisition, while that of Habib Bank was 0.34% with five branches.

“The smaller and somewhat weaker banks have been taken off the table. You can tell that’s likely to continue, especially if you’re considering issues around capital and essentially some of the challenges of the system,” says Mr Musau.

According to Mr Musau, somewhere between 10% and 25% of Kenya’s banking sector is ripe for consolidation. “Some of the smaller banks have struggled to find a competitive advantage. When you look at IFRS 9 implementation in 2018, as well as the introduction of an interest rate cap by the central bank, many smaller banks will be under pressure. So from an acquisition perspective, it’s a matter of finding the right price point for some of these entities.”

Elsewhere in Africa, Nigeria’s FirstBank, the country’s oldest bank, has firmed up its position in the Democratic Republic of the Congo (DRC). When it initially entered the market in 2011, FirstBank acquired a 75% stake in Banque Internationale de Crédit and formed FBNBank DRC. In the intervening years, this in-country operation has become one of the largest lenders in the country. As a result, in September 2017 FirstBank acquired the remaining 25% of its DRC operation, making it a wholly owned subsidiary.

“Over the course of 2017 we reappraised our position in the DRC. The country is a huge landmass with a population of more than 80 million. So we took the strategic decision to secure a 100% stake in our DRC subsidiary because we see an opportunity for significant upside,” says Adesola Adeduntan, managing director and chief executive of FirstBank Nigeria (see interview, page 72).

This transaction was notable because it is one of the few deals of recent times involving Nigerian lenders either bolstering or expanding their presence outside the home market. Indeed, a handful of lenders from the country have been scaling down their operations, particularly in Francophone Africa, in past years. Diamond Bank’s sale of its Benin unit to an Ivorian financial group in November 2017 is a case in point.

Besides acquiring the remaining 25% stake in its DRC unit, FirstBank will also look to optimise its position before making any new acquisitions. “Beyond the DRC, we will be optimising the bank’s existing footprint. We are in Ghana, Senegal, Guinea, Gambia and Sierra Leone and we intend to make significant investments in these locations as there’s a lot more potential for growth,” says Mr Adeduntan.

More to come

With political and economic uncertainty clouding a number of markets in Africa and the Middle East, as well as in Europe, the prospect for further M&A activity is unclear. More consolidation of smaller banks should be expected in the coming year, though there is some scope for one or two mega-deals to be struck, particularly in the Middle East. Nevertheless, with the right opportunities emerging, South African banks may well step up and execute some notable deals in the coming years. 

“A few South African banks are still looking to expand across sub-Saharan Africa,” says Mr Nicolaides.

“I wouldn’t say that there is a pressing appetite for further acquisitions but if and when an opportunity arises and allows the banks to strengthen their position we could see further M&A activity.”


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