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Mainstreet Bank acquisition: Analysts laud Skye Bank

By on November 24, 2014

There is a consensus 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. Across a 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, Skye Bank is expected to move up the ladder 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 it the new owner of Mainstreet Bank. 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.

Partner and Head of Equity Research at Exotix Partners LLP, Kato Mukuru, thinks the deal is a major positive step for Skye Bank. 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 an email enquiry on analyst’s view of the transaction.

Spread and Reach
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).

In-road to the North
“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 per cent, 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, ensured that the bank’s retained almost its two million customers after the takeover.

Experts pointed out that the bigger branch network would enable Skye Bank to  mobilise more low cost deposits and enhance its  lending capacity. This, according to them 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).

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.

“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 emphasise 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.

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 judgment which is key for decision making. He is experienced, he’s a people’s person, he gets on well with people, he has good leadership skills, he has the attribute to lead so he can ensure that continuity and move the bank forward. I have no doubt that he can move the bank in the right direction,” said Kehinde Durosinmi-Etti, immediate past  Group Managing Director of Skye Bank

 

[ThisDay]