Jury out on Nedbank's Ecobank gamble

JSE-listed Nedbank maintains it knows what it is getting into by paying R5-billion for 20% of Togo's Ecobank Transnational.

Investors, however, are not convinced that Ecobank's governance scandal is entirely a thing of the past, as indicated by the 1.8% fall in Nedbank's share price after the announcement of the deal.

It's an immense deal for the Old Mutual-controlled bank, dwarfed only by its R7.3-billion purchase of BoE back in 2002, and easily Nedbank's most ambitious foray further north.

Ecobank is a powerhouse in West Africa - it is the top bank in Ghana, the third-largest in lucratively populous Nigeria and has a presence in three dozen sub-Saharan African countries.

"Our strategy is to build a pan-African banking network," Nedbank chief operating officer Graham Dempster said this week.

Ecobank will be the strongest pillar of Nedbank's plan. And Nedbank is now grasping around to catch up with the much more substantial footprint that its local rivals - Barclays Africa, Standard Bank and increasingly First National Bank - have on the continent.

Dempster says the relationship with Ecobank has been built over six years, giving Nedbank access to its profitable and powerful franchise.

But this "reward" comes with a nasty twin called "risk". And analysts see plenty of risk lurking in Ecobank's patchy governance record of the past year.

Last year Nigeria's Securities and Exchange Commission (SEC) launched a probe after Ecobank's financial director said she had been pressured to misstate financial results. The regulator criticised weaknesses in the board's ability to monitor management and ensure ethical behaviour.

Finally, under pressure from South Africa's state-owned Public Investment Corporation (PIC), with a stake of nearly 20% in Ecobank, CEO Thierry Tanoh quit in March.

But the PIC has a lot less to lose than Nedbank, which lent $285-million (R3.2-billion at Friday's rate) to Ecobank in 2011, which gave it the right to take up a shareholding in the bank - chips it is cashing in now.

Dempster insists the governance issues were dealt with in a "decisive manner", pointing to external reports and a 51-point action plan Ecobank agreed to.

He says these issues are a thing of the past and Nedbank has confidence in its partner's new CEO and chairman.

But if the market reaction was any indicator, investors aren't convinced Nedbank is getting a great deal.

"In the short term it may be a bit expensive but in the longer term it should be good value," said Abri du Plessis, of Gryphon Asset Management.

Just the scale of the potential profits bodes well for Nedbank's shareholders.

Last year Ecobank made $164-million (R1.8-billion) in profit for the six months to June - money that will be a handy boost for Nedbank's own bottom line. Ecobank's return on equity sits at 17.7%, which is higher than Nedbank's last reported 15.1%.

But the bigger question is about strategy.

Nedbank is buying a seat at the top table, which it will have to share with Qatar National Bank, which currently has 23% of Ecobank (although this will drop to 20% when the new shares are issued).

Chris Steward, head of financials at Investec Asset Management, said: "Nedbank will be investing a very substantial amount of its energies into a business in which it owns a 20% stake, and another bank with considerably deeper pockets owns an equal stake."

Nedbank knew it was a possibility that anyone could jump in and buy a stake, Dempster said.

But he said the bank was "very comfortable" that its 20% would give it enough say - as well as enough access - to what Dempster called an "Africa rising" market. - Additional reporting by Reuters