Nedbank in for the long haul with Ecobank

Over the past decade, investors have pushed some of South Africa's major companies to seek expansion outside the country by exploiting the better growth opportunities offered in other parts of the continent.

The expansion has come with varying degrees of success and results from Nedbank's investment in West and Central African banking giant, Ecobank Transnational, highlighted some of the difficulties created by a slowdown in sub-Saharan African growth.

This week, the World Bank cut sub-Saharan Africa's growth projection because of a slowdown in the region's three biggest economies - Nigeria, South Africa and Angola.

With operations in about 40 countries in the region, Ecobank reported a loss after tax of $205-million (R2.7-billion) earlier this week. News of the loss sent shares in Nedbank, which owns a 20% stake in the lender, falling as much as 5.1%. Shares in the country's fourth-biggest lender ended the week 1.6% lower.

Woes in its African business have arisen in a year when the Mike Brown-led institution, along with other South African banks, have come under pressure from growth concerns and political machinations regarding the Treasury.

A large chunk of Ecobank's business is dependent on the Nigerian economy, which is in its first recession in 25 years. The economy, which vies with South Africa as the continent's biggest, has been struggling because of low oil prices that have plunged more than 50% over the past three years.

Nedbank spokeswoman Esme Arendse said Nigeria's recession would negatively affect Ecobank's short-term performance and profitability.

However, she said, over the long term the growth potential of financial services in the rest of Africa remained attractive.

"We expect that as the Nigerian economy recovers, Ecobank will build on their strong positioning in Central and West Africa and that longer-term performance will improve off a low base," Arendse said.

Nedbank acquired its 20% stake in Ecobank in October 2014, after getting into a "strategic banking alliance" about six years earlier. The bank remained committed to its investment, Arendse said.

Nedbank joins a growing list of South African companies that have found the going tough on the continent in recent years, in particular in Nigeria.

Tiger Brands had a disastrous experience after acquiring Dangote Flour Mills from Africa's richest man, Aliko Dangote.

The operation reported huge losses that would eventually lead to the resignation of Tiger Brands CEO Peter Matlare in 2015. When Tiger Brands announced the details of the loss its share price slumped by about 31% in a 2015 low.

Some analysts placed much of the blame for MTN's battle with Nigeria's regulators over a record multibillion-dollar fine on the struggles of the country's economy in recent years. Retailers such as Woolworths and Truworths have also found the jurisdiction challenging.

However, analysts have welcomed Nedbank's more "cautious" approach to its Nigerian investment.

Reuben Beelders, a portfolio manager with Gryphon Asset Management, said the alliance between the two groups showed Nedbank was cautious in its original approach and "certainly don't seem to have rushed into a deal".

"It seems to have been reasonably slow and measured. The fact that only 20% was acquired, not too much but enough to get board representation, gave Nedbank the opportunities to kick the tyres before taking out the entire business," he said in an e-mailed note to Business Times.

He did not think that Nedbank's management could be faulted like that of Tiger Brands for "bumbling" into its Ecobank acquisition.

Beelders said the environment in Africa had changed dramatically since 2011, singling out companies such as Nampak which had expanded heavily into the rest of the continent and struggled to find the profits.

An issue with Africa's growth was that it was a function of the commodity cycle and when this went into a downturn, he said, the economies of the majors took a major hit.

Patrice Rassou, a fund manager at Sanlam Investments Management, said that Nedbank's experience was unfortunate. Nedbank wasn't running Ecobank so it would be unfair to attribute all the blame to the South African bank.

"The quality of the book that Ecobank had in Nigeria was the main problem with a large portion of loans made in foreign currency, hence exposed to naira devaluation," he said.

Nigeria's central bank devalued the currency in June last year to try to attract investment from abroad.

Apart from the effect of slow growth in its most important market, Ecobank has been embroiled in corporate governance issues in recent years.

The International Monetary Fund (IMF) warned in early 2015 that the bank posed a threat to the continent's financial stability because of poor governance processes mainly related to its Nigerian business.

The IMF was quoted in a Bloomberg report as saying the bank's Nigerian subsidiary was plagued by "poor governance, questionable transactions and an unsustainable operation model".

Ecobank has since made board changes, including the appointment of a new CEO.

Nedbank's Arendse said the bank remained supportive of the strengthened management team and would continue to work closely with the "lenders, shareholders, board and management team to unlock value".

anetosp@sundaytimes.co.za