The two minnows are strange creatures - both are listed with just more than R1-billion in market capitalisation, making them small caps as well as small banks (the next-smallest, African Bank, is worth R25-billion).
Mercantile, particularly, has been an odd feature on the JSE in that there is almost no trade in its share - its Portuguese state-owned parent, Caixa Geral de Depósitos, owns more than 90% of it.
That means it is in violation of the JSE's unenforceable listing rules that require a 20% free float.
Mercantile has had a rather dismal decade, requiring successive bailouts from its parent after squandering great amounts of money. To reinforce the point, it announced a day after the merger talks announcement that it would be reporting earnings between 30% and 40% lower than last year.
Mercantile has tried to be a full-service retail and commercial bank, offering from transaction accounts through to home loans, but has never had the scale to make it work.
In comparison, Sasfin has carved out a niche by banking owner-managed businesses. Sasfin has a neat operation focused on asset finance - for photocopiers and the like - for small businesses, with a brokerage to manage the wealth of those businesses' owners.
The banks both also have clear cultural alignments - Mercantile is focused on the South African Portuguese community; Sasfin is Jewish in character.
So why would the two get together?
Sasfin has a slightly larger market capitalisation, but is smaller on every other measure. Mercantile has loads of regulatory-qualifying capital on its balance sheet - R1.5-billion compared to Sasfin's R368-million. It also has twice the assets of Sasfin.
But the fact that the market values Sasfin more highly indicates how inefficient Mercantile's balance sheet is - its return on capital lags Sasfin's - as well as market frustration at a lack of liquidity in Mercantile shares.
If the banks merge, Sasfin gets to use the combined capital to expand its asset finance operations. Mercantile gets access to Sasfin's customer base to push its transactional retail and corporate products.
Mercantile would also bring a deposit base, which could lower the overall cost of funds for the merged group. One hopes it would launch a push for more deposits, taking competition to the likes of Bidvest Bank and Grindrod Bank, which have been more aggressively courting retail depositors.
And the deal would dilute the interest of Caixa Geral de Depósitos, leaving the merged entity with a larger free float, so obeying JSE rules and improving the shareholder proposition.
But the practicalities of merging and establishing systems to cross-sell each other's strengths to their customer bases could be expensive. And that is before navigating the challenge of merging two rather different cultures.
The two are engaged in talks, but it would be naïve to think a deal is a sure thing.
- Derek Cooper is getting his R7.5-million ex gratia payment from Standard Bank following his retirement as chairman, despite significant opposition from shareholders.
At the bank's AGM this week, 57% of shareholders approved it, while 40% voted against it (of 81% of shareholders present at the meeting).
That means more than half of minority shareholders voted no (excluding Industrial and Commercial Bank of China, empowerment shareholders, and Standard Bank share incentive trusts).
As argued here two weeks ago, the payment is not justifiable as it has no positive incentive effects.
According to a report on Moneyweb, remuneration committee chairman Ted Woods justified the payment as a "thank you" to Cooper. In other words, the old boys' club being nice to one of its own.
I suppose a bank can be nice if it wants to be, but I would rather it showed that by helping a retrenched elderly customer from having her home foreclosed than by handing R7.5-million to a well-paid former chairman. From a shareholder's point of view, there is no difference between these two options. Both amount to a transfer of the bank's profits to an individual, for no return to the bank.
I'm sure the Standard Bank board, unaccustomed as it is to accusations of poor governance, has been shocked by the experience. It should be a reminder that no matter how good you are - and Standard Bank is a good bank - do not start thinking you can do no wrong.
- - banknotes@intelllidex.co.za