Thursday, February 19, 2015 11.49 AM / Research
Q: What is the likely effect on the market of the Mainstreet Bank (MBL) acquisition and eventual integration (and why the share price hardly budged)?
The acquisition will clearly improve the industry positioning of Skye Bank to between 7th and 8th, depending on the parameter(s) applied. Specifically, and using their 2013 audited financial statements, the combined entity will rank 8th in terms of PBT, Total Assets, and Deposits. To gauge this better, we may have to wait for their their 2014 Audited financial statements.
As regards the issue of SHARE PRICE, in the last 23 months, the share price of Skye Bank Plc has been on a steady decline pattern to record -75.32% loss- a significant depletion of its market value, following an impressive 7months rally of +171.15%, moving from low of N2.60kobo to its high of N7.05kobo experienced between August 31th 2012 to April 3rd 2013. However, the bank closed the year 2013 with a modest gain of 2.33% on the back of extraordinary volatility, driven by active profit-taking tendency, which eventually triggered sell-off- an indication of melt-down in the fundamentals of the bank.
The stock closed the year 2012 with +11.98% price appreciation. In a similar fashion, 2.33% uptick was recorded in 2013. In 2014, the stock erased the two years gain, plunging by -39.55%. So far in the current year 2015, the stock had shed -25.56% of its market value it started the year with.
Analytically, the share price of bank is currently retracing from its all time low of N1.98kobo. it had appreciated by 8.8% in the last one week.
From a technical stand point, sentiments analysis revealed strong pessimistic postures and falling investors' loyalty towards the stock while the stock remained bearish in both short and mid-long term periods as indicated by technical indicators.
It is very instructive to note that share price movements are an agglomeration of several factors, including perception, financial performance, investors’ gut feeling/sentiments, domestic and local/international economic conditions that influences the foreign portfolios that dominates the bourse, amongst others.
That said, the MBL acquisition was executed at a time the All Share Index (NSEASI) faced negative sentiments around banking regulations, tighter monetary policies, falling oil revenues, political uncertainty, and illiquidity. While the share price of Skye Bank Plc rose just after the announcement of the transaction, it tapered down almost immediately on the market sentiments towards the bank and the market in general.
Furthermore, sentiments are likely to remain mixed with lackluster trading pattern as long as the stock is trading below N3.81kobo, which used to be its key support point, now a strong resistance for the stock.
Similarly, the stock would remain depressed and battered as long as the stock is trading below N2.60, which has been its all-time support. The stock is technically in a depressed and battered position at N1.98kobo. This however, may incite moderate bargain tendency towards the stock, provided there are healthy fundamentals to drive the almighty reversal.
Furthermore, sentiments are likely to remain mixed with lackluster trading pattern as long as the stock is trading below N3.81kobo, which used to be its key support point, now a strong resistance for the stock, provided there are healthy fundamentals to drive the almighty reversal and expectations are therefore high as regards the 2014 Audited Accounts and Q1 2015 financials.
Conclusively, it would appear that the market is playing a ‘waiting game’ (as was done with past acquisitions such as those by Access, FCMB, Ecobank, etc) where they adopt a “wait and see” approach to how and when Skye Bank will fully realize the value and synergies the bank espoused about the acquisition of MBL, hence, the seemingly muted impact on its share price. We may not have to wait for too long.
Q: How is it likely to affect competition?
Its’ likely effect on competition may be seen along these lines/areas:
· Branch network: The combined entity now has 469 branches (259 of Skye and 210 of MBL), which would mean the opportunity to achieve cost reductions through synergy of operations, increased network for customers and additional outlets to gain market share in retail and commercial banking, which are the segments of focus for both banks.
With this, Skye Bank now has the fourth (4th) largest branch network in Nigeria (from their previous 8th position).
· ATM and other delivery/distribution channels: When combined, Skye Bank’s ATMs and POS are now 814 and 8,605 respectively. For ATMs, they now have the 4th largest network. This will definitely positively influence their capacity to serve diverse customers across various locations in Nigeria.
· Customer base: The combined customer base of the larger Skye Bank is 4.39 million, fueled by the loyal customers of MBL who remained with the bank in spite of its government ownership and uncertainty surrounding its future at the time. The breakdown / demography of this customer base is not known to us and it will be interesting to know the distribution between private/government; corporate/individual; active/dormant and current/savings. That said, the numbers offers Skye Bank the opportunity to compete with other banks.
Additionally, major corporate brands that stuck with MBL (in spite of their status) offers Skye bank the opportunity a share of the business of these corporate organizations.
· Stored Value in Subsidiaries: Skye Bank has acquired nine (9) subsidiaries of MBL, with interest ranging from financial services, bureau de change, capital markets, real estate, insurance, micro-finance, registrars, securities to trusteeship. The Bank has till June 2016 to determine whether or not it would divest from these subsidiaries, or otherwise.
It is instructive to note the dichotomy between the type of banking licenses held by these two banks up till now. The regulatory space that allows them to run pari-passu means that at some stage, sooner than later, a decision becomes imperative.
Whatever decision it chooses to take, the likelihood of creating value is very high. For instance, it could harness synergies from retaining them for revenue diversification and reach, or it could realize exceptional income from their divestment, especially when one considers the huge profits made by some banks from their recent divestments.
· Retail Banking & Commercial Banking: Perhaps the two segments in which competition will definitely feel the impact of the acquisition the most will be in retail banking and commercial banking. For instance, Skye Bank recently started the Direct Sales Agent (DSA) structure whereas MBL has had a history of success at executing a similar structure, hence the synergy accruable to Skye Bank in mobilizing cheap deposits/savings gets strengthened, given that retail and commercial banking contributed 78%, 36%, and 18% of deposits, loans, and PBT of MBL, which clearly shows the focus on the two segments – one in which Skye Bank is expected to leverage this strength to upscale its focus on these two segments.
Q: Is the bank likely to repeat integration achieved during Consolidation (of EIB, Prudent Bank, Bond Bank, Co-Op Bank and Reliance Bank)?
Sources within the bank suggest that their integration plan is to have the two organizations run separately until the end of May or June 2015 (at the latest). This move supports the action seen immediately after the take-over of the management of MBL last December, when Skye Bank seconded her DMD and ED, Risk Management to Mainstreet Bank as GMD and Group ED respectively.
The integration achieved in 2006 (i.e. EIB, Prudent Bank, Bond Bank, Co-Operative Bank and Reliance Bank) is structurally different from this one given that the current transaction is an outright acquisition whereas the 2006 transaction was a merger of five (5) distinct banks.
This notwithstanding, it is understood that Skye Bank plans to integrate the various components/operational parts such as Information Technology, Risk Management, Human Resources, Operations, Strategy along timelines drawn. We cannot ascertain such a timeframe but would imagine that it would be consistent with the points made above if they are to aggregate the customer focus/benefits enumerated.
Market sources indicate that Skye Bank Plc has engaged the services of seasoned consulting firms to work them through the integration areas mentioned above, and given their history of integration/change management, there is an expectation that this will be seamless.