Experts worried over Skye Bank’s acquisition of Mainstreet

In from Success Allantee ….

Analysts have said the success of the merger between Skye Bank Plc and its acquired bank, Mainstreet Bank Limited is uncertain and Skye Bank might in turn become a target for acquisition.

In an equity research report, analysts at Exotix Partners said Skye Bank has significant short-term negative catalysts which could undermine the much-anticipated gains of the acquisition.

Exotix Partners LLP, a global finance and investment firm with offices in major global financial centres and significant imprints in Africa, coordinates its global operations through five major offices in London, New York, Lagos, Dubai and Nairobi. The Exotix report was signed off by Ronak Ghadia, a chartered financial analyst.

According to the report, while the acquisition of Mainstreet Bank was a good opportunity for Skye Bank to cement and grow its market position, the current position of Skye Bank could undermine potential gains.

“But we believe the bank’s low capital adequacy and low profitability outlook mean a successful merger is uncertain,” Exotix stated.

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The report noted that while Skye Bank has indicated plans to raise N30 billion in new equity funds later this year, “it may be difficult for the bank to raise this amount due to weak market conditions as well as the scale of the issuance”.

According to analysts, a successful issuance would significantly dilute current shareholders as it would increase issued shares, and the ability of the bank to raise capital is further dampened by the weak earnings environment as return on assets would likely drop by 0.1 per cent in 2015.

The report outlined that Skye Bank could record a 100 basis point increase in cost of risk to four per cent this year due to deteriorating macro-economic conditions; a 550-basis point increase in cost to income ratio due to a 30 per cent year-on-year increase in operating expenses including potential restructuring costs that may arise due to integration of Mainstreet’s operations and a 10 basis point year-on-year decline in net interest margin to 5.2 per cent due to a 60 basis point year-on-year increase in funding cost to 4.8 per cent owing to the expensive short-term bridge funding the bank raised to pay for the acquisition.

“Given the bank’s current low valuation and capital constraints, we believe it could potentially be an attractive acquisition target. For a theoretical deal size of $400-500 million based on its market capitalisation of $190 million and further capital requirements of $150 million, a potential suitor would be acquiring $7 billion worth of assets, a network of 460 branches and customer base of 4.4 million,” the report stated.

The report however noted that in the event of a successful merger, the post-consolidation Skye Bank could benefit from strong non-interest revenue growth and lower funding costs.

“Despite the attractive valuation, we choose to remain cautious given the significant short-term negative catalysts which increase the uncertainty of successfully gaining the synergies of the merger,” the report stated.

The Asset Management Corporation of Nigeria (AMCON) had on December 19 transferred full ownership of Mainstreet Bank to Skye Bank Plc, giving the latter the control to begin the post-acquisition integration for the acquired bank. The transfer of full ownership took place after a completion meeting where AMCON divested its interest and transferred full ownership of the bridge bank to Skye Bank.

Skye Bank had successfully paid 100 per cent of the acquisition value and received regulatory clearance as the new owner. Between October 3 and October 31, Skye Bank paid both the initial 20 per cent mandatory deposit and completed the 80 per cent balance well ahead of the November 3 deadline for the 100 per cent acquisition of Mainstreet Bank, which was described by several analysts and financial commentators as a ground breaking acquisition in Nigeria’s financial sector.

Group managing director, Skye Bank Plc, Mr. Timothy Oguntayo, last week told a select audience of stockbrokers and financial journalists in Lagos that the bank has the experience and the resources to ensure seamless integration of the acquired bank and unearth significant benefits that would improve returns in the years ahead.

According to him, the bank has put in place all necessary measures to ensure seamless integration and switchover of Mainstreet Bank’s operations and customers unto Skye Bank. The switchover started June 1 with the final integration of banking software and operations while the final stage will be delayed till later this month pending approval from a court-ordered meeting.

Oguntayo said the bank would hold a court-ordered meeting for the final approval for the absorption of Mainstreet Bank on June 8, just as shareholders would also be voting to increase the authorized share capital of Skye Bank at the annual general meeting in Lagos.

He said the bank would be raising some N30 billion tier 1 capital, referring to new equity funds, in the third quarter.

He said the board of the bank would be presenting a resolution to the shareholders of the bank at the annual general meeting scheduled for June in Lagos, seeking to increase the authorized share capital preparatory to the supplementary equity offer.

He noted that the bank and its professional advisers would later decide on the appropriate means for the offer, including possible combination of rights issue and public offer.

He pointed out that while the bank has adequate capital base, the additional funding would further strengthen the post-consolidation Skye Bank and put it in better position to meet future regulatory requirements as a strategically important bank (SIB).

SIBs are expected to have capital adequacy ratio of 16 per cent by June 2016 while other banks would continue with the current rate of 15 per cent. With the additional equity funding, Skye Bank’s capital adequacy ratio will be 17 per cent.

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