Mercantile Bank CEO Karl Kumbier. Picture: SUPPLIED
Mercantile Bank CEO Karl Kumbier. Picture: SUPPLIED

Little-known Mercantile Bank has seemingly become a market darling overnight, catching the eye of foreign investors, a big four bank and the country’s largest asset manager.

The bank, owned by Portuguese state-owned banking group Caixa Geral de Depósitos, will be the proud new purchase of one of four bidders by the end of the year.

In the running are Capitec, Nedbank, a Public Investment Corporation/Bayport Financial Services consortium, and a consortium comprising Grindrod Bank and investment company Arise.

So what’s the big appeal? Mercantile is small, with customer numbers in the tens of thousands (not millions) and a balance sheet a fraction of the size of commercial rivals.

Mike Brown, CE of Nedbank, described the possible acquisition as "bolt on" and unlikely to affect market shares.

Still, Mercantile punches well above its weight and has a number of attractive qualities.

For one, Caixa is not a willing seller, immediately giving the asset a certain allure.

The European Central Bank has ordered Portugal’s largest bank by assets and deposits to sell Mercantile as the condition of a restructured loan.

Caixa is also selling banks in Spain and Brazil as part of efforts to offload half of its risk-weighted assets offshore. It will keep banks only in Portuguese-speaking countries where it has sizeable market share, including in Mozambique and Angola.

Mercantile’s relationships with these banks could be a drawcard for the Grindrod Bank/Arise consortium. An African investment fund, Arise is backed by Norwegian investment fund Norfund; Dutch development bank FMO; and Rabobank, a Dutch co-operative bank.

Operational since January 2017, Arise aims to grow Africa’s small to medium-sized enterprise (SME) and agribusiness sectors by investing in financial institutions. It has already invested in 10 financial services companies, mainly banks, on the continent.

For Grindrod, the acquisition would add scale plus the 12,000 entrepreneurs that Mercantile services. Mercantile also has about 16,500 SME clients, mainly in its rental finance business, and services 18,000 credit card merchants.

With a balance sheet of R13.4bn, it is a bigger bank by assets than JSE-listed rival Sasfin, which was one of as many as 18 bidders that tabled offers for Mercantile.

The PIC and Bayport, a provider of personal loans and funeral insurance, may simply be after Mercantile’s banking licence. Mercantile is also one of a handful of banks that has access to all payment streams in SA, which means the PIC, with assets nearing R2-trillion, would not have to invest in banking infrastructure.

"We are one of the few banks in the country that has a fully integrated core banking system. That system is scalable, paid off and brand new," CEO Karl Kumbier told Business Day.

This system, called TCS BaNCS, is the same one the State Bank of India uses to serve its 100-million customers, Kumbier says.

"With the right brand this bank really has legs."

Mercantile also appears to be performing financially. The bank’s net profit after tax climbed 20% to R213m for the year to December 2017. This followed growth of 21% and 15% in the preceding two years.

Its rental finance book, which it bought in 2011, has grown from R30m to R1bn. Turnover and volumes in its foreign exchange business doubled in the last three years.

Mercantile, which tops business banking service rankings in the South African Customer Satisfaction Index, would boost Nedbank’s presence in the SME space, while providing Capitec with an easy entry into business banking.

Harry Botha, an analyst at Avior Capital Markets, says a sale price of anything more than one times Mercantile’s net asset value, expected to reach R2.5bn at the end of 2018, would be optimistic, considering that its return on equity has averaged 8% over the past five years. "I would say somewhere between 0.5x and 1x [book value]."

ziadyh@businesslive.co.za