An Ecobank branch in Bangui, Central African Republic. Its woes have hit Nedbank's earnings. Picture: GETTY IMAGES
An Ecobank branch in Bangui, Central African Republic. Its woes have hit Nedbank's earnings. Picture: GETTY IMAGES

Nedbank Group is finding its profitability is at the mercy of the oil price and Nigerian and South African politicians because of the lender's reliance on its two biggest markets.

The company has shaped its African expansion strategy around a 20% stake in Ecobank Transnational, which makes the bulk of its money in Nigeria, among the 36 countries in which it operates. A contraction in Nigeria's economy following a slide in oil prices and currency controls caused Ecobank to tumble to a 2016 loss, weighing on Nedbank's earnings.

This comes as Nedbank faces its own issues at home, where President Jacob Zuma's firing of three finance ministers in less than two years helped to shove the economy into recession and spurred credit downgrades to junk.

Large exposure

While peers Barclays Africa Group, FirstRand and Standard Bank Group face the same local challenges, those lenders have bought or built diverse operations across the continent that are under their control.

"Nedbank's Africa strategy is the least attractive of the South African banks," said Richard Hasson, a portfolio manager at Electus Fund Managers. "It has a large exposure to Ecobank, which is an asset it doesn't control or manage, and therefore it's unable to manage the lending practices or risk."

Ecobank makes up 22% of Nedbank's earnings and contributed to a 3.7% decline in the lender's net income in the six months to the end of June, Nedbank said on Wednesday.

The market value of Nedbank's investment in Ecobank, for which it paid almost $500-million (R6.7-billion at today's rates) in 2014, is now equivalent to $218-million, based on Ecobank's share price on the Nigerian Stock Exchange on Thursday.

Ecobank also had governance challenges, said Patrice Rassou, head of equities at Sanlam Investment Management.

However, not everyone sees the investment negatively, especially with Ecobank returning to profit in the first quarter. The company's stock has rallied 65% this year.

"Ecobank does give Nedbank a low-risk way of participating in the long-term growth prospects of the west and central African region in the long run," said Adrian Cloete, an analyst at PSG Wealth.

"By owning more than a 50% stake you would expose yourself as a bank controlling shareholder to all the corporate governance and other regulatory risks. Nedbank definitely followed the correct strategy by buying a minority stake in Ecobank rather than setting up its own operations."

Nedbank CEO Mike Brown suggested in an interview this week that Ecobank's fortunes were improving. Nedbank's corporate and investment banking head, Brian Kennedy, is also joining Ecobank's board, giving it two directors on the Togo-based company's board.

Smaller assets

Further, Nedbank did have operations in countries including Mozambique, Lesotho, Swaziland and Malawi, although they were small. While it had mooted buying assets in east Africa, particularly Kenya, for almost three years, nothing had come of these ideas. Instead it was hunkering down and focusing on existing operations, Brown said.

"Nedbank should be growing into Africa as opportunities arise to acquire control of smaller assets at reasonable valuations," Hasson of Electus said. "Getting to scale in Africa can take a very long time, over 10 years, but we do believe that the seeds for this future growth should be planted on an opportunistic basis." - Bloomberg

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