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Why Capitec (and not Nedbank, the PIC or the Grindrod consortium) should buy Mercantile

The business banking space is hotting up, and few will be able to match the simplicity and fees that Capitec offers.

The four-member shortlist of financial services groups in the running to buy Mercantile, a bank targeting small and medium-sized businesses, is almost exactly what one would’ve expected: one from the ‘old school’ establishment; the state (via pension fund manager, the PIC, teaming up with an unsecured lender); an African investment company owned by European banks and funds (together with a niche local player who already holds a banking licence); and a bidder that actually makes sense.

Mercantile says the sales criteria – as determined by its ultimate shareholder, the Portuguese government (following its bailout of Caixa Geral de Depósitos) – included, among other things, “price, financial capacity and strategy”.

One of the traditional ‘big four’ full-service banks was always going to be on this list. Here, any acquisition of smaller Mercantile would be a simple customer as well as deposit- and loan-book building exercise. At the end of 2017, Nedbank’s business banking unit, which targets similar sized customers as Mercantile, had deposits of R126 billion and total advances (assets) of R66 billion. It reported headline earnings of R1.4 billion. Mercantile, by comparison, had deposits of R9.3 billion, assets (advances) of R13.4 billion, and reported a 20% increase in net profit after tax of R213 million. Mercantile would increase the size of Nedbank’s business banking unit by anywhere from 10% to 15%.

The state, via the Public Investment Corporation (PIC), was also always going to be on this list. Generally, the PIC tends to bid for assets it wants to operate as part of a consortium. The other member of this consortium, Bayport Financial Services, is a rather left-field choice. Bayport, once a subsidiary of JSE-listed Transaction Capital, is owned by a mix of private equity funds, investors and a BEE consortium. It must be noted that the PIC is already the largest shareholder in the local banking sector: it holds 12.3% of Standard Bank, 9.1% of FirstRand, 7.2% of Capitec Bank, 6.6% of Absa Group (neé Barclays Africa) and 6.2% of Nedbank. One could easily argue that the PIC has a number of more pressing issues, mostly involving governance, than trying to run a sub-scale bank.

The Africa-focused investment fund Arise is part of a consortium including Grindrod Bank. Grindrod is not a dissimilar size to Mercantile; it has a loan book totalling R6.9 billion, and a deposit base of R15 billion. Arise’s shareholders are Norfund, the Norwegian Investment Fund for Developing Countries, Dutch development bank FMO, and Dutch cooperative bank Rabobank. It owns (largely minority) stakes in financial services providers operating in Ghana, Kenya, Uganda, Rwanda, Tanzania, Mozambique, Zambia, Zimbabwe and South Africa. Locally, it owns 16% of Real People. On paper, Mercantile seems a good fit for this consortium, but these new owners are hardly likely to move the needle.

Capitec Bank has shown that it can disrupt and upend the cosy oligopoly that existed in South Africa’s banking sector. It has tiptoed into the business banking sector, primarily by offering point-of-sale services and salary payment solutions to small and medium-sized businesses.

Already with these limited products, it is chipping away at the incumbents. You’ll find its point-of-sale machines at many smaller independent retailers (think coffee/gift shops) as the fee structure is far more competitive than the other four banks. On salary payments, Capitec’s solution runs alongside a current business account. A single transfer is made to a Capitec account and then payments are made. The bank illustrates an example of a business that has to pay 300 employees monthly. At worst, using Capitec to pay salaries will save a business paying those 300 employees R25 000 a year. At best, the number is over R65 000.

So far, it’s chosen to only play in these two limited areas when it comes to business banking. Could it do more? Absolutely. Does it want to do more? Yes. In its presentation to the market accompanying its 2018 financial results, Capitec highlighted merchant services and SMEs as one of its key focus areas for this year.

In the announcement to the market about the bid for Mercantile, it says it will “commence a formal, in-depth due diligence exercise to determine whether the opportunity presented by Mercantile fulfils Capitec Bank’s expectation to build the Capitec Bank business bank strategy”.

If Capitec Bank succeeds with its bid for Mercantile (and it doesn’t find anything strange in the due diligence process), the business banking space is about to become very hotly-contested indeed. Already, former FNB executives Michael Jordaan and Yatin Narsai are aiming to shake up the sector with Bank Zero, which has been granted a provisional mutual bank licence. The other banks will try to react, as they have in the retail space, but their cost and operational structures mean they won’t always be able to match the simplicity and fees that Capitec offers. Being competitive in the business banking space is nowhere close to offering a (loss-making) entry-level account for R5 a month.

A successful bid by Capitec will be, by far, the best outcome for competition in the space, and for small and medium businesses in South Africa. Judge me in five years (if the deal concludes, obviously).

* Hilton Tarrant can still be contacted at hilton@moneyweb.co.za.

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I wonder how Capitec will use its payday lending expertise in small business banking? Short term loans, invoice factoring, notarials over loose assets – all at 25% plus various fees

“Why Capitec (and not Nedbank, the PIC or the Grindrod consortium) should buy Mercantile”

I nearly asked who are you to say the others shouldn’t.

Capitec and Nedbank don’t need Mercantile, at all. Does Capitec and Nedbank owners believe that they will be able to sell the investments (banks) higher if they did anything like acquiring Mercantile? I don’t know but I don’t think so although a cheap business banking platform would always be appreciated by clients/consumers.

The best possible outcome for me is that Capitec comes out on top, hopefully. This will be good for business and also very good for consumers, as it will make for competitive pricing in this sector. Earlier this year, I started my company and wanted to open a business account with them and they were not able to provide me with that. I did not feel comfortable to be fleeced by these old banks, which I stopped banking with 14 years ago! For me its competitive pricing, a robust banking sector, and excellent quality service for the consumers and businesses. I wish them well in their bid.

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