Unpacking Malawi FMB’s bid to buy Barclays Bank Zimbabwe

By Mutemwa Ushewokunze (The Source) – At the end of last month, Barclays Bank Plc said it was in exclusive talks to sell its stake in its Zimbabwe unit to Malawi-based First Merchant Bank.

Unlikely as it seems, the small, mostly family-owned bank is hunting down one of Zimbabwe’s prized assets.

In February last year, Barclays Plc announced its intention to exit Africa as it seeks to focus on the British and American markets in a transatlantic tilt.

In 2015, Barclays Africa Group said it had failed to reach an agreement with its parent company for the purchase of its assets in Zimbabwe and also those in Egypt.

The two operations were excluded from a 2013 deal that saw Barclays Africa, formerly ABSA, acquire eight African operations from its parent company because of political uncertainty, although it already manages their operations.

FMB has a market cap of $51,47 million, while Barclays Zimbabwe is at $78.6 million. Further, the balance sheet of Barclays Zimbabwe, at $476.2 million is significantly bigger than that of its suitor, $450,8 million, which suggests that this is a brazen move by the FMB management who see the more sophisticated bank and larger market of Zimbabwe as an important strategic opportunity.

FMB already has operations in Botswana, Mozambique, as well as Zambia; and owning an asset in Zimbabwe would be a reasonable addition to its portfolio.

The difference in size between the two entities suggests, however, that there could be more at play with this transaction. The 68 percent owned by Barclays Plc is worth $52 million at market prices, therefore FMB would have to come to the market or already have a backer for this transaction.

FMB’s stock hardly trades on the Malawi Stock Exchange so one would naturally assume a rights issue would not be possible, unless there is already a large funder who would invariably dilute other shareholders. Borrowing the amount would be a massive load on FMB’s balance sheet. Such a funder would need a low aversion to risk, and a strong balance sheet to weather any storm.

The Barclays brand represents the highest quality of financial services in Zimbabwe, opening its first branch in 1912. Its management has over the last 20 years successfully negotiated perhaps one of the most torrid operating environments in global financial history.

Unfortunately, despite their best efforts, the bank suffers from a heavy overhang of regulatory and political risks, along with an uncertain financial environment and outlook.

Zimbabwe’s inability to form a reliable yield curve along with high systemic risk significantly distorts valuations across the markets. Present Barclays strategy sees concentrated focus on non-funded income, with a very cautious approach on lending as quality borrowers remain sparse.

Improving return on equity and return on assets, building out a more comprehensive multi-channel offering, broadening their product suite are all measures presently at play to sustain profitability.

Ultimately for anyone betting on a recovery, or more specifically, a positive political event, these valuations are very attractive and FMB could be taking note. I might argue, however, that they would be inclined to leave the present management in place as they would better serve the interests of shareholders in negotiating Zimbabwe’s treacherous regulatory environment.

All that being said, FMB will have another hurdle to overcome if Plc agrees to sell its stake. The Ministry of Finance and Reserve Bank of Zimbabwe will have to approve the deal. There will be heightened scrutiny on the board of FMB, some of whom have black spots on their reputations due to irregular lending activity in Uganda and Malawi – but the MoF and RBZ have made less prudent decisions in the past.

Thus, there is every chance that this deal could happen.

One cannot ignore the importance of cross-border activity in sub-Saharan Africa. More of it is needed and such approaches certainly signal the growing economic integration in the region. Beyond these positives, however whatever integrity remains of the few local banks in Zimbabwe that are performing should be preserved over and above who the controlling shareholder is and what country they come from – or else it could add further instability to an already precarious banking environment.

Therefore, regulators should scrutinize FMB’s ability to ensure the sustainability of Barclays Zimbabwe. The fact that such a sizeable transaction is being considered in Zimbabwe also indicates that there are some looking to the future of Zimbabwe’s economy…and this is a good thing.

Mutemwa Ushewokunze is Vice President for South African equities at Macquarie Bank in New York. Mutemwa holds an Honours in Economics from Adelaide University, and Master’s Degree from the UCT in Development Finance. He is also a member of the Global Development Finance Institute (CDFA).

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