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New giant flexes its musclesTHE merger of UAL, Syfrets and Nedbank Investment Bank into Nedcor Investment Bank (NIB) has some of its competitors worried.
Apart from the fact that NIB will be able to offer staff the same kind of incentive packages that made scores of millionaires at Investec, RMB and other competitors - arresting the problem of staff poaching in the process - the new bank has a formidable capital base, a strong deal flow and, arguably, the largest pooling of technical skills in the sector.
NIB boasts shareholders' funds of R1.6-billion, slightly smaller than Gensec but substantially larger than other domestic competitors. Investment banks are able to gear up the balance sheet by a factor of eight times or more, which explains why NIB has total assets of R15-billion on shareholders' funds of R1.6-billion.
Balance sheet size is a critical competitive advantage in investment banking and the merger gives NIB a head start in the battle for market share.
The new bank's vision is to become southern Africa's leading investment bank. It is currently scouting the market for an international partner that will give it a global distribution network.
Izak Botha, joint MD of NIB, says the merger made sense on several grounds: "There was significant overlap in the services provided by the three financial services companies. Secondly, although the three companies produced a combined after-tax profit of R320-million last year, these earnings were valued on the same price-earnings multiple as Nedcor. By floating NIB off as a separate entity we expect it to attract a higher PE. It will also overcome the problem of attracting and retaining quality staff."
Based on forecasted profits of about R400-million for the current financial year and a PE on listing of at least 20, NIB warrants a market value of no less than R8-billion, according to one analyst. Some 10% of this will go to staff, a portion to the international partner, with Nedcor retaining about 70%.
Another motivation for the merger was the need to attract an international partner. To do that, NIB had to eliminate inter-group competition and build synergies, says Botha.
"A strong international partner will be particularly important once exchange controls go," he says. "Private banking needs an international partner for offshore investments; corporate finance needs international distribution capabilities for debt and equity; structured finance needs a partner for cross-border business; and we need an international funds management operation."
Eurorands - rand-denominated debt traded in Europe - is now the most traded emerging market paper in the world, and NIB wants a piece of it. Domestic banks have so far been excluded from most offshore debt and equity issues but, with a powerful international partner, NIB would be able to compete against the likes of Merrill Lynch and Deutsche Morgan Grenfell.
UAL competed with Syfrets in institutional asset management, private banking, unit trusts, offshore investment and linked products, and with Nedbank Investment Bank in corporate finance, project finance, investment banking and structured finance. Both UAL and Syfrets offered money market treasury services, stockbroking and property unit trusts. One of UAL's strengths is its treasury division, focused on foreign exchange, money market, bonds and derivatives. The merger, adds Botha, will eliminate these overlaps and integrate the various functional areas into world-class business units.
The merger of the various fund management, corporate finance and structured finance operations is already complete, the stockbroking businesses have been merged into NIB Securities and all property operations now are integrated. In addition, progress is being made in rationalising the various unit trusts.
Last year, each of the three component businesses reported combined profits of about R320-million, more or less equally split between the three companies - but off vastly different balance sheet sizes. UAL had the largest capital base, Nedbank Investment Bank the smallest. Botha says attention will focus on getting the underperforming parts of the combined balance sheet to perform better.
A pro forma comparison of NIB's earnings with that of RMB, Investec and BOE puts it ahead of the competition each year since 1994, with the exception of 1997, when Investec reported larger profits.
NIB's risk-weighted capital ratio of 13.5% will be strengthened to about 17.5%. The bank is projecting a reduction in its cost to operating income ratio from 48.2% in 1997 to 43.1% this year. Its long-term target is to achieve after tax profit growth of more than 25% a year and a return on assets in excess of 2%.
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