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Mounting sovereign risk weighs on bank mergers

The nation is about to witness the culmination of an ambitious initiative that will establish Zimbabwe’s largest financial services company, with an asset base over US$2,5 billion.

THE consolidation of the local banking sector may be compromised by the sovereign risk, which makes it challenging for them to obtain capital outside of Zimbabwe, analysts said this week.

The nation is about to witness the culmination of an ambitious initiative that will establish Zimbabwe’s largest financial services company, with an asset base over US$2,5 billion.

At the centre of the venture will be the merging of CBZ Holdings, ZB Financial Holdings (ZBFH), First Mutual Holdings Limited (FMHL) and First Mutual Properties (FMP).

The institution will focus on banking, insurance, property investment and agriculture.

Information published by our sister paper, NewsDay, shows that CBZ was also close to buying a controlling stake in ZBFH.

The central bank also approved FBC Holdings Ltd’s purchase of Standard Chartered Bank Zimbabwe Ltd (Stanchart), a process which has already commenced.

As banks keep converging, this means the sector will have a few players left.

While the market welcomes this development saying it will enable the sector to easily raise the much-needed capital, financial analyst Ranga Makwata thinks otherwise.

“If you are coming from Zimbabwe and you are a predominantly a local brand, which is what CBZ (will be) even after combining with ZB, it will always be a problem to raise capital in the international capital markets because of sovereign risk that is attached to Zimbabwe,” he said.

“The country is not rated, so if you are not rated, it becomes difficult on the international capital markets. There are some risks that are there when the economy is seeing consolidation in banking because these banks had different models which means they are servicing a different set of clients.

“So, if you are creating this behemoth, there is a certain section of the economy that might be left out as everyone seeks to become big and be serving the big client.”

Makwata said there was a need for a combination of bigger banks that can do bigger projects, while the smaller banks can support the growth of the informal sector.

“Banking is about brands, it’s about reputation. For example, if FBC is buying Stanchart, they are basically buying assets not the brand. Yet the brand is the most valuable aspect as it is the intangible asset of the bank,” he said. “So, you are bound to lose a bigger chunk of attractiveness when the brand goes away. What used to be Stanchart became part of FBC. So, the attraction around Stanchart will not remain.

“And also, there are differences in models, differences in culture. So those differences might actually create problems potentially as teams fail to gel, to work together in one direction, different cultures. So that’s the other problem that is potentially there.” 

Investment analyst Enock Rukarwa said: “The mergers and acquisitions are a welcoming development as they enable banks to have stronger financial positions, making them resistant to economic downturns and financial challenges.

“The banking sector is heavily regulated and monopolistic tendencies are limited since most price indicators like bank charges, interest rates, service fees are all prescribed and pegged by the central bank.”

But Inter-Horizon Securities equities data analyst Vanessa Machingauta said there were concerns on the industry shrinking and becoming monopolistic in nature.

“The wave of consolidation we saw within the banking sector was warranted by upped capitalisation requirements by the central bank, which required some smaller players to latch on to bigger banks in order to keep their licences,” Machingauta said.

“Building societies in particular, struggled with the US$20 million capitalisation requirement. This latest round of aquisitions in our view is more strategic in nature with an aim of beefing up the balance sheet to enable depth in product offering as well as expansion of operations.

“There are definitely concerns on the industry shrinking and becoming monopolistic in nature, it remains to be seen on the net effect of these transactions on the industry and the economy at large.”

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