Banking Sector Update

Transcription

1 Vetiva Research 29 March 2011 M&As Rounding-off Early thoughts on targets and acquirers Analyst Abiola Rasaq Key Theme As the market awaits details on the recapitalization and ultimate buy-outs of the CBN-intervened banks, a final cap which is expected to fully put the banking system back on track, we take a cursory review of the processes. We expect that significant mileage in the M&A process would have been reached by the end of H1 11 with most of the deals nearing conclusion. This report is an interim general view of the implications of the M&As on the quoted acquirers, as we look out for details of the terms of the transactions to fully assess the impact on both the targets and acquirers. Overall, we are provisionally upbeat on FIRSTBANK and ACCESS but indifferent to FCMB in respect of their on-going M&A bids. Acquirers Mkt Share* Targets Mkt Share* FirstBank 15.6% Oceanic 6.1% ACCESS 5.3% Intercontinental 4.2% FCMB 3.3% FinBank 1.1% African Capital Alliance Private Equity Union Bank 7.5% Vine Capital Private Equity AfriBank* 2.0% Habib Bank Fresh Formal Entry BankPHB 3.4% *Based on estimated Q3'10 balance sheet - measured by asset base. **Fidelity Bank Plc (a local bank) also showed interest in AfriBank and has been identified as a reserve bidder) Wiping off the negative capital; our thoughts: We recall AMCON s blueprint to recapitalize the target banks to zero equity; a laudable strategy aimed at de-risking them, thus providing further attraction for the bidders. We note that AMCON s capital injection may not be in cash, given the liquidity position of the corporation and the fact that the quantum of capital injection needed cannot be raised in the market within the short time frame. With the expectation of concluding the official Shelf registration of its proposed N3 trillion zero coupon bonds before the end of H1 11, we believe AMCON will issue registered bonds to the CBN-intervened banks as its equity injection with the understanding that these banks will in turn subscribe to the bonds. In anticipation that the bonds will be liquid, can be discounted via the Expanded Discount Window of the CBN and tradable in the OTC market and the Nigerian Stock Exchange, such capital form may be converted to cash at minimal cost by the acquirers. While cash is king and preferable, especially in an environment of rising interest rates, we are cautious to say that this capital form will also pay-off in the short term when viewed from the perspective that the bonds will generate immediate returns (unrealized gains), whilst also being used to maintain liquidity requirements. We think AMCON will also redeem (on behalf of the banks) the N620 billion tier-2 capital provided by CBN in 2009, to alleviate liability burden and minimize excessive public intervention in the ownership/management of the acquiring banks. Targets Q3'10 Equity (N bn) AMCON Bonds (N bn)* Vetiva FY 10E Equity Gap(N bn)** Oceanic Intercontinental FinBank Union Bank AfriBank NA NA BankPHB *This is the discounted value of the consideration received in respect of NPL sales to AMCON on December 31, ** Please note that our FY 10E Equity Gap refers to the nominal amount required to bring the Shareholders Fund back to zero equity. This does not factor in other accounting issues such as deferred taxes which may be considered in determining the needed capital injection for the banks. Please see the last 2 pages for important disclosure and analyst certification 1

2 AMCON s holding in targets; a likely tussle between the bad bank and Shareholders: Whilst shareholders of rescued banks are often left with nothing, especially in cases where there are no residual claims which can be attributed to equity owners (negative equity), the regulator s forbearance and commitment to restoring investor confidence has shown that the ownership of the intervened banks will be shared between the shareholders and AMCON. That said, we then ask the question - what is the appropriate sharing formula? We believe the sharing formula will not only be subjective, but have a welfare face as AMCON is seen as a bailout for both depositors and shareholders of the intervened banks. We expect the CBN and appointed financial advisers to play crucial roles in establishing a generic framework which may be used in resolving probable contentions. In our opinion, key consideration will be given to AMCON s bond issuances to the banks in December 2010 and new capital injection as this sum reflects the total inflows from AMCON. Splitting the beans, the bonds from NPL sales, though coming from AMCON, are due to shareholders given that AMCON got NPLs in exchange. Thus, the proceeds from the NPL sales may be considered as fresh capital injection by the shareholders since the NPLs belonged to them (shareholders). Relying on this presumption, we think the ownership of the banks may be in the ratio of capital injection by the both parties as detailed below. We think this will be fair to shareholders especially when one considers the fact that the shares would have been worth nothing in the event of liquidation. Probable ownership structure after AMCON s recapitalization to Zero Equity Targets Forecast Equity Gap (N'bn) Ownership Structure At Zero-Equity Shareholders AMCON OCEANIC % 50% INTERCONTINENTAL % 78% FINBANK % 81% Still on AMCON s stake; what form of equity in the acquirers? We think the definition of AMCON s consequential equity in the acquirers is crucial, particularly for the quoted banks as this will have significant dilutive impact on the holdings of current shareholders. We see two likely options in the pipeline: Option 1: Non cumulative preference shares: Acquirers may negotiate for the issuance of non-cumulative preference shares to AMCON with respect to its eventual stake in the targets following recapitalization. This will avert the huge dilutive impact of accepting AMCON as a common shareholder and minimize the exposure of the acquirers to the political risk which may arise from AMCON s representation on the Board and Management of the acquiring banks. More importantly, we believe such equity form will enable the acquirers to negotiate for a preference dividend yield that is lower than the acquiring banks return on capital, a payout policy which will enrich the wealth of common shareholders. Our choice of non-cumulative preference shares is aimed at minimizing the risk of losses which may accrue from the target banks in the short-term. While the foregoing are in the interest of the acquiring banks shareholders, we assert that this form of equity will not only minimize AMCON s oversight functions on the acquiring banks but also provide a clear exit channel for the bad bank given its pre-defined life-span (7-10 years). If this option is adopted, we expect the post-merger banks to set up a sinking fund for the redemption of AMCON s preference shares at a pre-defined maturity date. 2

3 Option 2: Non-participatory common shares: Given AMCON s bail-out considerations for the NPL purchase and recapitalization of the target banks, the corporation will want to take its full share of the imminent returns from the restitution of the rescued banks. Some of the acquiring banks may also be averse to a fixed commitment, especially taking cognizance of the fact that it might be challenging to isolate the performance of the target banks after their integration with the acquiring banks operations. Hence, the option of issuing common shares to both AMCON and the existing shareholders may become exigent. This equity form further lightens the acquirers absorption of execution risk as returns to all stakeholders are dependent on post merger success of the acquiring banks. Nonetheless, we are quick to say that a distinction should be made between AMCON s common shares and those of the acquiring and target banks shareholders. This is essential to minimize the acquiring banks vulnerability to political risk which may arise from AMCON s participation in the management of these banks. Our interim analysis, which is explicitly stated in the discussions on each of the focused acquirers, shows that AMCON will have >5% holding in the acquiring banks; a substantial interest which will give the corporation some level of participation. To avert this looming political risk and loss of control, we expect acquiring banks to negotiate that whilst existing shareholders of the target banks should be issued common shares of the acquiring banks with equal status as the existing shares outstanding, the common shares to be issued to AMCON should be non-participatory. However, we expect acquiring banks to be committed to a well defined corporate governance practice that will guard the interest of AMCON. In our opinion, treading this path will also necessitate a defined exit strategy for AMCON. We anticipate a buy-out/share-repurchase plan with defined exercise terms that will ensure a seamless exit for AMCON. Recapitalization and Transmission Process 2 Probable Equity Options AMCON injects Capital Non-Cumulative Preference Shares Non-Participatory Common Shares Benefits: Benefits: Easy exit route for AMCON Shared risk of execution failure Target Bank Minimal exposure to political risk No burden of payment of fixed Negative Equity Owned by Existing Shareholders for the Acquirer Minimize dilution of common shares returns for Acquirer AMCON gets fair share of imminent returns Target Bank With Zero Equity; Owned by AMCON Existing Shareholders Acquiring Bank Consolidates Target s balance sheets with its Assets and Liabilities Post -M&A Bank Owned by: Acquiring Bank s Shareholders Target Bank s Shareholders AMCON Risk: Fixed payout on preference shares Risks: Dilution of Shareholders stake by AMCON Political risk from AMCON Source: Vetiva Research 3

4 A quick look at the imminent mergers In the interim, we focus on the listed banks with interest in the on-going purchase and assumption agreements. Our rationale for this is to evaluate the likely impact of the deal on near term operations of the banks and sentiments for their shares on the floor of the Exchange. Hence, we zoom in on FirstBank, Access Bank and FCMB, which, based on relatively reliable grapevines, are bidding for Oceanic Bank, Intercontinental Bank and FinBank respectively. We believe the key attractions for the bidders are broadly mixed. Nonetheless, the cheapness of the offer is a common attraction for all acquirers. We are cautious to say that FCMB may have dropped its earlier bid for FinBank given newsflow of Vine Capital s interest in the target. FirstBank of Nigeria Plc Set to take a quarter of the market: With a current market share of 16% (based on total assets), the bank is set to further concentrate the industry as the combination with Oceanic Bank may gross its share to 22%. Though the CBN earlier placed a check on the industry s concentration as it indicated an allowable maximum market share of 20%, we believe the apex bank may have relaxed its position given its central role in the on-going M&A talks. Whilst it may be justified to restrict dominance in the interest of competition and ultimately market efficiency, we are cautious to say that the market is still in its infancy for such regulations to be enforced. Data from emerging markets such as South Africa shows that the biggest players control an average of 25% of the market. With due acknowledgement to other return-based rationale behind FirstBank s appetite for this acquisition, we see this decision as a proactive move to defend its market leadership. Pre- and Post- Merger Market Shares; FirstBank set to take 22% share FirstBank 15.6% FirstBank 21.7% Oceanic 6.1% Others 78.3% Others 78.3% Source: Vetiva Research, CBN, Banks Filing How much value do we currently see in the M&A? We highlight key value attractions in Oceanic, particularly for FirstBank. The first attraction that comes to mind is the bank s large branch network. Oceanic currently has 376 branches, with a good spread in commercial centres across the six geopolitical zones. Though we believe FirstBank will rationalize sub-optimal branches after the merger, particularly Oceanic branches in close proximity to FirstBank s, the current branch network of both banks will hover 980. While this inorganic explosion in branch network does not necessarily increase FirstBank s value, we believe it is a necessary condition for the actualization of the bank s near term strategy and goals. With the new business restructuring along the different business lines and on-going investments in retailrelated IT infrastructure and human capital, we believe FirstBank is set to champion a new course for accessing the unbanked market. Given the significance of branch presence to retail banking, the choice of Oceanic can be seen as optimal. 4

5 More than branch network; Oceanic sales force and customer demographics are a good match for FirstBank: In our assessment of Oceanic, the bank s direct sales force continues to appeal to us. We believe this will bode well for propelling the relatively weak retail banking segment of FirstBank, especially as we see it replicating the successful Bangladeshi model of the Bank of the Poor in Nigeria. Beyond the attractive sales force which we believe will have a modest synergy with FirstBank s age-long brand marketing approach, the demographics of Oceanic Bank customers and staff will positively dilute FirstBank s status. Given Oceanic Bank s focus on SME/consumer financing, FirstBank will have a robust base on which to deepen its retail business. With the inciting interest rate spread in the retail market, being a conduit of financial integration for the >60% currency outside the banking sector will obviously pay-off for FirstBank, especially as we believe in the bank s ability to leverage on the broad retail client base of Oceanic. We suspect the opportunity in the low-end of the market and paradoxically increased competition in the premium high-end segment are complementary value drivers for FirstBank s appetite in deepening its presence at the low-end with the choice of Oceanic. Gauging probable execution risk, we think downsides are within band: With due acknowledgement to the likely lag in system integration and the induction of Oceanic Bank work-force into FirstBank- two key phenomena that will define the speed of synergy exploitation, we believe the highest execution risk is subdued with the concluded litigation over the irregularities of Oceanic Bank s erstwhile management. More appealing, is that unlike the disturbances raised by the shareholders and employees of some of the other CBN-intervened banks, there is relative calm over the FirstBank-Oceanic merger, thus signaling underlying approval by key stakeholders whose actions and inactions are crucial to the success of merger. Going by the recent M&A history, the inheritance of legacy NPLs is one of the key risks to mergers in the banking sector, as acquirers ended up with huge provision charges on the non-performance of legacy loans. Given that AMCON has taken off Oceanic s NPLs, we believe the risk of legacy loans has been averted. On integration risk, we are cautious to say that FirstBank has requisite M&A experience and platform, to manage inevitable challenges that may arise in the process of integrating Oceanic Bank. FirstBank s relatively seamless integration of MBC International Bank in 2005, though on a much smaller scale, bear evidence to our view. Strong bargaining power to drive home value for FirstBank s shareholders: Another general downside risk which can be thought of at this early stage is the propensity for FirstBank to pay unjustified premium for the acquisition. Relying on our earlier meeting with the management, FirstBank does not seem desperate on an M&A deal. Our perception of the management s position allays our fear over the likelihood of an unjustified premium, especially as we do not see any unexpected competition at this point of the deal. Whilst we await the FY 10 numbers of Oceanic and other relevant details to enable us give an objective valuation of the bank, a simple benchmark of the worth of the bank is its 2010 market capitalization which stood at N55.6 billion. With zero-equity, we think the market value is the bull-case price of the bank given that such payment is largely in respect of the bank s brand equity, synergy benefit, customer base and operational structure. 5

6 Our interim position is hinged on expected zero equity base and 100% ownership control. Going by Oceanic s market capitalization of N55.6 billion and FirstBank s share price of N13.73 on December 31, 2010, we therefore expect FirstBank to issue some additional 4 billion units or some 12.4% of its current shares outstanding to pay for the deal. We however think FirstBank may mitigate this imminent dilution on its shareholders stake via a scrip issue in respect of its FY 10 fiscal year performance; a corporate action exclusive to the existing shareholders of FirstBank. Overall, we think Oceanic Bank shareholders will be offered 1 unit of FirstBank for every 11 units of Oceanic Bank, following from which AMCON would be issued 2 billion units of FirstBank (about 6% holding in FirstBank). Hence, we are provisionally upbeat on FirstBank s bid: We think the overall market frenzy (which is largely driven by heightened political risk) may suppress any potential rally in FirstBank s share price in the new term. However, we believe the shares of FirstBank will enjoy appreciable patronage when market gets further clarity on the acquisition. Hence, we maintain our N18.11 target price on the shares of FirstBank with expectation of market justification when the political risk cools-off. Whilst we expect at least one fiscal year lag for significant earnings accretion from the merger, we are upbeat that the combination will pay-off for FirstBank shareholders in the medium to long term. Considering the short term impact of the restructuring lag on earnings, we believe the likely tax savings from the utilization of Oceanic s deferred tax asset (which stood at N131.7 billion as at Q3 10) will minimize the downside to the near term profitability of the post-merger FirstBank. Highlights on Q3 10 position of FirstBank and Oceanic Key headlines (N'bn) FirstBank Oceanic Combined Entity Net Cash and Interbank Position Other Liquid Assets Net Loans 1, ,568 Deposits 1, ,195 Borrowings Total Asset 2, ,375 Equity NM Source: Vetiva Research, Banks Filings 6

7 Access Bank Plc (ACCESS) Crisis bears a unique opportunity: We believe Access Bank Plc is leveraging on the banking sector crisis with its bid for Intercontinental Bank Plc. ACCESS aims at being one of the top-3 banks in the Nigerian banking space by 2012; thus, if the merger scales through, the bank will grow its market share by >75% (from 5.3% to 9.5%). We believe this inorganic growth will be an early realization of our FY 12 outlook which suggests ACCESS will again cross the N1 trillion (ex-contingents) balance sheet mark. Although it has a bunch of retail product offerings, the bank has largely focused on the corporate end of the market. Whilst the high risk of default remains a caveat on further exploitation of the retail market, increasing consensus over innovative bankable opportunities in this space and the CBN s progressive efforts at de-risking the system may have incited ACCESS interest in acquiring a modest brand with appreciable footprints in the low-end of the market. We are cautious to say that among the CBN-intervened banks, Intercontinental Bank, with a strong presence in the retail market, proves a good fit for ACCESS. Whilst ACCESS has a relatively lean footprint (barely 131 business offices with high concentration in the Southern region of the country), Intercontinental has an estimated branch network of 367. Given its branch spread across the six geopolitical zones and strong presence in the Federal Capital Territory, we believe it is a cheap, rare opportunity for ACCESS to avert the high branch set-up cost which has relatively suppressed its commercial and retail business units. Time series of market share: Access seems ambitious to join the big-3 Bank FY'11F FY'10E FY'09 FirstBank 21.7% 16.1% 14.7% ZENITH 12.7% 12.6% 11.7% UBA 11.0% 11.0% 10.5% GUARANTY 7.7% 7.5% 7.2% UBN - 6.2% 8.4% INTERCONTINENTAL - 6.6% 6.8% OCEANIC - 6.1% 6.1% ACCESS 9.5% 5.3% 4.7% Source: Vetiva Research, Banks Filing, CBN Can the ACCESS brand outlive the merger? Given the relative size of ACCESS to Intercontinental, we are cautious to say that there may be a slight change in ACCESS brand and name. Although the possibility of Intercontinental s business culture subsuming the ACCESS brand exists since the former is a bigger bank (in terms of number of employees and branches), we are positive on both human and process integration, particularly with the perceived acceptance of all stakeholders of the banks. As regards the possibility of name modification, we think it may be positive for the post-merger brand (if such possibility plays out). We believe both banks may replicate the success story of the Stanbic-IBTC merger; another birth of a competitive and strong brand from two modest names. If history is anything to rely on, we recall ACCESS proven dexterity in M&A synergy exploitation as reflective in the swift integration of Capital Bank International Limited and Marina International Bank Limited, following their acquisitions in

8 A more protracted value accretion, in our view: Though the likely acquisition cost will be a good bargain for ACCESS shareholders, we think the bank s profitability will be relatively suppressed in the short term. As against our expectation that the acquisition of Oceanic will begin to rub-off on the bottom-line of FirstBank after a fiscal year lag, we think of a more protracted synergistic benefit from Intercontinental. Our thoughts are guided by the balance sheet of Intercontinental. We note that earnings generating assets, which are largely low interest yielding assets, account for barely 54% of the asset base with deferred tax (an accounting non-earnings yielding asset) accounting for 25% of the total asset. While we acknowledge that ACCESS may enjoy tax savings from the utilization of the deferred tax assets, we are cautious to say that the quantum and significance of this taxsavings right to total asset base may generate contentious debate with tax authorities after the merger. If such risk crystallizes, ACCESS may be left with no option than to amortize this intangible asset over a period with significant impact on near term earnings outlook. Nevertheless, we believe the merger will aid ACCESS scale efficiency with a positive outlook on the medium to long term post-merger fundamentals. How cheap can the acquisition be? Just as we think of Oceanic s worth, we believe ACCESS consideration for Intercontinental will be in the threshold of its December 31, 2010 market capitalization which stood at N31.3 billion. Putting this pricing and cut-off date into perspective, ACCESS may have to issue additional 4.1 billion units or some 23% of its shares outstanding to existing shareholders of Intercontinental Bank and AMCON, in respect of the acquisition. Relying on our view of the acquisition price and emerging ownership structure of Intercontinental, we think twenty (20) units of Intercontinental shares may be exchanged for one (1) unit of Access Bank. In effect, former shareholders of Intercontinental will own about 4% of post-merger ACCESS while AMCON takes 15% stake. We assert that this likely pricing will be negative for Intercontinental share price but positive for ACCESS. Besides the likely positive market reaction to ACCESS shares when the market gets further clarity on the M&A terms, we believe the acquisition will improve the medium to long term fundamentals of Access Bank. Hence, we have a positive provisional outlook on Access Bank shares and maintain our target price of N Highlights on Q3 10 position of ACCESS and INTERCONTINENTAL Key headlines (N'bn) ACCESS INTERCONT Combined Entity Net Cash and Interbank Position Other Liquid Assets Net Loans Deposits Borrowings Total Asset Equity , , NM Source: Vetiva Research, Banks Filing 8

9 First City Monument Bank Plc (FCMB) A cheap way to deploy excess capital! We have always believed that FCMB has a robust diversified business model but with concerns over its relatively low capital deployment. In our view, FCMB focuses largely on the investment/corporate banking business, which to us does not require as much capital as the bank has accumulated. The low capital deployment is more apparent in its annualized Q3 10 return on average equity of c.5%. Whilst the relatively weak 2010 profitability may be seen as a mirror of the industry-wide lull, we think the bank s comparatively weak commercial banking operation further exposes its earnings to the vagaries of business cycles. FCMB has displayed an aggressive strategy of deepening its commercial/retail banking operations in recent time; however, the systemic cyclone suppressed its penetration, especially as the heightened risk environment and strict regulation continue to send caution signals. Hence, we believe FCMB s interest in plugging into the on-going M&A is a rare opportunity to deploy its excess capital and accelerate its growth momentum. Our estimates shows that acquiring a small-sized bank like Finbank will not require fresh capital injection given FCMB s current capital buffer (a CAR of 33%). Nonetheless, we are a bit concerned about the choice of FinBank: Whilst we think Finbank s relatively small size and liquidity position (asset base of N173.8 billion with +50% liquidity as at Q3 10) might have been key attractions for FCMB, the synergy benefits appear marginal, in our view. Our position is influenced by a cursory review of FinBank s operation and business model. Finbank, to us is a retail market player with a focus on consumer lending. We understand FCMB s passion to grow its retail business, especially with the success story of Credit Direct Limited (a retail subsidiary with focus on salary accounts-backed consumer finance); however, we do not think FinBank currently has the requisite platform to project this model. Though the bank has an estimated 120 branches with modest spread across the regional markets, its slim client base and relatively weak brand may not provide as much leverage as FCMB requires. We are cautious to say that the likelihood of a post-merger wide branch network with slim revenue stream may erode shareholders wealth. Our early thoughts flow directly from our concern of a high cost-to-income ratio over a prolonged period due to our view of the current operating structure of FinBank and FCMB s product offerings. We believe FinBank s strength is rather in treasury operations (particularly currency trading), a niche with narrowing arbitrage and in which we are convinced of FCMB s savvy. All these, inform our view of marginal synergy benefit from the combination. Albeit, we think Finbank is too cheap to be ignored: Still relying on our view that none of the targets will be acquired beyond their 2010 market capitalization, we see Finbank hovering N8.9 billion. This suggests that barely 1.2 billion units of FCMB shares will pay for the deal. At this pricing, we think FCMB s interest may be justified as it stands to offer some 7.3% of its current shares outstanding in respect of the payment. We rely on the management s savvy to maximize the value accruals from the acquisition, having been involved in M&As in the past. In our view, a first-hand optimization of the branch is crucial as this will help stream-line cost in line with earnings generation. With modest reliance on FCMB s management commitment to the retail business line and expectation of a repeat of the relatively seamless integration of the three banks that were acquired in 2005 (Midas Bank, Cooperative Development Bank and Nigeria American Bank), we provisionally remain indifferent to the acquisition bid in expectation of an accelerated synergy. 9

10 Appendix: Snapshots on other acquirers Habib Bank Limited; a self acquisition?: We recall that Habib Bank currently has 6.8% holding in BankPHB, thus implying a seeming self-acquisition. However, as against public expectation of shareholders acceptance of Habib, the acquisition has been subjected to litigation. Habib is one of the Tier-1 financial supermarkets in Pakistan with about USD10.9 billion in asset and USD1.1billion capital base. It operates a Holding company structure given its diverse service offerings which are marketed via its wide branch network of 1,501 (1,459 in Pakistan and 42 offshore). Habib Bank currently reports based on IFRS and the local authority compliance modules. The Bank s provisional FY 10 scorecards show a modest level of capital adequacy and profitability as reflective in its CAR of 14.6% and RoE of 17.9%. With regards to Habib s asset quality, we estimated an NPL ratio of 9.3% and coverage of 126%. We think this NPL level is modest for a player in the retail market with large exposure to unsecured consumer finances. We are cautious to say that Habib Bank s entry into the Nigerian banking space may initiate the long-debated Islamic banking model given the bank s resolve to shift its operations to a pure Islamic banking play, in line with the State Bank of Pakistan directives. African Capital Alliance; has signed MoU with Union Bank: African Capital Alliance (ACA) is a leading private equity firm focused on Nigeria and West Africa. ACA was founded in 1997 with a mission to build Africa s premier private equity investment firm by mobilizing capital, technology and management resources from local and international sources to unlock Africa s private sector potential. ACA Sponsored funds have been investing in Nigeria and West Africa for close to 15 years. ACA has partnered with over 30 businesses in various key sectors of the economy that have been contributors to the growth that has occurred in the region over the last decade. The firm is a partnership of highly revered professionals with rich public and private sector experience; among which are Chief Ernest Shonekan (Former Interim head of State), Pascal Dozie (Chairman, MTN Nigeria Communications Limited and retired Chairman of Diamond Bank Plc) and Okechukwu Enalamah (The current CEO who has a rich private equity background from Zephyr Capital and SouthAfrica Growth Fund). The ACA Consortium which will invest as Union Global Partners Limited, consists of ACA-B Holding Limited, (comprising an ACA Managed Fund, FMO Netherlands, an international development financial institution and other co-investors), TRG Management LLP, The Keffi GroupVIII LLC (comprising the Keffi group and other United States based institutional investors), ABC Holdings Limited (Bank of Botswana) and the Discovery Group. The Consortium will be investing USD750 million (N112 billion) in Union Bank. We believe this capital injection will be in form of equity and debt. Vine Capital; eying the public bank: Vine Capital Group is a private equity firm. However, at the time of the release of this report, the only available public source of information was the firm s website ( which has little information which may enable our assessment of its history and savvy in restructuring Afribank. We however believe that the CBN must have carried out due diligence on the firm in the process of reviewing bids. Recent newsflow reveals that Vine Capital may also acquire FinBank in addition to its earlier interest in bid for AfriBank with a plan to merge the two rescued banks. The media has widely reported Tosa Ogbomo and Kalil Udalor, both formerly of Goldman Sachs as the company s principals. 10

11 INVESTMENT RECOMMENDATIONS Vetiva uses a 5-tier recommendation system for stocks under coverage: Buy, Accumulate, Neutral, Reduce and Sell. Buy % expected absolute price performance Accumulate % to % expected absolute price performance Neutral/Hold 5.00% to +9.99% range expected absolute price performance Reduce -5.00% to +4.99% expected absolute price performance Sell -5.00% expected absolute price performance Definition of Ratings Buy recommendation refers to stocks that are highly undervalued but with strong fundamentals and where potential return in excess of or equal to 25.00% is expected to be realized between the current price and analysts target price. Accumulate recommendation refers to stocks that are undervalued but with good fundamentals and where potential return of between 10.00% and 24.99% is expected to be realized between the current price and analysts target price. Neutral/Hold recommendation refers to stocks that are correctly valued with little upside potential return of between 5.00% and 9.99% is expected to be realized between current price and analysts target price. Reduce recommendation refers to stocks that are overvalued but with good or weakening fundamentals and where potential return of between -5.00% and 4.99% is expected to be realized between current price and analysts target price. Sell recommendation refers to stocks that are highly overvalued but with weak fundamentals and where potential downside in excess of -5.00% is expected to be realized between current price and analysts target price. Disclosures Section Analyst Certification The research analysts who prepared this report certify as follows: 1. That all of the views expressed in this report articulate the research analyst(s) independent views/opinions regarding the companies, securities, industries or markets discussed in this report. 2.That the research analyst(s) compensation or remuneration is in no way connected (either directly or indirectly) to the specific recommendations, estimates or opinions expressed in this report. Other Disclosures Vetiva Capital Management Limited or any of its affiliates (collectively Vetiva ) may have financial or beneficial interest in securities or related investments discussed in this report, potentially giving rise to a conflict of interest which could affect the objectivity of this report. Material interests which Vetiva may have in companies or securities discussed in this report are herein disclosed: Vetiva may own shares of the company/subject covered in this research report. Vetiva does or may seek to do business with the company/subject of this research report Vetiva may be or may seek to be a market maker for the company which is the subject of this research report Vetiva or any of its officers may be or may seek to be a director in the company which is the subject of this research report Vetiva may be likely recipient of financial or other material benefits from the company/subject of this research report. 11

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