Moody’s backs Nedbank’s NCBA deal as credit positive

Moody’s says Nedbank’s proposed purchase of a controlling stake in Kenyan lender NCBA for R13.9bn is credit positive for South Africa’s banking major because it will help diversify its earnings base and strengthen its presence in higher-growth African markets.

Nedbank took the market by surprise last month when it said it had clinched a deal to buy a 66% stake in NCBA, a company domestic rival Standard Bank was also pursuing.

Moody’s said the mooted deal would not change Nedbank’s risk profile.

“The acquisition would enhance Nedbank Group’s geographic diversification and longer-term growth prospects by increasing its exposure to East Africa, a region with structurally higher economic and credit growth than Nedbank’s core South African market,” Moody’s said in a statement.

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“Kenya is a key regional financial hub, and NCBA would provide Nedbank with an established banking franchise with strong positions in retail, small and medium-sized enterprises (SMEs) and corporate and digital banking, alongside operations across Kenya, Uganda, Tanzania and Rwanda.

“Entry through an established entity reduces execution risk compared to organic expansion, and it would accelerate Nedbank’s ability to extend its corporate and investment banking activities in the region.”

NCBA’s main shareholders include the Kenyatta family and that of the erstwhile governor of the Central Bank of Kenya, Philip Ndegwa. It has a client base of 60-million.

Entry through an established entity reduces execution risk compared to organic expansion, and it would accelerate Nedbank’s ability to extend its corporate and investment banking activities in the region.

—  Moody’s

NCBA also operates in other East African economies — Tanzania, Uganda and Rwanda — and has a “digital offering in Ghana and Ivory Coast” in West Africa.

Media reports from Kenya suggest that the Standard Bank-NCBA deal collapsed over branding disagreements.

Nedbank’s South Africa franchise accounted for 90% of the group’s R1.4-trillion in assets and contributed 79% of the group’s R16.9bn headline earnings in the 2024 financial year.

Standard Bank derives more than 40% of its earnings from its African portfolio, which comprises 20 countries (excluding South Africa) with the recent addition of Egypt.

Nedbank, which holds 16% of South Africa’s banking assets, last week said Standard Bank now owns 5.57% of the group’s shares, making it one of the lender’s largest shareholders.

Local risk capabilities

Moody’s said that even though the NCBA deal increases Nedbank’s exposure to jurisdictions with higher intrinsic credit risk than in South Africa and foreign exchange movements, it expects Nedbank to manage those risks.

“NCBA’s established local risk capabilities, alongside Nedbank Group’s oversight and conservative underwriting standards, would mitigate these risks. The acquisition does not reflect a material change in the group’s overall risk appetite, and it modestly reduces geographic concentration,” the ratings agency said.

“We expect the effect on Nedbank Group’s capital position to be manageable. While consolidation will increase risk-weighted assets, the limited cash component of the consideration reduces balance sheet strain, and the equity-settled portion supports capital preservation.

“Strong internal capital generation provides an additional buffer to absorb the transaction without pressuring regulatory capital ratios.”