FIRST Merchant Bank (FMB), the US$457 million diversified financial holdings firm, gave a cautionary statement last Friday announcing that it had successfully signed an agreement with Barclays Plc to purchase 68% of the London-based bank’s stake in Barclays Zimbabwe.
The Brett Chulu Column
There are a number of corporate governance and financial matters that have not been given sufficient attention in local corporate talk surrounding the deal.
What is striking is the history and pattern of questionable corporate governance practices FMB has entertained in its most recent history. The corporate history of chairs who have led the board of FMB is worrying. The immediate past chair of FMB is the founder of and major shareholder in Prime Bank of Kenya. Prime Bank is the joint second largest shareholder in FMB, with an 11,24% stake, with the other 11,24% belonging to Prime Capital and Credit Limited. Prime Capital and Credit Limited was founded by the same founder of Prime Bank. This means that the erstwhile chair of FMB through these two investment vehicles controls 22,48% of FMB. That represents no small influence. In fact, Prime Bank is listed as the co-founder of FMB. It is perturbing that a major shareholder was allowed to chair the board.
What’s more disturbing is that the former chair of FMB held 48,67% of Crane Bank of Uganda which was put under curatorship in October last year. Worse still, this very ex-chair of FMB was the chair of Crane Bank when it collapsed. He is also the chair of Prime Bank. The reason of Crane Bank’s collapse was irregular lending practices.
Irregular lending practices including that nerve-racking banking anathema subprime lending happened under the watch of the chair, a majority shareholder. That is worrying sick in that there is a clear pattern in which major shareholders of FMB insert themselves as chairs of banks in which they are founders and major shareholders. Early this year, the Reserve Bank of Malawi subjected the same ex-FMB chair to a fit-and-proper test to ascertain his suitability to serve as a director of a Malawian Bank.
Curiously, the latest list of directors of FMB excludes this ex-chair. As indicated in last week’s instalment the current chair of FMB is also a founder and major shareholder of FMB. It would appear that the practice of founders and major shareholders chairing their boards is an entrenched culture within FMB and other banks banks run by its common directors and shareholders.
Given our country’s inglorious history of bank failures instigated by reckless lending practices perpetrated by domineering founder directors, we need to know the steps our Zimbabwean financial regulators are taking to make sure that FMB’s archaic aforementioned corporate governance behaviour is not sneaked into Zimbabwe.
The collapse of owner-dominated banks has been cited as the main driver of loss of confidence in the Zimbabwean banking sector. It is incumbent upon the Reserve Bank of Zimbabwe, prior to giving the say-so to the FMB-Barclays deal to lay down the law and state without equivocation that the entrenched practice of allowing major shareholders to chair their boards is not acceptable in Zimbabwe.
Allow me to draw liberally from the Bible for fitting metaphors to probe deep into our banking regulator welcoming FMB to our banking fold.
“Can the Ethiopian change his skin, or the leopard his spots? (then) may ye also do good, that are accustomed to do evil.” (Jeremiah 13:23, KJV). Jesus once remarked: “O generation of vipers, how can ye, being evil, speak good things? for out of the abundance of the heart the mouth speaketh.” (Matthew 12:34, KJV).
Just in case someone thinks that these scriptures are invectives, you can rest assured that they are far from being insults. The use of vipers is a figurative expression Jesus leased from the everyday life of his hearers. Vipers were known to be very poisonous snakes. The key in decoding the key thought resides in the use of generations.
Generations supply the notion that the offspring of vipers will genetically inherit venomous qualities from their parents.
The rub of the Ethiopian’s skin, leopard’s spots and generation-of-vipers images is that the fundamental constitution of an entity determines its repeated behaviour. It’s clear from a historical analysis of FMB’s corporate governance practices that it’s in its corporate DNA to catapult major shareholders to the helm of the board. We would be naïve to expect those tendencies to suddenly evaporate because FMB is now operating in Zimbabwe.
It is quite possible for FMB to surprise us by allowing on paper a board and chair who appear to be independent.
We need to check closely for a remote control or puppet-string reincarnation of owner-dominance through a pliant board serving at the beck and call of the majority shareholders, including the disgraced ex-FMB chair.
There is one financial grey area in need of close scrutiny.
As reported in the Zimbabwe Independent last week, it appears that FMB and Barclays Plc agreed to exchange Barclays Zimbabwe at US$60 million. Barclays Zimbabwe has equity of US$65,193 million. Barclays Zimbabwe’s market capitalisation at the close of 2016 was US$68,894 million, representing a market-to-book value of 1,05. At the close of Thursday last week, Barclays Zimbabwe’s market-to-book value stood at 1,12. There is no denying that Barclays Zimbabwe is regarded as a prime banking asset, with investors valuing it at a premium to its book. This stands in stark contrast to the valuations placed on the biggest banks in Zimbabwe.
For instance, CBZ Holdings has been trading at a discount of between 71-76% and FBC Holdings is valued by capital markets at a discount of 50%. If FMB is buying the 68% Barclays Plc stake at US$60 million, it means that Barclays Zimbabwe is valued at US$88 million, representing a 35% premium on its book value or 21% premium on its current open market value.
Put in another way, FMB is willing to pay 21% more than what investors on the Zimbabwe Stock Exchange are willing to pay for Barclays Zimbabwe. The question is: did FMB buy an overpriced asset or this reflects the true market value of Barclays Zimbabwe? Valuation of companies for buying and selling purposes is a very subjective affair.
As they say in asset management circles, price is what you pay for an asset and value is what the asset is worth. I am sure FMB does not see itself overpaying because with the purchase of this single Zimbabwean crown jewel, they will double the size of FMB’s asset base to nearly US$1 billion and also double profit to US$20 million per annum.
FMB can practically recover its investment in about six years, all things being equal. That is not a bad investment at all.
Will FMB’s historically questionable corporate governance behaviour destroy Barclays Zimbabwe’s value-generating capacity? Are we going to see Barclays Zimbabwe’s market value retreating southwards into discount territory as investors paint the new entity with the same scepticism they hold other giants of Zimbabwe banking? It is a development worth tracking.
Chulu is a management consultant and classic grounded theory researcher. He has published research in an international peer reviewed academic journal.