Fortune News | Jul 06,2019
Apprehensive of a rapidly changing financial sector, banks have shareholders weighing mergers and acquisitions to strengthen their foothold against impending foreign competition and fear of failing to meet a regulatory deadline.
As the banking industry braces for change, shareholders and executives contemplate tough calls that will shape their institutions' future. Whether through mergers, partnerships, or strategic capital raising, private banks are charting new courses in response to a rapidly transforming financial sector. At their annual general meetings on Saturday, November 9, 2024, industry veteran Wegagen Bank and fourth-generation Ahadu Bank saw their shareholders mulling on consolidation issues.
Wegagen Bank executives presented a clause in the agenda tabled to shareholders, proposing strategic preparations for an evolving banking space.
"We won't be acquired," declared Wegagen Bank President, Aklilu Wubet (PhD), to some of the bank's 12,000 shareholders who met at the Addis Abeba Hilton Hotel. "We aspire to acquire."
The Bank, incorporated in 1997 with an equity of 60 million Br, has grown substantially but faces challenges meeting its ambitious targets. In the latest posting of results for the fiscal year 2023/24 operations, Wegagen netted a profit of 1.6 billion Br, exceeding the National Bank of Ethiopia's (NBE) minimum paid-up capital requirement of five billion Birr, a year-on-year increase of 1.1 billion Br. Despite these achievements, its executives conceded limitations in reaching a 20 billion Br capital goal by 2026.
Wegagen Bank is exploring establishing an investment firm and preparing for potential acquisitions. The Bank is also laying the groundwork to enter the nascent capital market, with plans to initiate investment banking operations and possibly form a subsidiary investment bank.
"Partnerships are also one possibility," said Aklilu, framing the need for strategic flexibility.
Its shareholders' contemplations of potential acquisition come as new policies permit foreign banks to operate in Ethiopia.
"We've to be prepared," Aklilu told Fortune. "We'll see which option benefits us."
Wegagen Bank reported 36.9pc earnings per share (EPS) in the fiscal year, larger than the industry's average last year. Its Board Chairperson, Abdishu Hussein, urged shareholders to recapitalise dividends.
The Bank plans to focus on raising capital, mobilising resources, improving service quality, and enhancing technological capabilities, recovering from the aftermath of militarised conflict in the northern part of the country. Around 30pc of Wegagen Bank's deposits come from the Tigray Regional State, where branches have become fully operational after a period of instability due to the two-year civil war that began in November 2020.
"We're returning to our track," said Aklilu, praising efforts to resume normal operations and strengthen market position.
Ahadu Bank's general assembly, held at the Millennium Hall the same day, echoed similar themes but with greater urgency. Shareholders debated the merits of three strategic options directors tabled in raising capital through investments and prudent loan provisions, offering shares for foreign acquisition, and pursuing a merger with a domestic bank. According to its Board Chairperson, Anteneh Sebsebe, selling equity to foreign banks has potential benefits, including improved operational efficiency and acquiring technology. However, he expressed concern about foreign investors' interest in the Bank and the potential of losing its identity through mergers.
He disclosed that the Board had considered the strategies long before being presented.
"We're hoping to prepare shareholders," said Anteneh.
Some of the Bank's 13,500 shareholders expressed apprehension, urging executives to thoroughly consider the merger option to preserve the Bank's distinct character. A shareholder spoke of his preference to have external consultants carry out an assessment.
"It's essential that the Bank undergoes rigorous assessment before involving us in this decision," he said.
Ahadu Bank faces a tight timeline in meeting regulatory capital requirements due for June 2026. With a paid-up capital of 1.027 billion Br and a net profit of 90 million Br, residual losses from previous years have limited dividend distributions. Its President, Sefialem Liben, attributed the cautious performance to strategic decisions to manage costs effectively. The Bank reduced planned branch openings from 75 to 25.
"Given the regulatory environment, we're taking steps to build up our resources and control spending," said Sefialem.
The National Bank of Ethiopia (NBE) is already paving the way for such potential consolidations. The broader context for these developments is financial sector liberalisation, opening doors to foreign banks for the first time. Domestic banks are under pressure to scale up operations, enhance technological assets, and improve service quality to remain competitive. The central bank's ongoing reforms push to strengthen corporate governance and ensure domestic institutions can withstand the pressure ahead.
According to Martha H. Mariam, advisor to the Vice Governor, the regulatory bank is drafting directives on mergers and acquisitions, endorsing them as practical responses for banks struggling to meet capital thresholds amid impending foreign competition.
"We're implementing comprehensive reforms across corporate governance and asset classification," she told Fortune.
Industry experts see consolidation as an inevitable outcome for the industry. Investment banker Worku Lemma commended the banks for proactively reckoning their positions.
"The path to consolidation is essential for smaller banks," he said.
He foresees younger banks, in particular, struggling to meet the capital threshold deadline on their own. He called for rigorous assets evaluation and strategic alignment, anticipating that consolidation will become a near-term reality.
PUBLISHED ON
Nov 09,2024 [ VOL
25 , NO
1280]
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