Skye Bank’s acquisition of Mainstreet: Betting big on retail

According to Opeyemi Agbaje, CEO of Resources and Trust Limited, a banking industry analyst, the acquisition should strengthen Skye Bank’s strategic stakes in the industry. It should make it easier for the bank to transition into the industry leadership segment if it can optimise the integration and leverage new advantages the new profile may offer.

The implications of taking advantage of the ‘strategic stakes’ involved in serving the segment customers, suddenly leaps to the consciousness of market players on consideration of the wider implications of the Buy.

“This will, positively influence their capacity to serve diverse customers across various locations in Nigeria,” says Femi Awoyemi, CEO Proshare.

Skye Bank’s GMD/CEO, Timothy Oguntayo, agrees; he says swooping on Mainstreet Bank and the consequent exploitation of increased branch network would make the bank’s services easier as branches are now easily accessed by its over 5 million customers.

Early signals that the bank wants to play big in this segment came to the fore when it placed a whopping N76 billion for the assets of Mainstreet Bank, a bank valued at N126 billion, freeing N50 billion for the Asset Management Company of Nigeria (AMCON). To soak in that premium and to pay-up in record time not only got heads turning but sent a strong signal to the market that indeed there is enormous value to be created and released in that segment, which by one estimate is worth more than N177 billion.

Milking only a tenth of that market could buoy a bank’s balance sheet by a staggering N17 billion, more than enough to enrich bottom line profits and register efficiencies.

A recent McKinsey study provides a hint of the potentials bottled up in that segment when it estimates that Nigeria’s retail and wholesale market could grow 7.1 percent per year and ultimately become Nigeria’s number one contributor to GDP. It prognosticates that by 2030 about 160 million Nigerians could live in households with sufficient incomes for discretionary spending.

That would be more Nigerian consumers than the current populations of France and Germany.

“One of the most important underappreciated changes in Nigeria is the growing size and strength of its consuming class. Although more than 40 percent of the population falls below the national poverty line, the number of households in the consuming class is growing rapidly.

In 2013, an estimated 8 million households had incomes of more than $7,500 per year — the threshold for what the McKinsey Global Institute considers “emerging consumers,” with sufficient income to meet all basic necessities and have money left over to start buying more and better food as well as health and education services. By 2030, we estimate that about 35 million households (an estimated 160m people) could be living above this threshold. Today, Nigeria’s consumer market is worth nearly $400 billion per year and, based on this expanding consuming class, could reach $1.4 trillion a year by 2030. Food (including beverages) and non-food consumer goods would account for $1 trillion of the total”, says the report.

An army of consumers that big certainly could rev up the retail and commercial sectors of banking and confer much needed rent to early adopters and the strategic group competition engenders.

But Skye Bank is not among the top 10 players in the retail market, according to KPMG, which ranked the following banks as the top 10. Zenith Bank, Diamond Bank, GTBank, Standard Chartered Bank and Stanbic IBTC. Others are Fidelity Bank, FCMB, FirstBank, Sterling Bank and Access Bank.

Add to this that Skye Bank is only the tenth biggest player in the corporate/commercial sector, according to the same study by KPMG and the strategically inclined would begin to discern that there is a catch. The bank must have a strategic manoeuvre capable of tilting the game in its favour. And it does!

The acquisition of Mainstreet Bank in October of last year could have a multiplier effect that could approximate a disruption in that segment. And the thing about disruptors is that incumbents never see them coming.

For example, that move has vaulted Skye Bank to a position where it controls the fourth highest branch network in the country; from 250 to 450.The move also spiked the number of ATMs from 500 to 815. The incumbents certainly didn’t see this coming.

It is established that superior branch network is a veritable tool for reaching out to the vast numbers of under banked and for warming retail banking offerings to the vast majority of bank customers spread all over the country, especially the emerging middle-class as pointed out by the McKinsey study alluded to.

Many who follow banking in Nigeria would quickly recall that the forte of Mainstreet Bank is retail banking, accounting for 78 percent of the business. The segment pulled in 36 percent of deposits and 18 percent of total loans. Mainstreet’s savings and demand deposits accounted for 21 percent and 43 percent of deposit mix, which also demonstrated its focus on these two segments”, the bank said.

What this immediately throws up is that with integration, the new Skye Bank would have acquired a robust retail competence. If postulations by strategic management thinkers like Gary Hamel and C.K Prahald are anything to go by, then the Bank is developing core competence in Retail Banking, the direct effect of which would manifest in superior value creation from that segment.

“Core Competency is a deep proficiency that enables a company to deliver unique value to customers,” according to Bain and Company, management consultants. “It embodies an organisation’s collective learning, particularly of how to coordinate diverse production skills and integrate multiple technologies.

Such a Core Competency creates sustainable competitive advantage for a company and helps it branch into a wide variety of related markets. Core Competencies also contribute substantially to the benefits a company’s products offer customers.”

What has come to be known as the LITMUS TEST for a Core Competency is that it is hard for competitors to copy or procure such as the hefty acquisition of Mainstreet Bank; it is an acquisition which allows Skye Bank to invest in the strengths that differentiate them and set strategies that unify their entire organisation.

According to experts of corporate strategy, a company either grows competence or acquiresit. Skye Bank used the later to deepen that competence.

The learning curve barrier that would have been a major stumbling block to entering andplaying in the retail market would have been surmounted with the purchase as would the assets to be leveraged to serve the market.

According to the Bank and true to strategy, the reason for forking out a princely sum for Mainstreet is that the acquisition would help intensify its penetration in places where Skye Bank is under represented or where it did less business.

Areas like the South East and South-South regions fall in that catchment. Interestingly of Mainstreet Bank’s 201 branches and nine subsidiaries, 26 percent or 54 branches are located in the two regions.

Oguntayo had said the bank had strongly established its presence in the South-South, South East and the North owing mainly to the acquisition.

What remains it would seem, is the bank’s ability to achieve integration. But that would not be a problem, according to Agbaje.

“Skye Bank’s previous merger experience improves its chances of achieving successful merger integration, but its main challenge will be enhancing efficiency and returns given a larger balance sheet, “he says.

HOPE MOSES-ASHIKE