Does Nedbank have ‘deal fever’ with ‘pricey’ Kenyan takeover?

Nedbank may have won the race among South Africa’s biggest banks to buy meaningful scale in Kenya’s fast-growing market. But its proposed takeover of NCBA Group has sparked concerns that it is paying too much, straying from its stated expansion strategy, and potentially sacrificing future shareholder returns.

Sub-Saharan Africa’s fourth-largest bank by assets said this week it offered to buy control of Nairobi-based NCBA in a cash-and-shares transaction worth about R14bn. The deal gives Nedbank a rapid entry into East Africa – and catapults it ahead of Absa and Standard Bank in terms of size in Kenya, where FirstRand has a representative office focused on corporate and investment banking.

“The target [NCBA] wasn’t a surprise … The buyer was a surprise,” says Keagan Higgins, an investment analyst at Anchor. Bloomberg reported in October last year that Standard Bank was in talks to buy Kenya’s fourth-largest bank, and takeover speculation has lifted the share price by more than 41% since then. The stock reached a record high on Thursday, the day after the deal was announced.

“Management had previously guided the market to expect ‘organic growth’ or small bolt-on deals,” the analyst tells Currency. “Buying a massive 66% stake is a huge deviation from that script. It looks like they may have seen an opening and grabbed it.”

Nedbank has long wanted to diversify away from South Africa, which accounts for more than 80% of its profit. Chief executive Jason Quinn last year highlighted the Southern and East African regions, and suggested the push would be led by corporate and investment banking rather than a retail expansion.

“East Africa has become a key battleground for all the South African majors because of its growth prospects,” he says. The International Monetary Fund expects economies such as Tanzania, Uganda, Rwanda and Ethiopia to grow at almost twice the pace of the global average in 2026.

The deal also changes the game for Africa’s biggest lender. “It leaves Standard Bank in a tougher spot,” Higgins adds. With NCBA off the table, it would need to pursue smaller bolt-ons to build scale – which takes longer – or pay up for another asset. 

Crucially, though, for potential buyers: “The precedent valuation for quality banks in Kenya just went up.”

With great opportunity comes great risk

But East Africa’s growth comes with familiar frontier-market risk. Kenya is fiscally stretched, debt servicing is heavy, and repeated attempts to raise revenue have triggered political backlash – most notably the protests that forced the withdrawal of the 2024 finance bill. Uganda’s election this month and Tanzania’s vote last year were both marked by tensions and arrests of opposition leaders.

Ninety One’s Chris Steward questioned how much strategic value Nedbank can realistically add in Kenya once it becomes the controlling shareholder, given that NCBA appears well-run, has delivered consistently in a tough environment, and still has a sizeable minority shareholder base.

Fitch, in a note published last year on its B- rating on NCBA (six notches below investment grade and in line with other Kenyan banks), pointed to the company’s operating profitability, deposit-based funding and liquidity as strengths. However, the ratings agency flagged its exposure to Kenyan government debt and elevated credit risk.

The bigger question, Steward suggests, is concentration. Standard Bank’s pan-African franchise draws part of its appeal from breadth: with operations across about 20 countries outside of its home market, it benefits from a “portfolio effect”, when one market weakens, the others act as a buffer.

Nedbank, by contrast, would be building an African presence that is initially narrow and heavily reliant on Kenya. That issue was evident when Ghana defaulted and Absa had to take a massive hit that saw its impairments jump more than 60% in 2022.

Were other bidders as keen?

Steward echoed concerns about what Nedbank is paying.

“We’re talking about around 1.4 times book value, and about seven or eight times earnings,” he explains, for a bank generating “about a 19% return on equity” in a market where the cost of capital could be “a little north of that”. On that basis, the multiples “look quite elevated”, he says.

It also raises questions about how eager rival bidders really were. Standard Bank runs Kenya’s sixth-largest bank, just behind Absa’s business there, and could, in theory, extract more value through consolidation. “Yet, even with the potential synergies that Standard Bank could deliver, they ostensibly didn’t come up with a price north of what we see Nedbank offering,” Steward speculates, though he notes that regulatory conditions, competition issues or strategic fit may have shaped the outcome. 

Standard Bank declined to comment on “market speculation” about NCBA, and said its strategy for the region is unchanged.

“In relation to our long-term strategy, we remain firmly committed to East Africa as a strategic growth priority, with a primary focus on disciplined and sustainable growth opportunities,” it said. “We have well-established financial services operations in Kenya, Uganda and Tanzania, as well as a representative office in Ethiopia. East Africa continues to offer some of the continent’s strongest growth prospects, supported by robust population growth, deepening regional integration and ongoing investment in infrastructure.”

No more capital returns?

Kabelo Moshesha, an investment analyst at Mazi Asset Management, questions Nedbank’s about-turn on a “big acquisition”, which he says was out of step with recent communications. He also flags the use of shares and the valuation gap between Nedbank’s own rating and the multiple implied by NCBA’s shares.

“The acquisition goes against recent communications, which were focused on growth in Africa through their corporate segment. A large acquisition was not on the cards,” Moshesha says. At face value, issuing up to 44-million shares – after a recent buyback of 11-million securities – to buy a bank on 1.3 to 1.4 times book raises questions when Nedbank itself trades at about one times book, he adds.

“They have sufficient capital on hand, which could have seen them increase the cash component of the offer, so this acquisition could risk excess return of capital to shareholders” because of investment to fund NCBA’s potential growth.

Steward believes the deal might still be “earnings accretive” because part of the offer includes cash, and the earnings yield on cash is low at current interest rates. He also warned, however, that, for Nedbank shareholders, the transaction changes the capital return story. “It absorbs any surplus capital that Nedbank may have been sitting with,” he notes. That, in turn, could put buybacks or additional capital returns “off the table”.

“We think the price is full,” Anchor’s Higgins adds, especially because there are no synergy benefits to extract.

The failed West Africa experiment

That concern feeds into an older scar: Nedbank’s ill-fated investment in Ecobank.

Radebe Sipamla, a portfolio manager at Mergence Investment Managers, calls Nedbank’s acquisition track record “horrendous”, and describes the Ecobank deal as a “prime example” of “FOMO” driving poor capital allocation.

Nedbank bought a 20% stake in Ecobank for more than $490m in 2014, only to agree to sell it for $100m last year. Nedbank was hoping to use the Lomé, Togo-based lender’s network across more than 30 countries, one of the continent’s most expansive, to lead its African foray. That was until volatile currency swings and volatile political and macroeconomic conditions in some of Ecobank’s regions weighed on the investment.

While NCBA has delivered returns above its cost of capital over the past two to three years, it still has “stubbornly high” credit metrics, including non-performing loans and credit loss ratios that, he points out, were materially higher than those of Standard Bank’s Stanbic unit in Kenya.

Higgins is of the view that while an “Ecobank 2.0” is “the big concern”, the structure is materially different this time because Nedbank has control and can appoint management, direct strategy and integrate systems. 

Better spent at home

“At this valuation”, Anchor’s Higgins says he would have preferred to see Nedbank allocate capital into improving its core South African franchise. “We think that Nedbank has room to improve here in South Africa,” he adds. “Using that capital to bolster their South African franchise might have been a safer bet than a higher-risk venture in Kenya.”

Still, Steward pushes back on the idea that two deals in quick succession automatically equal “deal fever”. The purchase of iKhokha, a Durban-based fintech company, for R1.65bn, is aimed at strengthening Nedbank’s domestic position in payments and give it a “jumpstart” in the SME space, he explains, while the Kenyan move is a separate play for regional growth.

“The market may say: ‘There are other cheap banks out there.’ Investors can buy Nedbank or Absa, both trading at low valuations, and just sit on the sidelines to see whether this deal works,” Steward says. “Banks trading on low price-to-book ratios aren’t automatically ‘cheap’, just as banks on low p:e multiples aren’t automatically ‘cheap’ either. You have to consider returns and growth.”

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