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10% of bank’s total capital to finance Ghana share puchase
On April 17, Republic Bank announced that it would be making a mandatory offer to the shareholders of HFC Bank Ltd to acquire all of the shares of the Ghana bank it does not already own. Republic began investing in Ghana in November 2012, with the acquisition of an 8.9 per cent stake in HFC Bank “in keeping with its expansion strategy and its focus on areas outside of its traditional Caribbean markets,” according to a statement from the local bank at the time.
HFC Bank was licensed as a commercial bank in 2003, with core services in mortgages, consumer loans, commercial and investment banking. The bank is considered to be a leader in Ghana’s mortgages market, and operates 27 branches in that country. The West African country—the world’s second largest producer of cocoa—is not without risk with the International Monetary Fund identifying Ghana and Zambia as the African countries most at risk if there’s a sudden reversal of foreign inflows.
“Countries with large fiscal deficits or increasing debt levels, for example, Ghana and Zambia, should intensify their efforts to bring their public finances back to a sustainable footing, including by containing expenditure,” the IMF said in its Regional Economic Outlook.
Bouyed by strong oil and cocoa prices and continuing investment, the Ghana economy expanded 7.1 per cent last year, but inflation is running at over 14 per cent and on Friday the Ghana Central Bank issued a three-year note that pays investors an eye-watering 25.48 per cent yield.
Given the possibility that Republic Bank shareholders may have concerns about the bank’s embrace of Ghana, the Sunday BG’s Anthony Wilson sent Republic executive director, Nigel Baptiste, some questions by e-mail on Thursday, to which he promptly responded:
Q: If all outstanding shareholders accept this offer, Republic Bank will pay US$83,697,859 (TT$540.7 million). This is equal to about six months of RBL profit. Is the bank biting off more than it can chew in Ghana?
A: Assuming all of the shareholders accepted our offer, our total investment would be the US$83 million plus US$47 million already invested in acquiring the 40 per cent. The total investment would then be around US$130 million (TT$840 million). The relevant reference point for assessing the bank’s ability to digest a transaction of this size is actually the bank’s capital base. Republic Bank’s capital base as at September 2013 was $8.3 billion. This transaction therefore represents a manageable 10 per cent of our total capital.
How will the transaction be financed?
This transaction will be financed by drawing down on the bank’s surplus US dollar liquidity. We have balances on deposit with our US correspondent banks that can be used for this purpose with negligible impact on our US$ liquidity ratios.
Will RBL’s dividends be cut as a result of the transaction?
Based on the existing performance of HFC Bank in Ghana, we expect the transaction to be accretive to our shareholders.
What were HFC's 2013 earnings in TT dollars and what is the earnings expectation for 2014?
HFC’s financial year end is December. I can tell you that, in 2012, profit after tax was US$8 million and that for the first half of 2013, the profits after tax exceeded US$8 million. The AGM was today (April 24, 2014) and the bank reported profits after tax of US$18.4 million for 2013. The expectations for 2014 are positive.
One notes that RBL’s share of the profits from Ghana for two months amounted to $10 million. If RBL owned 100 per cent of HFC in 2013, what would the bank have contributed to the parent's top and bottom lines?
With respect to the $10 million, if we had 100 per cent rather than 40 per cent, it would have contributed around $25 million to the bottom line (we got up to the 40 per cent via a series of transactions over a period of time so the actual math would not be as straightforward but the number would not be far off $25 million). If we had 100 per cent for the entire year of 2013, then the US$18.4 million would have come through to the group’s bottom line.
Ghana is a high inflation, large fiscal deficit, fluctuating exchange rate economy. Some may argue that the economy is facing the prospects of a sharp downturn if gold and oil prices soften. What is Republic Bank’s view of the Ghana economy?
Gold, cocoa and oil will be the main drivers of the economy going forward. The three variables mentioned are all interconnected, of course, and the first challenge is to get the fiscal deficit under control. On the plus side is that the Ghana economy has not begun to see the benefits of its oil discoveries just yet, so that should hopefully generate positive government revenues before long.
Our view though has always been a long term view. There are challenges at the moment but the fiscal deficit is where it is because the government is also trying to propel the country forward. There is a lot of public sector investment ongoing. We know how to manage a bank in a challenging economic environment. We experienced it in Trinidad in the 80s, Guyana in the late 90s and Grenada and Barbados are experiencing it now.
We think the price being paid is fair when you look at the long-term prospects: 26 million people, a burgeoning middle class, foreign direct investment in the oil and gas sector.
What is the loan loss ratio for HFC and what is the expectation if there is an economic reversal?
The non performing loans ratio is 9.28 per cent for 2013 which is a slight improvement over the 2012 number of 11.98 per cent.