Bob Diamond is back on the offensive

It was classic Bob Diamond. Never one to pass up a deal, he emerged as a possible buyer of Barclays Africa when Barclays announced its exit from the continent last year. Diamond of all people knew the target inside out: as group chief executive of Barclays earlier this decade, he was instrumental in moulding it in its modern, Johannesburg-centred form.

Diamond’s bid was a long shot. Atlas Mara, the African banking platform that he chairs and co-founded in 2013, has never had an acquisition in South Africa in its sights. Its focus is on the smaller and less-developed banking markets further north, whereas by far the biggest bit of Barclays Africa is South African lender Absa, which has a substantial mortgage book. Overall, the Barclays Africa assets were much more akin to a developed-market portfolio than the funky financial technology and local corporate business that is the future of African banking, in Diamond’s view.

In terms of market capitalization, the target was more than 10 times the size of Atlas Mara. There were reports of a partnership with Carlyle, which was doomed to fail, not least because of the South African Reserve Bank’s uneasiness with private-equity ownership.

Barclays Africa’s network elsewhere on the continent, accounting for just under a quarter of its overall earnings, would have made it a much more manageable – if still very large – deal for Atlas Mara. But Diamond, in a previous role, had made a separate purchase of Barclays’ banks elsewhere in Africa practically impossible: following Barclays’ acquisition of Absa in 2005, Diamond had put in place in the early part of this decade the very strategy consolidating those operations in South Africa.

The merger of Absa with the rest of Africa in 2013, in exchange for a higher stake in the Johannesburg-listed entity, was something that neither Absa nor Barclays Africa, as it became, had any desire to reverse. Barclays always had a minority of seats on the board and, as a related party, had not voted on the 2013 deal.

“It was never Barclays’ decision whether they were going to split the business up,” underlines Maria Ramos, Barclays Africa’s chief executive. “We paid good money for those businesses. Our ambition was to build a pan-African business.”

A central figure at Barclays and its investment bank for 15 years, Diamond left Barclays in the middle of 2012 in the wake the Libor-rigging scandal, just two years after he became group chief executive. That background made his pursuit of Barclays Africa even more tantalizing, especially given the importance of Atlas Mara to his reputation. Atlas Mara is not the only business Diamond has started since leaving Barclays, but it is the most publicized. Adding parts of Barclays Africa, which has a unique franchise, would have given heft to the project.

But Diamond and his team are already building an African bank of their own, which will eventually have a common brand and back office, and which, Diamond hopes, will be more suited to the opportunities on the continent than a subsidiary of a lender based outside Africa. And while the rival ambitions of Ramos and others frustrated Diamond’s efforts to buy some or all of Barclays Africa, in recent months Atlas Mara has found the means to achieve its ambition of integrating acquisitions across the continent. 

In the middle of this year, when Atlas Mara raised $200 million of new capital, a new Africa-focused fund set up by Canada’s Fairfax Financial Holdings committed to contribute at least $130 million of the total, including a $100 million convertible bond. The money will allow Atlas Mara to get close to a majority stake in what is, some say, the most exciting story in Nigerian banking: Union Bank.

Even with the roughly 31% stake that Atlas Mara owned in 2016, Union Bank was already its most important generator of profits. The $55 million Atlas Mara is paying to buy an additional 13% in Union Bank, from Singapore-based Clermont Group, will lift its stake to 44.5%. Analysts think a looming Union Bank capital-raising could allow Atlas Mara to increase its stake still further and pave the way for integration with Atlas Mara’s other businesses.

The Barclays heritage, again, looms large. Union Bank was Barclays’ unit in Nigeria before it gradually sold down its stake in the 1970s. That heritage may be distant, but it gives the investment added allure for Diamond, quite apart from the low valuations at which Nigeria bank stocks are trading. 

According to research from Renaissance Capital, the deal is being done at a discount of roughly 15% to book value.

“Over time this will prove to be extraordinarily positive,” Diamond enthuses. “It’s an amazing opportunity. It’s the biggest economy in Africa, and Union Bank is one of the best banks in the country.”

As Africa’s biggest oil producer, as well as its most populous nation, Nigeria is benefiting from a rebound in oil production and oil prices, and the effect of the central bank’s new liberalizing currency measures, according to Diamond. “We’re beginning to see green shoots,” he says. “It won’t be a V-shaped recovery, but economic growth is coming back.” 

In retrospect, 2013 was perhaps not the ideal time to start an African banking venture. Soon after Atlas Mara’s creation, international interest rates for African borrowers started to rise, exacerbating the effects of the commodities downturn. Investors have punished Atlas Mara’s shares even more severely than other African bank stocks in its first four years.

But thanks to the latest Fairfax-backed capital-raising, Atlas Mara now has the resources to consolidate what could be a flagship bank in Nigeria and to build synergies across the group, starting with a new offshore markets and treasury business, and investments in financial technology ventures.

If those investments go well, Diamond might still struggle to buy Barclays Africa. But the reverse might also be feasible, suggests an emerging markets-focused financial institutions investment banker in London.  

Once a reinvigorated Barclays Africa – or Absa, as it could then be known – has hopefully extricated itself from Barclays PLC three years from now, Atlas Mara might make a tempting target for Ramos or her successor, especially if by then Atlas Mara has integrated a covetable Nigerian franchise. Barclays Africa, after all, does not even have a bank in Nigeria today.

In the more immediate future, Atlas Mara could be in the market for other acquisitions. After the Union Bank deal, and with an entry to Kenya through a reinvigorated fintech franchise in train, the most obvious gap and perhaps Atlas Mara’s next target is Ghana. Francophone African markets like Cote d’Ivoire or Senegal could follow later.

Diamond wants to turn this rather disparate and predominantly southern African seven-country operation into a much closer-knit network with greater continental scale. That project could and perhaps should revolve around majority ownership of one of the biggest banks in the continent’s biggest economy, but more of a pan-African scope would mitigate the dominance of a single big and volatile market.

“When we founded Atlas Mara, the aim was to achieve a network of top-tier banks in 10 to 12 key countries: to acquire them, improve their position, and then integrate them into a sub-Saharan African bank and brand,” says Diamond.

“We believe that the most successful banks in sub-Saharan Africa will be African banks operating in multiple countries. Only a small group of institutions have had the energy and the enthusiasm to put themselves in that position.”

Is Diamond’s famous energy and enthusiasm sufficient? There is a fundamental difficulty, says the financial institutions banker, with a platform founded on acquisitions in Africa looking to supercharge the region’s financial development, because that very lack of development means a dearth of well-managed targets with enough scale to be profitable. Taking advantage of international exits, moreover, is easier in wholesale banking than retail, especially once the possibility of buying bits of Barclays recedes, given the meagre international presence in African retail.

If Africa has turned the corner after the commodities crash, Diamond thinks Atlas Mara’s prospects could be more promising than ever. Lower valuations, he says, make African banking more of a buyer’s market: “These have been two very challenging years to be building and expanding in sub-Saharan Africa. The commodity cycle and weaker currencies had a big impact, but it has not been without its advantages.” 

The Nigerian investment is telling. Nigeria is a priority for any African bank with regional ambitions. Yet it is approached with caution, including by most of the big South African lenders. First Rand, for example, is Africa’s biggest bank by market capitalization, although its regional business is much smaller than that of fellow South African lender Standard Bank. After much ado, First Rand pulled out of talks to buy Nigerian mid-tier lender Sterling Bank in 2011. In addition, speaking to Euromoney, Ramos seems especially wary of barging into a Nigeria purchase unawares.

Nigerian banks can be unknown quantities. Investors worry about governance deficiencies: who is really behind such-and-such a bank, or indeed behind the handful of corporations that make up the majority of its loan book?

Nigerian assets have been so battered by the oil crisis, says an investment banker in Lagos, an investor could buy control of any Nigerian bank except the top two or three by market capitalization, with about $250 million. It would require conviction about the long-term story in Nigeria, says the emerging-markets investment banker in London, and steady nerves, given the continued doubts about the naira’s value. Yet even Diamond’s critics would not accuse him of lacking bravery, as his role in Barclays’ post-crisis acquisition of the North American investment-banking business of Lehman Brothers showed.

Importantly, Nigeria is not a peripheral project for Atlas Mara. Buying a bank in Nigeria would require a lot of effort and attention at the top management level – for a bigger bank it might not be worth it. The banks available for sale in Nigeria are unlikely to make much of a difference to the revenue and profit dynamics of a group like First Rand, with a big market share in a more developed banking market, even in a medium-sized economy like South Africa. For Atlas Mara, however, it is a game changer.

“We were always very clear that the single most important market is Nigeria,” says Diamond.

Since its $325 million IPO in London four years ago, Atlas Mara has made close to 10 acquisitions. Five of its seven countries – Botswana, Zambia, Zimbabwe, Mozambique and Tanzania – joined the group as a result of its first acquisition, when it bought BancABC for $265 million in early 2014. That purchase was partially made through the acquisition of a majority stake in Frankfurt-based African Development Corporation (ADC), which also gave Atlas Mara an initial stake in Union Bank.

A few weeks later Atlas Mara announced a smaller purchase, a majority in Development Bank of Rwanda, in a privatization. It later merged it with another Rwandan lender, BPR. In late 2014, after raising another $300 million in a private share placement, the firm announced its biggest deal so far: the $270 million purchase of more shares in Union Bank from Nigeria’s state bad bank, taking it to just under 30%.

Many of Atlas Mara’s staff worked with Diamond at Barclays. When he was looking for a CEO to head Atlas Mara three years ago, Diamond turned to John Vitalo, a man he had worked alongside for decades. Mike Christelis, Atlas Mara’s head of treasury and markets, worked with Vitalo when the latter was chief executive of Absa Capital from 2005. 

After 2014, Diamond’s enthusiasm and hires of experienced, if costly, staff became increasingly hard to justify, especially as Africa’s economies and currencies rapidly weakened along with the commodities cycle. Investors lost faith. From its IPO price of $10, Atlas Mara steadily slid to a low of just $2 in late 2016.

Given its numerous banks with numerous ownership structures and intermediate holding companies, Atlas Mara is unusually complicated for such a young business, says the EM financial institutions investment banker. A rival, based in southern Africa, suggests that Diamond simply lacks sufficient knowledge about the continent. He might have paid more attention to Africa than other Barclays group chief executives, but as a chairman of an Africa bank, his previous links to Africa are relatively thin.

However, Atlas Mara co-founder Ashish Thakkar has a much longer African history, having started out selling with a small computer business in Uganda when he was 15. He eventually built his Mara group into a conglomerate spanning technology, real estate and infrastructure. The two also brought in a chairman, Arnold Ekpe, who as chief executive of Ecobank for much of the previous decade has unparalleled experience of building a pan-African lender.

Atlas Mara has committed to $20 million of net cost savings at the corporate centre this year. Vitalo left in early 2017, relieving the company of a total compensation package that ran to $2.1 million in 2016 and $3.5 million 2015. Others including Ekpe (at the end of his term) and the heads of strategy and integration have also left. Atlas Mara has closed its Johannesburg office. 

Diamond admits the firm hired too many, too soon: “We grew the centre too quickly, given the environment in Africa at the time and the speed of the acquisitions.”

Diamond became chairman late last year, and the heads of Atlas Mara’s three main units now report to him: Christelis in markets and treasury in Dubai, Chidi Okpala in fintech in Rwanda and Sanjeev Anand in banking, based in Botswana, where Anand is also chief executive of ABC Holdings.

“Working with the executive team since November has been a pleasure,” says Diamond. “I’m thoroughly enjoying my time as chairman and I plan to stay in this role.”

Some worry that Atlas Mara lacks the staff to compete with bigger African banks for the best opportunities, not least because of the multiple financial businesses Diamond is managing through his Atlas Merchant Capital vehicle (most recently a new banking venture in Greece). But Diamond feels that having managers closer to the coal face, including in Botswana and Rwanda, is a better approach than before, when Vitalo was based in Dubai.

“The cost cuts are over, and they were appropriate,” says Diamond. “I want more of the activity out of the centre and in the business and in the countries. That’s why the CEO of the retail and commercial bank is in Botswana, not Dubai.” He says Atlas Mara, which earned $8.4 million in net profit last year, plans to double earnings this year and envisages a return above its cost of equity in the medium term.

Moreover, Fairfax could provide the much-needed breathing space to achieve an ambition that was, in reality, always going to take more than a few years.

Diamond says Fairfax Africa is a long-term, regionally focused investor who shares his vision for the continent’s future. Set up in the 1980s by Indian-born Prem Watsa, Fairfax Financial Holdings has acquired a reputation as a Canadian Berkshire Hathaway. It has a $17 billion market capitalization and invests through insurance companies. Watsa set up Fairfax India in 2015 and Fairfax Africa this year with $500 million, including an IPO in Toronto, to target various sectors. One of its first forays is Atlas Mara, with a share of around one third after the most recent capital raising.

The Fairfax investment will strengthen Atlas Mara’s position in Nigeria, the backbone of the group’s profitability. Union Bank was one of 10 banks that the Nigerian central bank rescued in 2009. It was also the one that attracted the most bidders in a subsequent central bank-led auction, according to one of the advisers in that process, Chapel Hill Denham.

The original buying consortium – ADC and Clermont, as well as African Capital Alliance, Corsair Capital, Dutch development bank FMO, and Standard Chartered Private Equity – brought in new management led by chief executive Emeka Emuwa, Citi’s former Nigeria country head. The bank subsequently achieved a dramatic rebound in profitability, which it has maintained and steadily grown since 2014 during the oil-price crunch, earning a net N15.7 billion ($43 million) in 2016.

One of the country’s oldest banks, by Nigerian standards Union Bank counts as a middle-tier bank today with a relatively large branch network and a recognized brand. If past record is anything to go by, Diamond might make further acquisitions to increase market share in Nigeria. Indeed, after bolting on BPR to its original Rwandan acquisition in 2014, most recently Atlas Mara paid $76 million, mainly in cash, to add Finance Bank Zambia to its local ABC franchise, gaining a top five position in Zambia.

“Union Bank is well placed to move to the top tier of banking in Nigeria,” says Diamond, indicating another Nigerian acquisition would be possible although not crucial.

As Atlas Mara moves from being just a platform for acquisitions to an actual bank, it is gradually introducing its brand to lenders in which it holds a majority stake. ABC and the BPR’s branding now say they are “part of Atlas Mara”.

Integration into a common operational and technology platform is still two or three years away. But Diamond thinks there are immediate cross-border synergies to be realized, such as helping SMEs do business across borders that the group straddles, thanks to the growth of intra-regional trade, for example.

The encouragement of intra-African trade is one of the factors behind Diamond’s plans to create Atlas Mara. African companies will expand regionally and could be world leaders in sectors such as agriculture, according to Diamond. 

“The chance to help many businesses by providing lending and risk management is an incredible opportunity,” he says.

Intra-regional trade in Africa is often conducted in dollars, euros, or sterling, so a domestic Zambian bank might not deal with Tanzanian shillings, even though those countries share a land border. Atlas Mara’s banks in both countries can help a Zambian client importing from Tanzania to pay in shillings rather than dollars, simplifying and reducing the cost of trade by reducing the number of currency transactions. “The big regional opportunity is in banking a corporate client that deals with us in one and all countries,” says Christelis.

Atlas Mara hopes to replace those international wholesale banks that are either leaving the region or reducing their presence with a better service to offshore clients, provided from the Dubai International Financial Centre. This is where part of the recent capital raising will go.

An Africa-focused hedge fund, managing assets of perhaps $200 million, is more likely today to be shunted off to a lower tier of primarily electronic sales coverage by a bulge-bracket bank, the thinking goes. That client is far more important to Atlas Mara, which can also keep costs down as its business can maintain a more focused and simpler product set. Moreover, Atlas Mara’s group of exclusively African banks will hardly shy away from African risk.

“We want to be a one-stop shop and give offshore clients one point of entry to all our markets in Africa,” says Christelis. “If you believe in the African story, our universe is going to be bigger. As the markets grow and the pool of investable assets grows, more and more people will be invested in them.”

Regional rollouts of financial-technology products under Okpala, working out of Atlas Mara Digital’s base in Kigali, will make another use of the group’s multi-country network. Previously, Okpala headed the retail unit at Nigeria’s pan-African bank UBA, before building a 17-country mobile money platform with 30 million registered clients for telecoms firm Airtel.

Now Okpala is overseeing the launch of digital lending as a means for Atlas Mara to enter Kenya. The aim is to partner with telecoms firms, retailers and utilities in Kenya to distribute credit via their networks, using credit-scoring algorithms based on those firms’ client data, starting with an initial mobile-operator agreement this year. 

Okpala is also working on a new mobile wallet service in Botswana, alongside ABC and a multi-country southern African retailer. 

In Rwanda’s domestic market, Okpala is piloting a merchant-payments platform to mobilize deposits and bring in more SME clients.

Apart from the digital platform’s portion of Atlas Mara’s recent capital raising, financing from developmental finance institutions might help the firm extend digital lending, because it fits into their financial inclusion and small-business agendas. 

“SMEs in Africa have been starved of credit,” says Okpala. “Banks shy away from them, but they are the drivers of growth … If we can find partners that work with those businesses, and we have access to data about them, we can design and extend low-value, high-velocity and low-cost credit.”