National Bank’s stake in African firm ‘credit negative’: Moody’s

“The investment is credit negative because it offers little strategic advantage to National Bank’s, reduces an already low capital position and could create future management distractions,” Moody’s says in a new report.

The rating agency says that, while the financial details of the transaction were not made public, it does not believe that the deal is financially material to the bank. “However, the transaction is an allocation of capital that does not support — and may dilute — National Bank’s primary credit strengths at a time when National Bank’s first-quarter 2015 common equity Tier 1 ratio of 9.3% is the lowest among Canadian banks,” it says.

“Moreover, it signals a trend toward increased exposure to businesses that are geographically remote and could present risk management challenges,” Moody’s adds.

Indeed, it notes that this deal is the third similar transaction for the bank in the past several months. Earlier this year, National Bank increased its stake in Cambodia-based ABA Bank to 42% from 30% in a $20 million deal; and, in December 2014, it acquired a 9.5% stake in AfrAsia Bank Ltd., which is based in Mauritius.

And, at the same time, Moody’s notes that the bank has reduced its exposure to Canada by trimming its investment in Montreal-based asset manager Fiera Capital Corp. (TSX:FSZ), back in February. The bank retained approximately a 22% stake in Fiera, which Moody’s says “constitutes a source of stable and growing earnings.”

Yet, it believes that, “Reducing capital committed to asset management while increasing international minority holdings dilutes NBC’s credit profile.”

Moody’s notes that the bank maintains that its expansion into Africa is consistent with its strategy of boosting its international presence through targeted equity acquisitions, as it seeks to diversify beyond its strong base in Quebec, and to gain a foothold in economies with favourable demographics and low financial market penetration rates.