BY ANTONY MUTUNGA
Since 2016 when the Government signed into law the interest rate cap, banks have been facing a challenging period as most of them continue to report reduced margins and profitability. Due to this, banks have resorted to finding alternatives for boosting their revenues. For instance, some banks have invested in technological innovation such as mobile banking and mobile loan applications as a means of reaching out to more customers.
In another bid to survive the difficult times, banks have also looked to consolidations as a way of remaining afloat. With the Kenyan market having a large number of banks, many of the smaller banks have found themselves recording low valuations. This has left them at the mercy of their counterparts with stronger financial muscles. According to a report by Cytonn Investments, merger and acquisition activity is expected to rise given the current low valuations, with banks that are uncompetitive in the market being bought out and banks with common significant shareholders likely to merge.
In fact, in the last 3 years, there have been four other bank consolidations that have taken place in the country. They include the complete acquisition of Giro Commercial Bank by I&M Holdings for Sh5 billion in June 2016. At the time, Giro commercial bank was valued at Sh2.95 billion. The next acquisition was in May 2017 when SBM holdings, which is from Mauritius acquired a 100% stake in Fidelity commercial bank. Diamond Trust Bank Kenya Limited (DTB) acquired 100% stake of Habib Bank Limited Kenya (HBLK) in August 2017.
The fourth acquisition was once more by SBM holdings when it acquired and carved out assets and liabilities in receivership of Chase Bank Kenya Ltd in August 2018. The move saw the SBM group increase its total investment to Sh8.7 billion in Kenya and help SBM Kenya move up the ladder from a tier 3 bank to a top tier 2 bank with a significant asset base.
Currently, the fifth acquisition is taking place. Last year the Commercial Bank of Kenya and the NIC Group announced their merger. Once the is approved by shareholders and regulators, merger of tier one bank CBA and tier two NIC will create the third largest financial services provider in the country going by their combined asset base and market share.
In support of this consolidation has been the Treasury Cabinet Secretary (CS); Henry Rotich who believes it is necessary for the sector to strengthen. “Consolidation of the financial sector is something of importance, Treasury has been supportive of a sector that is well served by stronger banks. So as you see more banks consolidating on voluntary basis, that is a welcome move so that we can ensure that the banks are strong enough to provide sufficient credit to SMEs,” said the CS.
This is indeed required in the sector as many small banks, especially those in tier three category, are still unable to overcome shocks triggered by the interest rates capping law which has significantly reduced their profitability
Apart from the Treasury CS, Governor of Central bank of Kenya, Dr. Patrick Njoroge, has also been in support of consolidation in the banking sector. He believes that consolidation is likely to strengthen the financial sector and prepare banks in the country to withstand future shocks in the fast changing market.
The rising call for consolidations in the country has been brought about mainly by the fact that Kenya is considered over-banked. This is because compared to the largest economies on the continent, Nigeria and South Africa which have 21 and 31 lenders respectively, Kenya has a large financial sector consisting of 41 commercial banks, one mortgage finance company, 13 microfinance banks, eight representative offices of foreign banks and 73 foreign exchange bureaus.
This large number of institutions, which consists of many small banks, have been mainly affected by the interest rate cap which has seen them lock out loans for a large number of the citizens thus causing the people to have no incentive to put their money in small banks that neither offer a good return nor lend to them. As a result, the banks have resulted to consolidation as a way for surviving the market.
Additionally, banks have also considered consolidation as a way of entering into a new market. Overseas banks find it easier to merge with a bank already in the country in order to have access to already existing customers. This enables the financial institution to ease into the market. An example would be the case of SBM holdings where they acquired Fidelity Bank, acquiring its customers and branches around the country.
On the other hand, some financial institutions are ready to consolidate when they are in a crisis, which they are not able to pull themselves out. This is usually the case for banks that tend to go under receivership for inability to liquidify. An example of this case would be Chase Bank, which went under receivership in 2016 following revelations of financial mismanagement that led to a bank run. It was recently acquired by SBM holdings in 2018 whereby it took over the bank’s network of 62 branches across the country with total assets over Sh101 billion ($1 billion) and employing around 800 staff.
The call for bank consolidations is not about to go down anytime soon as the country is still considered overbanked and the interest rate cap continues to reduce profitability. Over the coming years, banks will continue to see profits wither more and more until the option of a merger or acquisition will be the only way forward. There is indeed a need for the financial sector to be strengthened and consolidation is away forward. Only the banks that will be able to provide what the customers need in terms of better services like access to loans and better interest rates for savings will be able to survive the coming difficult times.