Cost-cutting pain pays big for banks
Banks that have reaped huge returns embarked on painful cost-cutting measures years ago after hiring experts such as McKinsey to restructure their operations and improve efficiency. FILE PHOTO | NATION MEDIA GROUP
What you need to know:
- Latest ranking by the Central Bank of Kenya shows that lenders that hired consultants to help them restructure are now reaping huge benefits in terms of increase in market share and profits.
Lenders which carried out far-reaching cost-cutting measures are now smiling all the way to the bank as the austerity move is now paying off.
Statistics show that some of the banks are edging upwards in the market share pecking order courtesy of these measures. The changes in the fortunes of the lenders are reflected in the ranking by the Central Bank of Kenya annual 2015 supervision report.
Experts say the shift in market share rankings also reflect the impact of recent moves by lenders to bolster their competitiveness through enhanced investments in new areas, especially ICT, and restructuring programmes.
Banks that have reaped huge returns embarked on painful cost-cutting measures years ago after hiring experts such as McKinsey to restructure their operations and improve efficiency.
“We exist in what is best described as a disruptive moment in the banking system. Therefore, organisations that are ahead of the curve and who can see the future not through the rear view mirror, will be the winners,” Mr Aly Khan Satchu, chief executive officer of Rich Management, told Smart Company.
The recent market share index is computed from key business drivers that determine the competitiveness of the banking business. These include net assets, deposits, capital, number of deposit accounts and number of loan accounts.
“KCB, for example, has gained more customers in the last 18 months than probably their entire previous history,” said Mr Khan adding that banks have to see the future and start positioning for it “otherwise you might be a wildebeest [which get easily eaten up in the wild].”
Economist Robert Shaw said banks with a much more “alert and responsive management” have managed to move faster.
“These are banks that have been undergoing sizeable restructuring in their own right for sometime. Co-operative Bank is a very good example. It is a large bank with many branches and a large client base. It used to have a reputation of being a rather cumbersome, overstaffed set-up. It is much more nimble now,” said Mr Shaw.
Among banks which sourced for the services of McKinsey — informally called the global Mr Fix It for companies and governments in crisis — include Barclays, KCB, National Bank and Co-op Bank.
Sterling Capital Investment Director John Kirimi said lenders have been forced to respond to stiff competition in the sector.
“With the current and growing competition in the financial market in the country, banks have limited opportunities for growing their bottom lines other than addressing their costs. Improving efficiency and productivity through optimising the use of IT and staff rationalisation are the most immediate in this respect,” he said.
“Some have gone ahead and restructured their balance sheet so that they can use assets at their disposal more efficiently. All this combined with robust management systems will see any business thrive and prosper.”
Economist Michael Chege of the University of Nairobi said banks that have reduced costs and created leaner structures are performing well.
“This is the first time Kenya has witnessed a decline in bank profits since 1999. Much of this can be attributed to rising costs outpacing revenue. So banks that reduced costs did better. But ultimately they did better because they dispensed credit to profitable borrowers including the government,” said Prof Chege.
In the latest market data by the Central Bank, KCB remains the ‘king of the jungle’ with a market size index of 14.1 per cent.
Experts have attributed the dominance of the oldest Kenyan lender to its long established brand and legacy business segments especially government and the wider public sector, which it has over the years leveraged on.
Successive reform and restructuring programmes, the analysts say, have also refreshed the KCB brand and kept it “sharp and agile,” enabling the lender to acquire substantial private sector banking business.
Its regional footprint remains the widest, but performance continues to lag the parent Kenya operation.
The Co-operative Bank came second in rank with a 9.83 per cent market share.
The bank predominantly-owned by the over 15 million-member co-operative movement appears to have gained significantly from the ongoing ‘Soaring Eagle’ transformation agenda advised by McKinsey, that is focused on enhancing operational efficiencies, reducing operating costs and improving customer delivery platforms.
Equity Bank came third with a 9.44 per cent share of the pie, as it continues to reap from its massive customer base approaching 10 million, deep brand familiarity and enhanced re-tooling of the business, notably what the bank refers to as next generation digitisation programme named Equity 3.0.
Standard Chartered and Barclays round up the top five banks in Kenya, with 7.0 per cent and 6.94 per cent market share, respectively.
Stanchart is seen to retain a solid positioning among high-end SMEs, corporate and high net-worth clients, which they continue to serve through a lean brick-and-mortar channels supported by automation and online banking capabilities.
Barclays meanwhile continues the fight to retain market share that it once dominated with an almost unassailable dominance two decades ago.
Experts say recent reports of their planned Africa exit has not helped matters despite denials by the lender. The bank, however, still enjoys solid loyalty among select corporates, SMEs and retail clients.
CBA and new Tier 1 entrant DTB round up the list of Kenya’s top banks by market share, referred to as Large Peer Group, which are banks that have a market share of at least 5 per cent.
