Mergers, buy-outs next as storm in banking abates, experts insist

As the storm in the banking sector abates, the future of Kenya’s financial sector may be about to change dramatically, with the players realigning to cope with market realities.

Kenya has 41 commercial banks, one mortgage finance company, 12 micro-finance banks, eight representative offices for foreign banks, 86 foreign exchange bureaux, 14 money remittance providers and three credit reference bureaux.

Analysts see consolidation as the probable route, but questions abound as to whether the debris from the storm is anywhere near their value.

Chase Bank, the third financial institution to be put under receivership in just under nine months, after Imperial Bank and Dubai Bank, is already courting five buyers - including Kenya Commercial Bank and Centum.

But whether the prospective buyers will be willing to cough up three times the book value for majority shareholding, as per a tool by investment group Atlas Mara, is in doubt.

“Consolidation made more sense last year when the run was not there. But given what has happened, what value are you looking at in buying some of these small banks? Let’s say you want to get ahead of your peers, it would make sense to buy the more stable banks,” a source told the Sunday Nation.

MERGERS AND ACQUISITIONS

Last year, about 22 banks faced the prospect of mergers and acquisitions - including K-Rep, Habib, Oriental, UBA Kenya, Victoria and Equatorial - when Treasury tried to raise the core capital for banks to Sh5 billion in three years.

Banks with core capital of between Sh934 million and Sh4.6 billion, as at December 2014, would have had to consider making shareholder cash calls, mergers or selling stakes to comply with the law.

But Parliament made last minute adjustments and threw out the contentious clause from the Finance Bill 2015.

This did not, however, halt the rise of mergers and acquisitions as the operating environment became tougher and the regulator tightened application of its prudential guidelines.

According to investment firm Cytonn’s 2015 banking report, increased regulation and capital base requirements increased competition, driven by an overbanked situation in Kenya.

This led to consolidation of the industry, including the acquisition of Giro Bank by I&M Bank and  acquisition of a 51 per cent stake of Equatorial Commercial Bank by Mwalimu Sacco.

“The banking industry has also witnessed increased private equity investment, with several funding deals and acquisitions such as Fidelity Bank by Duet Group and Credit Bank by FEP Holdings,” Cytonn says.

The ground for more deals is ripe, given that several banks have come under liquidity pressure owing to huge withdraws of money by depositors.

Although the regulator has strongly supported these banks with credit, extended tenure for reverse repos and overnight lending, insiders say some banks continue to struggle if they use the money to pay out depositors.

“Consolidation will depend on CBK’s moves, For example, during the financial crisis in America, the Federal Bank was clear in its language to buy out troubled banks. Even here it will depend on the regulator,” said the head of private equity real estate at Cytonn Investments, Shiv Arora.

Central Bank Governor Patrick Njoroge said this week that it would make more sense for banks to consolidate to withstand future shocks. “We have been clear about it. Banks have to consolidate to become more resilient. There will be shocks, so they need to link up and consolidate,” he said.

COMPETITION AUTHORITY OF KENYA

But the governor said mergers and acquisitions must be natural and not forced, adding that with the current developments, there was a lot of pressure on banks to come together.

The Competition Authority of Kenya (CAK) has said it will support the Central Bank to bring sanity to the sector even if it means relaxing the regulations on mergers and acquisitions.

“We will apply the failing firm doctrine if it is in public interest. We can even fast-track acquisitions to salvage employment. Is it good to let a firm fail or to have it taken over?” CAK director-general Kariuki Wang’ombe asked.

He added that the authority is also willing to relax the consideration on dominance until stability is achieved. “Even if some big banks become dominant, there will be a window where behaviour is checked,” he said.

The banking sector is dominated by seven banks, which control over 70 per cent of all deposits, making them dictate the market trends.

Nation Newsplex review data for Kenya, Uganda, Nigeria and Ghana reveals that Kenya has 32 bank branches per one million people. Ghana, with 38 per million people, recorded the highest number, followed by Kenya, Nigeria (nine) and Uganda (six).

The study suggested that Kenya might be overbanked, a situation that may lead banks to risky behaviour as they fight for profit and market share. This could cause distress to the economy should some banks fail.

Economists in the US and Europe say an overbanked country is at risk of economic instability. They trace the global financial crisis of 2008 to high growth of banks and the financial sector.