Mergers give small lenders way out of declining margins

Fidelity Bank along Nairobi's Kaunda Street. Last week, the market was hit by an announcement of the imminent sale the bank to Mauritian lender SBM Bank, which will pump in Sh1.46 billion in capital into Fidelity once the sale is done.FILE PHOTO | SAMMY KIMATU

What you need to know:

  • While it is early to call the sale the start of a trend, the Kenyan banking sector has seen heavier than usual activity in mergers and acquisitions over the past one year.
  • Acquisitions and mergers are also currently the only avenue available for any multinational looking to get a banking licence in Kenya, given that the Central Bank of Kenya has had in place since November last year a moratorium.
  • Speaking last month, KCB chief executive officer Joshua Oigara said that it is reasonable to expect that the new law would cause some reorganisation of the local banking sector.

When the law capping interest rates was signed in September, one of the immediate concerns raised by analysts was that smaller banks would find the going tough. This prediction seems to be coming to pass.

Last week, the market was hit by an announcement of the imminent sale of third-tier lender Fidelity Commercial Bank to Mauritian lender SBM Bank, which will pump in Sh1.46 billion in capital into Fidelity once the sale is done.

While it is early to call the sale the start of a trend, the Kenyan banking sector has seen heavier than usual activity in mergers and acquisitions over the past one year, and more deals are likely to come up as collapsed lenders Chase Bank and Imperial Bank find new owners.

Acquisitions and mergers are also currently the only avenue available for any multinational looking to get a banking licence in Kenya, given that the Central Bank of Kenya has had in place since November last year a moratorium (freeze) on issuance of new banking licences, except in instances of a lender acquiring or amalgamating with an existing player.

“The forecasted decline in funded income as a result of the Banking Amendment Act, coupled with flight to safety by both investors and depositors (to large banks) lead us to postulate that some lenders in the tier two and three banking space may opt for mergers and acquisitions in order to meet capital requirements or maintain relevance in the sector,” said Dyer & Blair analyst Kasee Mbao in a banking sector report released two weeks ago.

“The CBK governor is on record saying that multinational banks from USA, Japan and UAE have expressed interest of entry into the Kenyan market and with the moratorium still in place mergers and acquisitions are viewed as the most likely entry route.”

One of the banks affected by the moratorium was UAE lender Dubai Islamic Bank (not to be confused with the collapsed Kenyan lender Dubai Bank), which was on the verge of acquiring a licence to operate in Kenya last year. Non-banking financial institutions such as Unaitas — which had outlined plans last year to get a banking licence — have also had to shelve their plans of transforming into banks unless they can partner with an existing lender or acquire one.

The acquisitions are not just likely to come from external or multinational lenders, with large banks in Kenya also tipped to explore the possibility of buying up their smaller counterparts which face hard times in terms of liquidity.

It is instructive that CBK turned to local banks — KCB and NIC Bank — to manage some of the assets of collapsed lenders, Chase Bank and Imperial Bank, in a departure from previous practice whenever banks would be put under receivership.

Banks reorganisation

Speaking last month, KCB chief executive officer Joshua Oigara said that it is reasonable to expect that the new law would cause some reorganisation of the local banking sector.

“The new rates in a way will change the market structure for the Kenyan banking sector whether it is through consolidation or in reorganisation of banks,” said Mr Oigara.

“This is the right way to go for the industry, it is something we have spoken about for a long time. Maybe this is the catalyst that the industry was waiting for to bring a new market structure for the financial sector.”

Although it is not yet certain whether KCB or NIC will buy out their troubled peers, the market has already seen significant takeover action this year, with 10th ranked I&M Bank (market share of 4.1 per cent) close to completing its own Sh5 billion buyout of tier three Giro Bank, whose 0.49 per cent market share ranks it 27th among Kenya’s banks.

This year has also seen Tanzanian lender Bank M raise its stake in Kenyan lender M Oriental Commercial Bank Ltd to 51 per cent. The tier three bank was formerly known as Oriental Commercial Bank.

The Central Bank of Kenya (CBK) has given the green light to the acquisition of a 51 per cent stake in the shareholding of Oriental Commercial Bank Ltd by Bank M of Tanzania.

Kenya currently has 40 operating commercial banks, of which seven are classified as tier one, 12 as tier two and 21 as tier three.

The market is significantly skewed in favour of the tier one lenders in both the share of market and in access to liquidity.

CBK data shows that the seven tier one banks account for 58.21 per cent of the sectors market share, measured as a composite index of net assets, deposits, capital, number of deposit accounts and number of loan accounts.

The tier two lenders account for 32.42 per cent of market share, while the tier three lenders account for just 9.24 per cent. The seven large banks are also estimated to hold up to 80 per cent of the liquidity in the market.

This means that larger Kenyan banks such as KCB, Equity Bank, Cooperative Bank, Commercial Bank of Africa and Diamond Trust Bank can muster the necessary finances from their balance sheets to buy out a smaller rival, especially now that valuation multiples have gone down.

A 2014 report by the private investment group Atlas Mara — headed by former Barclays Plc CEO Bob Diamond — showed that prospective buyers of majority stakes in Kenyan banks at the time would have had to pay a premium at 3.5 times the book value of a lender.

The collapse of Chase Bank, Imperial Bank and Dubai Bank have however changed the metrics for Kenyan banks, and the impending sale of Fidelity Bank shows that an investor can now buy a small lender at a price par to book value.

Fidelity is on record as saying that its shareholders expect to be paid Sh1.3 billion by its buyer SBM Holdings of Mauritius, which is equivalent to its net asset value. It means the bank is not being sold at a premium.