Shareholders of Kenya’s struggling banks are not likely to get a premium on selling stakes, indicating deep-pocketed investors may buy them out for a discount, analysts at investment management firm Cytonn have suggested,
Some 13 acquisitions have taken place in less than six years underlining the ongoing organic consolidation expected to make the banking industry stronger and more competitive.
The majority of the deals reached from 2017 have, however, been at a price-to-book value (P/Bv) multiples of below 1.0, meaning the stocks were undervalued and investors got a discount.
“Smaller banks constrained in capital, and struggling in their operations are likely to continue receiving takeover offers, which would present the best case scenario to navigate the current competitive banking sector landscape,” Cytonn analysts wrote in a weekly report. “Transactions are happening at significantly cheaper valuations, perhaps due to the smaller banks’ relatively poor performance, leading to liquidity constraints, which may warrant even further capital injections, hence the cheaper acquisition costs.”
Last week KCB Group #ticker:KCB, the country’s largest lender by market share, announced bid to acquire struggling state-owned National Bank for Sh6.6 billion against a book value of Sh7 billion (as at December 2018) reflects a P/Bv of 0.94x.
This represents a discount on its book value — assets minus all debts as reflected in the balance sheet — largely attributed to high bad loans and low capitalisation which hurt growth in loans.
NIC Group’s #ticker:NIC share swap deal (merger) with largest privately-held lender, CBA Group, last week endorsed by respective shareholders, at a P/Bv of 0.59 percent in January, also represents a significant discount on the former, according to calculations by Cytonn.
Besides, CBA’s January agreement to acquire bottom-tier Jamii Bora Bank for reportedly Sh1.4 billion against a book value of Sh3.4 billion also point to a discount as was DTB Bank’s #ticker:DTB March 2017 acquisition of Habib Bank Kenya for Sh1.8 billion against a balance sheet valuation of Sh2.4 billion.
Shareholders of Fidelity, Oriental, Giro, Equatorial, K-Rep and Fina, however, got a premium on the deals inked between November 2013 and November 2016 with SBM Holdings, M Bank, I & M, Mwalimu Sacco, Centum and GT Bank, the Cytonn analysis suggests.
AIB Capital, in a separate report earlier this month, listed Victoria Commercial Bank, Bank of Baroda and corporate lender Citi Bank as smaller banks, which would attract a high premium if an acquisition offer came their way.
“There are a number of tier 2 and 3 banks that are very profitable and would offer attractive acquisition targets. Unfortunately, due to their adequate capital, attractive returns and strategic opportunities that they offer shareholders, a number of them are unlikely to be sold,” AIB researchers wrote in its industry analysis.
Central Bank of Kenya (CBK) governor Patrick Njoroge said in an interview with Bloomberg Tuesday last week he expects mergers and acquisition deals to continue into foreseeable future.
“What’s important have already began on a journey of strengthening their business operations meaning improving their business model to be more resilient and also changing the way they became with regard with customer,” he said.