Tough capital market signals takeovers of small banks, Fitch says

Money Markets

KCB banking hall. Market leaders such as KCB and Equity Bank are seeking to acquire smaller rivals o further boost their franchises. PHOTO | FILE |   NATION MEDIA GROUP

By John Gachiri

Posted  Thursday, June 25  2015 at  19:06

In Summary

• Fitch says new proposal that banks gradually increase their core capital to Sh5 billion from Sh1 billion by December 2018 will make some small banks be swallowed by larger rivals or merge with peers.
• Analysts at the rating agency said the two possibilities are the result of a tougher capital market where foreign investors are reducing interest in emerging markets due to anticipated interest rate rises in the US.
• Treasury secretary Henry Rotich said that increasing the banking sector’s minimum core capital is meant to enhance the industry’s stability and enable banks participate in financing large projects.  

Small banks will find it difficult to raise capital and will most likely be swallowed by larger rivals or merge with peers following new requirements by the Treasury, Fitch Ratings has said.

The ratings agency said the new proposal that banks gradually increase their core capital to Sh5 billion from Sh1 billion by December 2018 will make some small banks acquisition targets of Tier I competitors.

Analysts at the rating agency said the two possibilities are the result of a tougher capital market where foreign investors are reducing interest in emerging markets due to anticipated interest rate rises in the US.

“We believe mergers and acquisitions will be the preferred route for consolidation as market leaders, such as Kenya Commercial Bank and Equity Bank, seek to further boost their franchises. Raising substantial new capital in the country’s equity markets may prove more difficult,’’ said a briefing by Fitch.

‘‘We expect foreign investors’ appetite for emerging-market risk to reduce once interest rates begin to rise in the US. The small size of some of the banks will also be an obstacle to attracting new investors.”

Kenya has 44 commercial banks, of which only 20 would meet the proposed Sh5 billion core capital requirement.

READ: Steep rise in banks capital to Sh5bn signals mergers

All 11 banks listed on the Nairobi Securities Exchange have met the proposed minimum capital requirements.

Treasury secretary Henry Rotich said that increasing the banking sector’s minimum core capital is meant to enhance the industry’s stability and enable banks participate in financing large projects.  

There is consensus that the new capital requirements will result in banks either merging or smaller ones being bought by larger competitors.

“Anticipated tightening of core capital minimum requirement will see several Tier 3 and 4 banks facing increased exposure as they remain below their minimum limit, spurring consolidation of several banks,” said a budget review by Genghis Capital.