Niche market rules out need for banks to merge in Kenya

Central Bank of Kenya governor Patrick Njoroge. FILE PHOTO | EVANS HABIL |  NATION MEDIA GROUP

GEORGE BODO

This narrative that Kenya is overbanked, in my opinion, is pure hot air, from teeth to tail.

I actively track some of Kenya’s key peer banking markets within the region and here is the only market where they have accentuated niche leadership rather than overall market leadership.

Consider the six tier-1 banks. With the exception of KCB and Co-operative—both of which operate what I christen as the ‘supermarket’ model, the rest have core specialties, both on the funding and asset fronts, for which they have built capacity over time.

Barclays, as we know it, has always been the market leader in ring-fenced retail lending. Equity has built strong leadership in SME lending.

Standard Chartered, CfC Stanbic and CBA have built strong relationships with large corporates and multinationals. Even if you glide your fingers down to the tier II space, all the 15 are almost specialty shops in terms of lending.

With this heterogeneity in terms of asset strategies, criss-crossing segments among banks often become difficult. This is a sharp contrast to other key peer markets.

In Nigeria, where regulations forced consolidation, the top five banks, which combined control more than half industry assets and, therefore, considerably representative of the sector and its trends, have a heavy bias towards one single strategy—wholesale lending (corporate and commercial banking).

In fact, these business segments combined account for nearly 90 per cent of their loan books.

The story isn’t much different in Ghana where top 10 banks with the exception of Ghana Commercial Bank, are wholesale players. I see a similar scenario even as far as Côte d’Ivoire. In markets, such as these, market-driven consolidation is easy to realise.

However, in Kenya, where asset strategies are excruciatingly heterogeneous, any talk about consolidation has to gravitate around horizontal consolidation.

A good example is where a mature SME-focused bank wants to add asset finance to its product offerings by acquiring an asset-finance focused bank—after which it’s just a question of cross-selling.

This is what can drive consolidation. Vertical consolidation—where, for instance, a large corporate-focused bank acquires a retail bank—is likely to be a rarity.

In fact, in pursuit of new growth frontiers within their segments, banks have continued to innovate day-in-day-out rather than seek brownfield opportunities, especially around distribution. And really this is what has driven financial inclusion to the current high levels.

There is also the school of thought that consolidation will incubate fewer and stronger banks capable of supporting large ticket transactions. This may not be entirely true.

Over the last seven years or so, I’m yet to see a transaction in this market that requires stronger balance sheets--with the exception of recent large-ticket borrowings by the Treasury, Kenya Power and Kenya Pipeline Corporation, which are really outliers, and often sourced externally.

In fact, some of the precedent transactions consummated locally have rarely exceeded $30 million in size. I’m convinced that ticket sizes of this quantum do not require stronger balance sheets.

Further, I don’t think consolidation will solve some of the common balance sheet constraints—such as lack of long term liabilities as well as foreign currency shortages.

As and when Kenya commences commercial crude oil production, the balance sheet capacity of local banks, even after consolidation and due to their inability to source low-cost foreign currency customer liabilities, will still be unable to finely price the acquisition of any of those upstream and midstream assets; leave a lone the fact that the transaction sizes could be much larger, and could be relegated to value-chain financing, among other crumbs.

Therefore, it is my considered opinion that the banking sector consolidation narrative being floated around is tenuous at best.

Mr Bodo is an investment analyst. Email: george.bodo@gmail.com