By James Anyanzwa
In Summary
- The capping of interest rates has made banking a volume-driven business that requires players to effectively manage overheads and funding costs, and to have a stable funding base in order to minimise balance sheet refinancing risks.
- Prior to the enforcement of interest rate controls on September 14, the Central Bank of Kenya said it had received more than five offers for Chase Bank. Investors are said to now have developed cold feet.
- Regulatory uncertainties facing investors have been compounded by a moratorium announced by the Central Bank a year ago on licensing of new banks, which has been read as a signal that Kenya is overbanked and consolidation should be encouraged.
Chase Bank’s hopes of attracting new capital have been
dashed by interest rate caps that were effected two months ago, taking
the lustre from Kenya’s banking sector in the eyes of investors.
Industry players said three banks that had shown interest in
injecting money into the troubled lender, under a revival plan being
overseen by the Kenya Deposit Insurance Corporation, had developed cold
feet, citing interest rate caps and the valuation of the bank as the key
sticking points.
“Local banks are no longer interested in Chase Bank because they
have realised that they need to utilise their reserves to deepen their
digital banking platform as a result of the interest rate controls,”
said Amish Gupta, the chief executive of AG Capital Ltd.
KCB, which KDIC appointed to stabilise operations soon after it
took over the management of Chase Bank in May, had openly said it would
be in the running to acquire the bank. The bank did not respond to our
questions on its interest despite promises to do so. KDIC acting chief
executive Mohamud Mohamud did not respond to our queries either.
Mr Gupta said the foreign investors’ interest in Chase Bank has
cooled significantly because they have realised that they need to
revaluate their strategies and change their business model to be
competitive in Kenya.
Chase Bank was put under receivership in April 2016 after the
management under-reported insider loans by Ksh8 billion ($77.31
million), triggering a run on deposits.
The capping of interest rates has made banking a volume-driven
business that requires players to effectively manage overheads and
funding costs, and to have a stable funding base in order to minimise
balance sheet refinancing risks.
Prior to the enforcement of interest rate controls on September
14, the Central Bank of Kenya said it had received more than five offers
for Chase Bank.
Qatar National Bank (QNB) and Bank of Mauritius were among the institutions that had shown interest.
Regulatory uncertainties facing investors have been compounded
by a moratorium announced by the Central Bank a year ago on licensing of
new banks, which has been read as a signal that Kenya is overbanked and
consolidation should be encouraged. The moratorium has put two banks —
Dubai Islamic and Mayfair — which had been licensed provisionally, in a
quandary.
Dubai Islamic Bank said it had already spent $30 million on
mobilising for the business, and is awaiting a response from the
regulator. While Mayfair has yet to comment, it reportedly spent
substantial amounts of money to hire staff and set up outlets.
The Central Bank was expected to announce the new strategic
investor in Chase Bank by last month, after KCB’s transitional role
ended in August. KCB reorganised the institution and helped pay
depositors up to $10,000 each. When KCB was appointed to the job in May,
KDIC said the bank would also conduct due diligence and decide whether
it would acquire a strategic stake in Chase Bank.
Apparent pressure from shareholders forced KDIC back to the
drawing board, announcing at the end of KCB’s management that bids would
be invited for a stake in Chase Bank. KCB chief executive officer
Joshua Oigara said at the time that the bank would compete for majority
ownership with other bidders.
Besides interest rate caps, industry sources said the pricing of Chase Bank had become a deal-breaker.
“As for Chase Bank, the value proposition as an acquisition
target is no longer compelling. And given that its franchise has also
nearly collapsed, it will be an uphill task getting a strategic buyer,”
said George Bodo, the head of banking research at Ecobank Capital Ltd.
Analysts said it would be increasingly difficult to sell a bank
at a premium over its book value because valuations have dipped. Smaller
interest margins — the major source of revenue for banks — and the
plummeting returns on shareholders’ equity have also put off investors.
“The deal breaker could have been the pricing of Chase Bank at
three times its book value. At this point in time, when we have a new
law on interest rates, the level of returns from banking investments is
low and that obviously explains why some buyers are not keen to put
their money in Chase Bank,” said a source.
According to sources, Chase Bank shareholders refused to take a haircut on asset values further putting off buyers.
Market data from Cytonn Investments Management Ltd shows that in
the first six months (January to June) of this year, the combined
return on equity (ROE) of Kenya’s top 11 banks fell to 20.6 per cent
from 23.8 per cent in the same period last year. Analysts at Ecobank
Capital expect the ROE for the entire industry to slide to as low as 20
per cent by next year (2017).
The 11 banks were Standard Chartered, HF Group, I&M,
Stanbic, Co-operative Bank, Equity Group, KCB group, DTB Bank, NIC
Bank, Barclays Bank and National Bank.
Analysts at Exotix Partners said the average ROE of Tier 1 banks
such as Co-operative Bank, Equity and KCB would decline from a
historical average of 26.8 per cent to 19.8 per cent.
According to Francis Mwangi, head of research at Standard
Investment Bank, the banking sector faces reduced earnings and lenders
need to review their business models by reducing their overreliance on
interest income from loans and advances.
“Currently, for listed banks the return on equity is very low
and while that in itself would dampen demand, sellers also have to
adjust their selling price to reflect the current realities on the
ground,” said Mr Mwangi.
“It is difficult for banks to justify the selling price of 2.5
to three times their book value in the current environment of interest
rate capping,” he added.
Some analysts said returns on equity of as low as 15 per cent
would still be attractive to investors from mature markets if they were
ready to shrug off the risk premium often associated with sub-Saharan
Africa. They cited Ghana, Zambia and the DRC as markets that could
benefit from hesitation on Kenya.
Lenders such as Family Bank, Ecobank and Sidian Bank are
undertaking cost-cutting measures through lay-offs to remain relevant in
the market.
According to Mr Bodo, banks should review their business plans
towards being volume driven, manage their overheads and funding costs,
and have a stable funding base.
“With pricing regulations, both on the funding and asset side,
risk appetites have collapsed. The battle now is about good customers,
and they aren’t many,” said Mr Bodo.
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