Capital hitch could drive small Kenyan banks to seek buyouts

The Kenyan government intends to surrender its stake in Consolidated Bank to private investors. PHOTO | FILE | AFP 

In Summary

• Small and medium-sized lenders could soon seek buyouts to ease a financial strain that has left their shareholders with no returns.
• Last year, shareholders’ earnings per share for all banks fell by one per cent, compared with a growth of 4.4 per cent in 2016.
• Kenya’s small and medium-sized banks are fighting for survival with some opting to sell shares to strategic investors to avoid closing down.

By JAMES ANYANZWA
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Kenyan banks have been reporting shrinking profit margins in recent times, with market analysts saying that several small and medium-sized lenders could soon seek buyouts to ease a financial strain that has left their shareholders with no returns.

Last year, shareholders’ earnings per share for all banks fell by one per cent, compared with a growth of 4.4 per cent in 2016, and a five-year average of 6.7 per cent.

Transnational Bank, which has been shopping around for a strategic investor says it has abandoned its quest after it managed to raise cash internally.

The EastAfrican understands that Transnational had been looking for capital injection in exchange for equity to run its agribusiness segment, but managing director Sammy Langat said the call has since been rescinded after raising the required funds.

Transnational Bank’s profit has been on a downward trend since 2015.

Last year, the lender’s net profit plummeted 64 per cent to Ksh36.43 million ($364,300) from Ksh100.61 million ($1 million) in 2016 while customer deposits declined 16 per cent to Ksh423.92 million ($4.23 million), from Ksh507.43 million ($5.07 million).

The lender’s gross non-performing loans increased 78 per cent to Ksh1.59 billion ($15.9 million) from Ksh891.37 million ($8.91 million).

The bank’s focus is on financing agribusiness, including purchase of seed and fertiliser and other farm inputs. It also deals in asset financing for farmers to acquire machinery and equipment.

Its core capital stands at around Ksh2 billion ($20 million) compared with the statutory requirement of Ksh1 billion ($10 million).

Had it followed through with the plan, Transnational would have been the ninth Kenyan small bank to seek external support in five years.

Acquisitions

The banking sector has seen acquisitions of eight small and medium-sized lenders over the past five years, as their management and regulators sought to avoid a potential crisis prompted by depositors shifting funds to the big banks.

Three struggling state-owned banks — National Bank, Consolidated Bank and Development Bank of Kenya — are currently shopping for strategic investors.

The issue of brand funding (funding for safer banks) has affected Tier 2 and Tier 3 banks and as a result, customer deposits for these banks are declining.

And things will only get worse, predicts Eric Munywoki, an analyst at Genghis Capital, when all banks will start making higher provisions on their lending in line with the new global accounting standard, IFRS9.

“Some small and medium-sized banks are finding it difficult to mobilise deposits because depositors are perceiving them to be unsafe,” said Mr Munywoki.

Kenya’s small and medium-sized banks are fighting for survival with some opting to sell shares to strategic investors to avoid closing down.

The State Bank of Mauritius (SBM) Holdings, which acquired Fidelity Commercial Bank in 2016, has acquired troubled Chase Bank, while Habib Bank Ltd was acquired by Diamond Trust Bank last year.

Other deals include I&M Bank Holdings’ acquisition of Giro Commercial Bank, Mwalimu Sacco’s acquisition of Equatorial Commercial Bank (Spire Bank), Centum’s acquisition of K-Rep Bank (now Sidian Bank) and Nigeria’s Guaranty Trust Bank’s acquisition of Fina Bank.

Analysts at Cytonn Investments say Kenya’s banking environment is already going through consolidation, as evidenced by heightened mergers and acquisitions (M&A) activity over the past five years.

According to Cytonn, most acquisitions are happening at cheaper valuations due to the difficult operating environment characterised by the interest rate cap and the depositors’ apparent loss of confidence in the small banks.

“The smaller banks will have to restructure their balance sheets. It is a painful but necessary process. Probably we would see foreign banks looking at Kenya’s small banks when they become stressed assets so that they can pick them at a much discounted price,” said Daniel Kuyoh, senior investment analysts at Alpha Africa asset managers.

“We are surprised that some of the smaller banks have managed to stand this long, as we would have expected weaker banks [that don’t serve a niche, or don’t have a clear deposit gathering strategy], to be forced to merge or be acquired,” said Cytonn analysts.

“We however expect that the sustained effects of the rate cap and the reduction in the transition period for IFRS 9 adoption to have an effect on profitability and capital levels going forward and therefore still lead to more consolidation in the industry.”

Law on capping

The National Treasury and the Central Bank of Kenya have put up a spirited fight to repeal the interest rates cap, but their efforts have been met with opposition from Parliament, which argues CBK has failed to enforce the law as required.

The Banking Amendment Act 2015 that capped lending rates at 4 percentage points above the prevailing Central Bank Rate (CBR) and deposit rates at 70 percentage points of the CBR was enforced on September 14, 2016.

In March this year, the Central Bank lowered the policy lending by 50 basis points for the first time in 18 months to 9.5 per cent from 10 per cent pushing banks to reprice loans for existing borrowers from 14 per cent to 13.5 per cent.

The controlled interest rate regime has been blamed for stifling growth in private sector credit, as banks were unable to price risky borrowers in the set margins and instead opted to channel funds to government securities with higher returns.

With banks recording reduced net interest income following the regulation of interest rates, much of the attention has shifted to diversifying income, through non-funded (non-interest) income which is not affected the interest rate caps.

“We expect this to continue going into 2018, as banks seek alternative sources of income to boost profitability. We believe revenue and product diversification is one of the core opportunities for the banking sector,” according to Cytonn Investments.

So far, Kenyan banks have laid off a total of 1,620 workers and closed a total of 39 branches to cut costs and remain afloat.