CBA merger with NIC signals more bank consolidation

Treasury Secretary Henry Rotich. FILE PHOTO | NMG 

By VICTOR JUMA

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Summary

• At least six mergers and acquisitions have been completed or proposed in the past three years alone as players seek to build scale that is critical in lowering costs and boosting earnings.
• Other transactions were also prompted by failure by existing shareholders to provide new capital to rescue their banks that had collapsed due to a run on deposits.
• The trend has received the backing of the government which has been critical of the fragmented industry served by about 40 institutions.

The underway merger between CBA and NIC

banks is a signal of more consolidation expected in the banking sector in the medium term, following increased capital requirements and thinner margins brought by control of lending rates.

At least six mergers and acquisitions have been completed or proposed in the past three years alone as players seek to build scale that is critical in lowering costs and boosting earnings.

Other transactions were also prompted by failure by existing shareholders to provide new capital to rescue their banks that had collapsed due to a run on deposits.

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The trend has received the backing of the government which has been critical of the fragmented industry served by about 40 institutions.

“Kenyan banks will benefit from increased stability and will be stronger when they are bigger. This should help our banks to be able to take advantage of opportunities elsewhere in Africa,” Treasury Secretary Henry Rotich said recently following the announcement of the proposed merger of NIC Group and Commercial Bank of Africa (CBA).

The biggest merger expected this year is the tie-up of CBA and NIC which, if completed, will create the third-largest lender in Kenya by assets and overtake Co-op Bank which will be relegated to rank fourth. The merged entity will emerge with total assets of Sh444.3 billion, based on September disclosures.

This will see it rank third after KCB

and Equity

which had assets of Sh684.1 billion and Sh560.3 billion respectively in the same period. Small banks, in particular, have suffered from the interest rate controls and more conservative accounting standards that have eroded capital in the industry.

Sidian, Consolidated and Spire are among the institutions that have reported razor-thin capital buffers while National Bank of Kenya (NBK)

continues with its multi-year breach of capital requirements.

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The completed mergers and/or acquisitions are DTB Group’s takeover of Habib Bank in 2017 in a share swap deal and last year’s acquisition of Chase Bank by State Bank of Mauritius (SBM).

Banking group I&M Holdings also completed its buyout of Giro Commercial Bank in 2017 in a cash-and-stock deal. KCB Group is set to acquire the collapsed Imperial Bank.

The government has also mulled a merger of NBK, Consolidated and Development Bank of Kenya (DBK) but no concrete steps have been taken to this end.

Co-op Bank’s assets stood at Sh404.1 billion or Sh40.2 billion shy of what the CBA/NIC balance sheet will command.

Profitability of CBA and NIC has been much weaker compared to that of the country’s top three lenders and the merger is expected to help them cut costs and boost margins.