Commercial Bank of Africa Kirinyaga Road branch in Nairobi. FILE PHOTO | NMG
South Africa agency Global Credit Ratings (GCR) expects the
proposed merger between Kenyatta family-linked Commercial Bank of Africa
(CBA) and NIC Bank
Global
Credit Ratings says despite long-term benefits expected from the
merger, operational and technical risks of combining two banking
systems, funding structures and cultures may slow down future earnings.
The
agency has changed the outlook of the two lenders from ‘stable’ to
‘evolving’ pending more information on the merger timelines and its
medium to long-term financial and operational impact.
to drag earnings for up to three years.
The
agency says despite long-term benefits expected from the merger,
operational and technical risks of combining two banking systems,
funding structures and cultures may slow down future earnings.
The
agency has changed the outlook of the two lenders from ‘stable’ to
‘evolving’ pending more information on the merger timelines and its
medium to long-term financial and operational impact.
“We also anticipate the long-term integration costs to be
material, causing a drag on earnings for a two- to three-year period,
limiting the positive effect of the merger,” said GCR in latest separate
ratings on the two entities.
“GCR also notes with
caution that aggressive expansion on the back of increased scale of the
combined bank could have adverse long-term effects on the bank’s
performance and competitiveness.”
CBA’s nine-month
profit to September 2018 fell 16 per cent to Sh3.36 billion while that
of NIC dropped by 3.2 per cent to Sh3.3 billion during the same period.
According
to GCR, potential increases in asset and liability exposure
concentrations may also be an issue, especially considering the limited
number of high-quality borrowers and depositors in the region.
The
agency said there was a possibility of overlaps from both banks having
large exposures to the same asset or liability counterparties.
However, the combined bank is expected to emerge as the third
biggest lender in Kenya by total assets and the second biggest by
customer deposits.
This may ultimately result in lower
funding costs for the combined bank through improved ability to mobilise
deposits, according to the rating agency.
“It may also
increase the lending capacity of the bank to the private sector and
government’s focus areas, which has come under pressure in Kenya since
the introduction of interest rate caps,” said GCR.
However,
if the merger proves to be difficult, raising operational risks and
damaging the operating performance, capital and funding stability, GCR
says it will lower the ratings.
CBA and NIC expect to conclude shareholder and regulatory approvals in the first and second quarter of 2019, respectively.
Commercial Bank of Africa Kirinyaga Road branch in Nairobi. FILE PHOTO | NMG
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