Honeymoon ends for bank marriages

The Central Bank of Kenya in Nairobi.

File | Nation Media Group

By  Otiayo Guguyu

Nation Media Group

What you need to know:

• The dismal performance of banks who had made major acquisitions was mainly driven by Coronavirus and that it would take some time to realise gains.
• Equity made up for the slower growth in customers by pushing an additional Sh70.7 billion in loans while Cooperative Bank managed Sh14.5 billion more loans.
• Equity Bank's provisioning stood at Sh8 billion while NCBA had set aside Sh7,6 billion and Cooperative Sh1.8 billion.
  

The year is 2020 and 2,551 civil marriages have been suspended as a result of the Coronavirus with hope that they are moved online where at least half of them will be able to tie the knot on eCitizen.
But for banks, marriages are still on albeit with little ceremony or ribbon-cutting even as those that drove into the year with a just married sticker have their honeymoons ruined.

In six months a review of the latest banking mergers and acquisitions shows that Coronavirus killed the party even before consummation.
"The profitability of KCB/NBK and CBA/NIC has not significantly improved after the merger last year. However, it is too early to form any opinion on these deals as the transactions were completed towards the end of last year and both sets of banks have had less than 12 months to realise any synergy benefits from the transactions, especially since management's key focus during a majority of that period has been dominated by their response to Covid-19," said Ronak Gadhia, director - sub-Saharan banks at EFG Hermes.

Over the last decade, Kenyan banks had focussed on expanding in the region or turning into bancassurance, leasing and investment due to the belief that the country with over 40 lenders was overbanked with little room to grow here.
However, as prospects in the region withered, risks in currency lapses materialised and the local sector was seized with three years of the rate cap, banks suddenly turned cannibal eating the weak in the manyatta.
But has the banking consolidation that was supposed to boost the race to the coveted Sh1 trillion asset banks, hamstrung their buyers with a bigger burden during the pandemic?

In 2015, Airtel bought 2.2 million Kenyans who had bought extra SIM cards belonging to Essar's yuMobile.

1.1 million subscribers

Two years later 1.1 million subscribers had vanished and by the fourth quarter of 2016 Airtel subscribers had gone from 7.6 million to 6.5 million users.
This was a big lesson that in a country where mobile penetration is so high, mergers and acquisitions risk creating duplicate customers.
A similar situation exists in the banking sector where financial inclusion tripled from 27 percent in 2006 to 83 percent in 2019, and where mergers and acquisitions are turning out to be cannibalistic.
In the first six months of the country's two biggest mergers and acquisitions, the multibillion shilling customer and loan accounts could not help propel buyers to huge profits at a time of Coronavirus induced financial crisis.
KCB, which bought National Bank, increased customer deposits by Sh195 billion while CBA which merged with NIC bank to form NCBA saw a Sh184 billion increase in customer cash.
However when it came to loans, KCB only managed an additional Sh81 billion and suffered a 40 percent decline in profitability to Sh7.5 billion in the half year while NCBA scored Sh128 billion extra loans that made a modest profit growth from Sh2.4 billion to Sh2.6 billion.

"It has always been said Kenya is overbanked given that the top five banks take the bulk of the sector's customers, assets and profits. The mergers and acquisitions are not necessarily for customer acquisition but for synergies and unique niche an acquisition candidate brings to the group," said Gerald Muriuki Genghis Capital research analyst.

Financial inclusion

Mr Gadhia says financial inclusion has actually declined since 2016, when the government introduced interest rate caps; the estimated deposits to GDP ratio fell from 40.4 percent in FY15 to 36.5 percent in FY19 because banks were dis-incentivised by rate caps from carrying out their intermediary functions.
"The hope was that they would turn around this year following the repeal of rate cap last year. There has been setback on the same due to the outbreak of Covid-19," Mr Gadhia said.
Mr Muriuki said the dismal performance of banks who had made major acquisitions was mainly driven by Coronavirus and that it would take some time to realise gains.
"The mergers and acquisitions activity was closely followed by Covid and no one was counting on it. Merger integration is always a process and takes time for synergies to be realised. For KCB-NBK management had made notable progress in recovery of some of the NPLs in 4Q and 1Q. But this is now difficult because of the environment," he said.

During the pandemic, banks have opted to hold onto money, halting dividends to ring fence reserves but for those who were already in negotiations, the pandemic has not stopped the marriages as the fight to be the biggest bank or defend size is always too tempting to be ignored.
During the half year, the second biggest bank Equity managed to get an extra Sh85 billion in customer money while Cooperative Bank, now relegated to fourth largest bank by the NCBA outfit managed an extra Sh61 billion in deposits.
Equity made up for the slower growth in customers by pushing an additional Sh70.7 billion in loans while Cooperative Bank managed Sh14.5 billion more loans.
Now both Equity and Cooperative have opened their purse strings while trying to drive a hard bargain under the current circumstances.
Equity Bank which just recently bought stake in Congolese lender Banque Commerciale Du Congo (BCDC) got a discounted price of $95 million down from $105 million announced in September last year. Cooperative also closed the Jamii Bora deal at Sh1 billion lower than the valuations of Sh1.4 billion that had been anticipated when the bank had attempted to sell to CBA in January 2019.