Moment of reckoning for Kenya’s banking sector

June 20, 2016
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This is according to Cytonn Investments first quarter analysis of the banking sector that indicates that large volumes of deposits and business are moving from smaller banks to larger, and perceived less risky Tier I banks/FILE
This is according to Cytonn Investments first quarter analysis of the banking sector that indicates that large volumes of deposits and business are moving from smaller banks to larger, and perceived less risky Tier I banks/FILE

, NAIROBI, Kenya, Jun 20 – With the jitters in the banking system previously witnessed, especially after the placement in receivership of three banks, there is a large “flight to quality” happening in the Kenyan market.

This is according to Cytonn Investments first quarter analysis of the banking sector that indicates that large volumes of deposits and business are moving from smaller banks to larger, and perceived less risky Tier I banks.

As this continues, small banks will be forced to consolidate or be bought out, as they face liquidity pressures and low business volumes which will end up in a fewer number of banks, but stronger and more robust banks.

“The Kenyan banking sector continues to face a transition period but to a new and different landscape. The issues facing the banking sector still persist. The industry is divided into the “haves” and the “have-nots” which still poses a risk to the sector,” the report states.

According to the report, there is now a much firmer, and much more trusted, regulator in place at Central Bank of Kenya which will see increased emphasis going to be placed on corporate governance, professional ethics, as well as deep levels of supervision on asset quality and levels of provisioning.

This increased levels of supervision, and low levels of tolerance, for banks that do not adhere to the highest standards of governance and ethics, and safe banking practices, will lead to their closure.

“Banks with clear strategy and well defined market niche will survive while those with unclear strategies will either have to adapt or die,” the report states.
The government through the 2016/17 budget estimates has planned to re-introduce the Sh5 billion capital requirement for banks. This will see banks get well capitalised.

“Higher capital levels will create a more stable banking system, and will force consolidation, and banks such as KCB Group and Family Bank already raising capital in the markets. Banks looking to raise capital will have to do so at attractive valuations for investors, and for those banks unable to raise capital from the markets, they will be forced to merge or be acquired,” the report states.

“All in all, there are a number of areas of transition ahead for Kenyan banks. What is important is that, after we pass through this phase of transition, the landscape will look different; we shall have fewer banks, but much stronger, more robust, transparent and well-governed banks, which is good for the economy,” the report reads.

During the period, Barclays Bank Plc expressed wish to exit their African business selling 12.2 percent to a consortium while Giro Bank, Oriental Commercial Bank and Equatorial Commercial Bank have been acquired.

M Holdings Limited owned by various shareholders of Bank M Tanzania, received approval from Central Bank of Kenya (CBK), to acquire 51 stake percent at Kenya’s Oriental Commercial Bank Limited.

The move which paves way for Bank M to open business in Kenya will see Oriental Commercial Bank change its name to M Oriental Commercial Bank Limited.

According to the CBK, M Holdings has also been allowed to form a non-operating holding company, which only invests in other companies.

I&M Holdings disclosed transaction value of acquiring Giro Commercial Bank Limited (GCBL), a tier three bank at Sh5.09 billion.

The Sh5.09 billion represents about 11 percent of I&M Holdings’ market capitalisation using the acquisition price.

Compared to previous cash based acquisitions, I&M Holdings will pay by way of cash Sh2.55billion and issue of 21.04million shares at a price of Sh121.05.

This marks the first acquisition for I&M Holdings in Kenya.

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