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Kenya’s banking acquisition deals hit Sh23Bn in three years

CBK Governor has justified increasing core capital for banks saying this would strengthen the banking institutions as well as minimise risk/FILE

NAIROBI, Kenya, Jan 12 – Kenya’s banking sector has had acquisition deals worth about Sh23.3 billion in the last three years.

The acquisitions, which had an average takeover rate of 77 percent according to a Cytton Investments, were spurred by a tough operating environment as the regulator continues to tighten monetary policy.

Among the seven deals include, Mauritian Bank SBM Holdings acquiring 100 per cent stake in Fidelity Commercial Bank, Tanzanian Bank Bank M acquiring 51 per cent of Oriental Commercial Bank, GT Bank acquiring Fina-Bank, Mwalimu SACCO acquiring Equatorial and I&M Holdings acquiring Giro Bank.

Centum investments also acquired 66 per cent stake in Sidian Bank formerly K – Rep Bank while Chicago-based private equity fund Equator Capital Partners LLC, under its ShoreCap II fund bought 15 per cent stake in Jamii Bora Bank.

Analysts predict continued appetite for the Kenyan market by foreign banks with the moratorium of new banks still in force though CBK has hinted to remove it soon.

“Consolidation in the banking sector will only gather pace going forward, with weaker banks being forced to merge or acquired. Local stable banks will also seek to acquire banks aligned with their strategies, as witnessed by I&M Holdings’ acquisition of Giro. The likely candidates for mergers will be banks with common significant shareholders,” said analysts at Cytonn Investments.

Central Bank of Kenya Governor Patrick Njoroge had said banks from eight countries are looking to enter the Kenyan market owing to the high returns compared to other African countries, however, the new interest rates cap regulation complicates pricing.

Following the enactment of the Banking Act (Amendment) 2015, banks have lowered the rates charged on loans to 14 per cent, which is 4 per cent above the Central Bank Rate (CBR), while interest paying deposits are at a minimum of 70 per cent of the CBR.

Banks expect a compression in net margins in 2017, following reduced yields on assets and increased cost of funding.

“With Net Interest Income constituting 72 per cent of the total revenue of listed banks, we expect this to result in reduced profitability, and effectively reduced return on equity. To remain profitable, banks are resorting to cost containment initiatives, including laying off employees,” Cytonn Investments analysts explain.

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A recent World Bank report estimated banks’ average net interest margins are likely to decline by up to 430 basis points from the 11.4 percent they averaged in June 2016.

READ: Kenyan Banks turn to digital banking amidst layoffs

This will impact all categories of Kenyan banks. However, given lower profit margins among Tier 3 banks relative to Tier 1 banks, they are likely to be hit the hardest.

15 percent of the value of bank stocks (5.4 percent of the all share index) was wiped-off within a month of the passing of the Banking Amendment Bill.

Further, the law is likely to reduce the ability of banks to differentiate creditworthiness and price accordingly, leading to a more homogenous product, reduced competition and shutting out of certain categories of borrowers.

The much firmer regulator has seen increased emphasis 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.

Already three banks that include Dubai Bank, Imperial Bank and Chase Bank have been put under receivership in the three years.

READ: We need consolidation as Kenya is over banked – Rotich

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