Economy: Expect more bank tie-ups, say experts

Wednesday, January 22nd, 2020 00:00 |
Central Bank of Kenya. Photo/PD/File

John Otini

Consolidation in the banking sector is expected to continue this year as banks seek to shore up capital base and margins, analysts have said.

Apart from the planned acquisition of Mayfair Bank by Egypt-based Commercial International Bank and Nigeria’s takeover of Transnational Bank, clamour abounds in the industry to have more capitalised lenders.

“Most of the banks have been operating on thin margins while many had a high number of non-performing loans (NPLs), so it makes sense that they be acquired,” said David Gitau, Investment Analyst at Cytonn, adding that more acquisitions are on the radar.

Rate cap era

The banking sector in Kenya had six acquisitions and five mergers announced and some concluded since 2016 when the rate cap era began.

Most Tier three banks recorded the largest capital erosion after interest capping due to reduced earnings that impacted on capacity to build-up capital.

The cap was a key driver of mergers  since Tier three banks were based on a business model of getting deposits and lending at a high rate.

“With the rate cap, the small banks were put on life support making them easy targets for acquisition by Tier one banks,” said Martin Kirimi, a financial sector analyst at Standard Investment Bank, adding that consolidations will continue into 2020.

Banks such as Commercial Bank of Africa group acquired Jamii Bora Bank and Diamond Trust Bank acquired Habib bank, KCB also acquired struggling National Bank of Kenya while CBA and NIC Group Plc also merged in the course of last year among a host of other acquisitions.

The proportion of bad loans to the total loan book as at the last quarter of 2019 stood at 9.8 per cent, which is higher than the five-year average of 8.2 per cent.

The Central Bank, in the last quarter of 2015, indefinitely suspended licensing of new banks but continued approval of mergers and acquisitions (M&As).

This barred foreign investors from new entry into the market and facilitated the targeting of banks with licenses, for possible M&As.

The post rate cap era spells an optimism in the banking sector for the year 2020. Private sector credit growth is expected to increase from the current seven per cent as banks are able to price risk better.

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