Banking Sector Set for More Consolidation Activities in 2019 – Cytonn

The Kenyan banking sector should expect more consolidation as the relatively weaker banks that do not serve a niche become acquired by the larger counterparts who have expertise in deposit gathering, or serve a niche in the market.

Consolidation is also more likely to happen as entities form strategic partnerships navigate the relatively tougher operating environment that is exacerbated by the stiff competition among the various players in the banking sector.

According to Cytonn Investments, Kenya continues to be overbanked compared to other countries necessitating a reduction in the number of players in the sector.  

A number of consolidation activities in the banking sector too place in 2018 and there is still ore expected to happen as the year goes by.

In August 2018, State Bank of Mauritius (SBM) Bank Kenya completed the acquisition of select assets and liabilities of Chase Bank Limited, which was under receivership. Following the agreement between the Central Bank of Kenya (CBK), Kenya Deposit Insurance Corporation (KDIC), and SBM Bank Kenya, 75.0 percent of the value of all moratorium deposits at Chase Bank were be transferred to SBM Bank Kenya.

The remaining 25 percent remained with Chase Bank. This was a major milestone in Kenya’s banking sector as it the first successful instance, in the history of Kenya, of a bank being successfully brought out of receivership.

The deal highlighted the continued attractiveness of the Kenyan banking sector, as banks, both local and foreign, drive their growth inorganically through mergers and acquisitions as evident with Morocco-based bank, Attijariwafa Bank highlighting its plans for several acquisitions in Africa in the coming year, with Kenya being one of its key focus areas.

The bank, which has an asset base of USD 51 billion, indicated it was looking to make an acquisition in Kenya, targeting one of the 5 largest banks in Kenya, meaning that one of KCB Group, Equity Group, Co-operative Bank, Standard Chartered Bank Kenya and Diamond Trust Bank Kenya, would be the bank’s targets.

The Central Bank of Kenya (CBK) and Kenya Deposit Insurance Corporation (KDIC) announced the acceptance of a binding offer from KCB Group, to acquire certain assets and liabilities of Imperial Bank Limited under Receivership (IBLR). The transaction will see an additional 19.7 percent of deposits availed to depositors, an addition to the 35 percent availed, on the acceptance of the binding offer by KDIC and CBK in December 2018.

The remaining deposit balances will be availed to depositors in three tranches, 12.5 percent after the official signing of the agreement, a further 12.5 percent one-year after the signing of the agreement, and 25 percent balance on the second, third and fourth anniversaries of the signing of the agreement.

The split of the 25 percent deposits in the second, third and fourth anniversaries is however yet to be disclosed. The deposits will continue to earn interest in line with KCB’s prevailing deposit rates on its products

In January 2019, the directors of NIC Group and Commercial Bank of Africa (CBA) announced their agreement to a proposed merger between the two banks that was first announced on 6th December 2018, with the shareholders of NIC Group accepting the merger proposition during the Annual General Meeting (AGM) on 17th April 2019.

The proposed merger is expected to be completed upon fulfilment of a certain set of conditions, with the merged entity expected to commence its operations at the onset of Q3’2019. The proposed transaction will be executed through a share swap in the ratio of 53:47 between CBA and NIC, implying that shareholders of CBA Group will be entitled to own 53 percent of the merged entity’s issued shares while shareholders of NIC Group will be allotted 47 percent of the combined entity.

Given that NIC Group has 703.9 million issued shares, it will have to issue 793.8 million new shares to CBA shareholders, in order to adhere to the 53:47 share swap ratio. The merged company, NIC Group, is set to remain listed on the Nairobi Securities Exchange (NSE).

The increased consolidation activity continued into 2019, as CBA Group issued Jamii Bora owners with a buyout offer of 1.4 billion shillings to acquire a 100 percent stake in the bank. With Jamii Bora’s equity position of 3.4 billion shillings as at Q1’2018, without further injection, it would imply the transaction would happen at a P/Bv ratio of 0.4x.