Bank mergers out do acquisitions in profitability


Bank mergers out do acquisitions in profitability
NCBA Group Managing Director John Gachora poses with Group Chairman Isaac Awuondo during the presentation of NCBA strategic plan on October 3 PHOTO | COURTESY

In Summary

  • While the two consolidation models assure of overall stability, the profitability of joint units appears to be pegged on the type of the constructed union.
  • Nevertheless, acquisitions still hold an advantage over mergers mirrored by a greater growth in assets and better liquidity management practices.
  • In Kenya however, Mergers and Acquisitions have marked both boom and bust even as tighter regulatory requirements underpin the majority of transactions.

The consolidation of banks through mergers has emerged as a more profitable venture in comparison to acquisitions, fresh data from the Central Bank of Kenya (CBK) shows.

While the two consolidation models assure of overall stability, the profitability of joint units appears to be pegged on the type of the constructed union.

On profitability terms alone, merged units take the day in a combination of high efficiencies and a broader interest rate spread.

“Mergers impact organizational culture and business models, leading to more efficiency and profitability. Meanwhile, acquisitions may not necessary be motivated by the integration of business models and organizational values,” noted the CBK report in part.

“The new entity after acquisition may experience organizational friction undermining profitability.”

In the subsequent, profitability increases the viability of banks through the buildup of adequate capital buffers from retained earnings which increase the resilience of banks to shocks.

Nevertheless, acquisitions still hold an advantage over mergers mirrored by a greater growth in assets and better liquidity management practices.

Mergers and acquisitions (M&A) have their roots in the creation of stronger banking institutions but branches out in a bi-directional way.

Liquidity and corporate governance problems have pushed many lenders into acquisitions by sector rivals while the quest for economies of scale and the exploitation of niche-market segments has triggered the majority of bank mergers.

Globally, mergers and acquisitions scaled up in the aftermath of the 2008 financial crisis as foreign investor moved to de-risk their hold of stocks in emerging and developing countries.

In Kenya, however, M & As’ have marked both boom and bust even as tighter regulatory requirements underpin the majority of transactions.

Kenya recorded a sum total of 41 mergers between 1990 and 2018 with a majority 28 unions taking place in the 90’s.

Meanwhile, acquisitions have been few and far between with only six buyouts between 2000 and 2018.

Among the notable M & As include the union between the National Industrial Credit and the African Mercantile Bank in June of 1997 and the acquisition of Habib Bank by the Diamond Trust Bank (DTB) Kenya Limited.

Most recently, the KCB Group has topped its curve of assets from the Imperial Bank Limited in Receivership (IBLIR) with the capture of the National Bank of Kenya (NBK) while rivals NIC and the Commercial Bank of Africa (CBA) have joined forces to create Kenya’s third largest bank by asset base.

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Story By Kepha Muiruri
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