COVID-19 sets the stage for accelerated bank mergers and acquisitions


COVID-19 sets the stage for accelerated bank mergers and acquisitions
An ongoing rebranding excise at Jamii Bora Bank branch in Nairobi CBD following the lender's acquisition by Co-op Bank. PHOTO | COURTESY

In Summary

  • From disclosed earnings across the first six months of 2020, local lenders have been forced to adopt a pragmatic stance which includes capital preservation as the sector onboard higher costs from loan-loss provisioning and a deteriorated asset quality.
  • The evolution of a worsening operating environment is expected to soften pre-merger and acquisition conditions that have remained ripe in the country for years.
  • While the number of commercial banks in Kenya has reduced to 38 from 43 five years ago, the country remains overbanked there being an average of 7 banks for every 10 million Kenyans in comparison to 6.4 and one each in South Africa and Nigeria respectively.

The COVID-19 pandemic is expected to trigger a new run of mergers and acquisitions (M&As’) as Kenya’s banking industry shifts under the weight of the global health crisis.

The pandemic which has partly severed the current business operating environment has created new bouts of uncertainty among lenders.

From disclosed earnings across the first six months of 2020, local lenders have been forced to adopt a pragmatic stance which includes capital preservation as the sector onboard higher costs from loan-loss provisioning and a deteriorated asset quality.

According to an analysis of the performance of listed banks through the first half of the year by Cytonn Research, the gross non-performing loan (NPL) ratio rose to 11.6 per cent in the period from 10 per cent in the same period last year.

Further, the banks raised their NPL coverage to 57.8 per cent from 55.9 per cent in mid-2019.

The higher provisions are set to subdue the sector’s profitability this year on account of the tough business environment.

Moreover, the recent restructuring and reclassification of loans is expected to sink a hole in interest income- the bank’s core source of revenue.

The evolution is expected to soften pre-merger and acquisition conditions that have remained ripe in the country.

Cheap bargains

For instance, Kenya remains with poor capitalized banks which continuously struggle to meet statutory requirements including capital adequacy and liquidity.

Additionally, locally owned tier III banks hold insignificant market shares pointing to their industry non-competitiveness.

The negative outlook on returns from equity along with worsening balance sheets is set to further provide the vigour for continued consolidation.

“Going forward, we expect more consolidation which will build bigger and more resilient banking unit in the post-pandemic,” Cytonn Investments analyst Rodney Omukhulu told Citizen Digital.

Banks seeking to acquire competitors are expected to be in for a significant purchase bargain as the cost of acquisitions comes down significantly.

The yearly average price to book acquisition multiple has come down from 3.2 times in 2013 to a year to date (YTD) multiple of 0.5 in 2020.

“Ultimately, what we’ve been seeing is a depreciation in the book value of banks acquired over time,” added Omukhulu.

While the number of commercial banks in Kenya has reduced to 38 from 43 five years ago, the country remains overbanked there being an average of 7 banks for every 10 million Kenyans in comparison to 6.4 and one each in South Africa and Nigeria respectively.

The Central Bank of Kenya (CBK) and the National Treasury have been an advocate for continued consolidation as they seek to enhance the resilience of the banking sector to shocks.

CBK adopted the stance in 2016 following the seemingly coordinated collapse of Dubai, Chase and Imperial banks. The adoption of policy for instance saw the banking sector regulator require all foreign entrants into the sector to deploy local acquisitions.

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Story By Kepha Muiruri
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