COVID-19 trims bank acquisition costs to their lowest
- According to an analysis of the acquisition valuation for banks by Cytonn Investment which compares price to book multiples, the average acquisition multiple fell to 0.7 times from a higher 3.2 times in 2013.
- Analysts at Cytonn Investment foresee a further acceleration in M&A activity this year as bigger lenders look to take advantage of low valuations in the market to expand and consolidate market positions.
- On average, there are about seven banks for every 10 million Kenyans.
Mergers and acquisition costs (M&A) in the banking sector now sit at their lowest in seven years with the COVID-19 pandemic knocking off high costs of acquiring and merging banks.
According to an analysis of the acquisition valuation for banks by Cytonn Investment — which compares price to book multiples — the average acquisition multiple fell to 0.7 times from a higher 3.2 times in 2013.
The price to book ratio measures the valuation of a company relative to its book value/carrying value on the balance sheet.
With the ratio slumping to its lowest level across seven years to the end of 2020, this means that the market is attaching a lower costs to bank acquisition in respect to their asset carrying value.
2020 witnessed a surge in M & A activity in the local banking scene with some of the major deals including the buyout of Transnational Bank by Nigeria’s Access Bank.
Other deals announced or completed in the year include the acquisition of a 51 per cent stake in Mayfair Bank by Egypt’s Commercial International Bank (CIB) and the 90 per cent stake acquisition of Jamii Bora Bank (now Kingdom Bank) by Co-operative Bank.
Additionally, Equity Bank completed the acquisition of a majority stake in Congo’s BCDC for Ksh.10.3 billion, I&M ongoing acquisition of 90 per cent of Uganda’s Orient Bank for Ksh.3.7 billion.
KCB also disclosed it had entered into arrangement with Atlas Mara to acquire a 62.1 per cent stake in Banque De Populaire du Rwanda (BRP) and a 100 per cent stake in Tanzania’s African Banking Corporation (ABC).
From its BCDC acquisition, Equity Group crossed Ksh.1 trillion in assets at the end of 2020 making it the largest lender in the East and Central Africa region.
Analysts at Cytonn Investment foresee a further acceleration in M&A activity this year as bigger lenders look to take advantage of low valuations in the market to expand and consolidate market positions.
“The current environment could provide opportunities for bigger banks with an adequate capital base to expand and take advantage of the low valuations in the market to further consolidate and buy out smaller banks,” they stated in their banking sector report published earlier in the week.
“Consolidation will be key for most of the smaller banks that suffered losses during the pandemic, and would also benefit larger banks with the opportunity to improve their asset base.”
The number of Kenyan banks has shrunk from 43 to 38 over a period of five years demonstrating continued consolidation of the banking sector.
On average, there are about seven banks for every 10 million Kenyans.
In contrast, there are about six banks for every 10 million South Africans and one bank for every 10 million Nigerians.
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