Banks stir foreign interest

 BY James Anyanzwa

Two Kenyan banks are in the radar for huge investments by top multinational corporations eyeing the country’s lucrative financial sector.

A recent survey by a team of international researchers shows that Co-operative Bank and Diamond Trust Bank (DTB) have emerged as key targets by foreign investors.

The increased interest by foreign investors in Kenya’s banking sector is part of a new wave of investments in Sub-Saharan Africa whose financial sector remains under-penetrated.

According to the survey by a UK-based Frontier Market Investment Banking firm, Exotix Ltd, international investors are keen on pumping huge capital outlay in little known but potentially fast growing banking institutions whose stocks have mostly been undervalued due to under-research and lack of independent ratings.

According to the survey dubbed ‘Opportunities in Africa Financial Services’, Kenya Commercial Bank (KCB) and Equity Bank top the list of Africa’s eight big banks whose international visibility has since lured enormous foreign investment.

The eight big banks already profiteering from gigantic foreign investments include KCB (Kenya), Equity Bank (Kenya), Access Bank (Nigeria) and First Bank Holding (Nigeria).

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Others are Guaranty Trust Bank (Ghana), UBA Holdings (Nigeria), Zenith Bank (Nigeria) and Mauritius Commercial Bank (Mauritius).

Available data shows that foreign shareholding in KCB and Equity stand at 24 per cent and 46 per cent respectively while Co-op Bank’s foreign stake hovered at a paltry 2.47 per cent as at May 31, 2013.

According to the survey Co-operative Bank and Diamond Trust Bank are among twelve banks in Africa whose business models and growth prospects have incidentally caught the attention of foreign investors.

The two banks—Co-op bank and DTB— control market capitalisation in excess of $840 million (Sh71.4 billion) and $565 million (Sh48 billion) respectively.

According to the survey, Co-op Bank tops the list of banking institutions currently riding on huge foreign investor interest largely due to its strong retail franchise, improved operating efficiency and its unique business model revolving around the co-operative movement in Kenya.

It is closely followed by DTB, a bank that is stamping its authority due to its lucrative niche model (Aga Khan Community) and its fast growing East Africa franchise, the report says. According to the report the two banks’ asset quality is better than Kenya’s sector average.

They are also able to earn high net interest margins due to their dominant market share and profitable niche models targeting the SMEs and retail market.

Amongst the other banks branded as the next frontier of investments in Africa include Skye Bank (Nigeria), Diamond Bank (Nigeria), First City Monument (Nigeria), First National bank Botswana and Letshego bank (Botswana).

Others are State Bank Mauritius (Mauritius), Zambia National Commercial Bank (Zanaco), Stanbic Uganda, National Microfinance Bank (Tanzania) and Ghana Commercial bank.

“The cost of risk for the next dozen banks is moderately higher although asset quality is not a significant concern for most of them,” says Ronak Gadhia, Equity analyst at Exotix Ltd, adding that funding profile of the ‘next dozen’ banks is similar to the ‘big 8’ though short-term deposits are their key-funding source.

According to Exotix, these 12 banks have more aggressive balance sheets and are funded mostly by deposits and Tier 1 equity. However, they are under-researched and under-invested due to their smaller market capitalisation and less liquidity. They are also listed in un-benchmarked markets (not in the MSCI) and therefore less known and under-appreciated.

According to the report these banks are also under-researched and under-invested due to a belief that lower market share will translate to lower profitability. “The next dozen banks are under-researched and under-invested due to under-appreciated business models,” says Gadhia.

The report notes that Kenyan banks are expected to improve as banks adopt alternative banking channels.

Also, foreign investors are sniffing for investment opportunities in countries such as Kenya, Nigeria, Ghana, Botswana, Zambia, Mauritius, Tanzania and Uganda.

The investors are also scouting for other investment opportunities public equity, private equity and fixed income securities. Sub-Saharan Africa ranks amongst the fastest growing regions in the last 10 years and its growth prospects remain strong.