Why you could afford a Kenyan bank today

Chase Bank customers along Mama Ngina Street, Nairobi.  (Photo: Boniface Okendo/Standard)

Chase Bank has gone under the hammer after a turbulent year but the lender will probably cost less than it would have two years ago.

In early 2015, Kenyan banks were on a roll, selling at a premium especially with growing infusion of technology, regional expansion and above-average growth every year.

Their return on equity - the profitability generated by each share - was at an average of 18 per cent with their spread, the difference between what they pay for deposits and what they charge on loans, one of the highest in Africa.

Financial analysts point to the high premium that buyers of local banks were willing to pay.

“The seven local banks acquired over the last four years were overvalued by 29 per cent, with an average price to book value of 1.8 times against an average of 1.4 times for the listed banking sector at the time of announcement. This highlights the premium investors were willing to pay to acquire a controlling stake in a local bank in Kenya’s banking space, with the average transaction stake at 80.3 per cent,” said investment firm Cytonn.

However, Ecobank Head of Banking Research George Bodo said the banks’ selling price was a far reflection of the local industry.

“Fina, Giro and Oriental transacted at an average multiple of 1.5 times price to book value, which was a fair valuation in my analysis. Spire and Sidian were transacted at an average multiple of 2.8 times. Both transactions were equally fairly valued, in my view, given industry multiples averaged at 2.2 times price to book value,” he said.

 It was common for Kenyans to wonder how the banks made a killing even as the economy faltered.

But once Dr Patrick Njoroge, a Yale University-schooled economist, stepped in as Central Bank of Kenya (CBK) governor in August 2015, the grain started separating from the chaff.

Liquidity issues

Financial institutions had been operating on a grand scale of parallel banking where figures were cooked, colossal stocks of loans were not being repaid and bank directors got big interest-free loans to look the other way.

CBK staff were not left out of the party, as well as auditors from some of the most reputable international firms.

Dubai Bank, for instance, had liquidity issues yet it ‘passed’ regular stress tests and audits by the regulator without sanction. Imperial Bank, which looked fairly profitable on filings at the Nairobi Securities Exchange and was duly audited by PKF, was being bled for almost 10 years by its top management.

Dr Njoroge was not business as usual. He hit the waves with revelations that he had no property in Kenya, nor wife at the age of 54, and astounded Kenyans even further when he refused the trappings and frills associated with his posh office.

Within less than four months in office, the governor had closed down two banks - Dubai and Imperial - over practices that put depositors money at risk. In half a year, he closed Chase Bank, albeit temporarily.

The governor directed auditors to ensure all banks adequately provision for bad debt, which saw the level of non-performing loans (NPLs) spike in two years. According to CBK’s quarterly bulletin, NPLs increased by 6.7 per cent to Sh212.6 billion at the end of 2016 from Sh199.2 billion at the end of third quarter. Dr Njoroge then instructed auditors to check IT systems in their next round of audit after it emerged that Imperial Bank managers manipulated its IT reporting systems to defraud the bank.

Then in 2016, MPs managed to legislate against oppressive bank lending rates, which meant the spread came down to a modest average of seven per cent from the previous 18 per cent.

Thus, today buying a Kenyan bank is much cheaper.

Cytonn said that, generally, the price to book value of the listed banks has been declining from the historical average of 1.6 times to the current 1.2 times on the back of a challenging operating environment.

This is a result of increased regulations including the cap on interest rates and introduction of the International Financial Reporting Standards (IFRS) 9 - which will result in reduced profitability, and effectively reduced return on equity.

“There is also poor investor sentiment as a result of three banks being placed under receivership  and low asset quality, as NPLs remains a concern within the banking sector as well as weak performance of regional subsidiaries, notably in South Sudan that experienced a devaluation of the South Sudan Pound and hyperinflation in the economy,” said Cytonn.

Mr Bodo also noted that recent buy-outs of Habib and Fidelity banks showed discounts on their book values - perhaps representing market conditions at the time.

Attracted suitors

Fidelity Bank, for instance, was bought last year at a price that barely covered its reserves at the CBK, property and loan asset book.

Even as Chase Bank is said to have attracted 12 suitors, it may be sold for a song given that it has been stuck in receivership for over a year.

Kenya Commercial Bank, its initial receiver manager, is rumoured to have opted out of the purchase, which leaves a lot to be said about Chase Bank’s books. Sources who are not authorised to speak on behalf of KCB said the lender might have other priorities, while Managing Director Joshua Oigara declined to comment on the matter.