Indigenes in duel with foreign-owned banks

By James Anyanzwa

Competition for a bigger market share in the banking industry is getting stiffer and stiffer by the day as traditional banking giants appear to be losing steam that has propelled them to higher profit trajectory over the years.

This is paving way for a new breed of powerhouses of the likes of Cooperative Bank, Equity Bank and Kenya Commercial bank (KCB) whose retail and SME business models have seen their profits rise leaps and bounds over the last five years.

And with Co-operative Bank outperforming its peers for the first time during the first three months of this year, analysts are projecting that the country’s third largest bank by assets (more than Sh200 billion in asset base) is rapidly becoming a huge force to reckon with.

“Cooperative Bank has been coming up very fast due to their strong business models with growing clientele base.  I see great potential in this bank in terms of attracting clients owing to the diversified range of products they have,” said Ronald Lugalia, investment analyst at AIB Capital.

“In the next two years you will see great potential coming up on this bank.” According to analysts at Standard Investment Bank (SIB) Co-op Bank also outperformed its peers in terms of Earnings Per Share (EPS), which grew by 44.9 per cent while Barclays underperformed with its EPS dropping by 26.6 per cent in a similar period.

But even as the battle for supremacy engulfs the banking industry, major realignments seem to be taking shape amongst the top five banks that have ruled the banking industry for years.

An analysis of the profitability trends of the top banks (Co-operative Bank, Kenya Commercial Bank, Equity Bank, Standard Chartered Bank Kenya and Barclays Bank Kenya) over the last five years (2008-2012) reveals what appears to be a shift in earnings power in favour of the fast growing local banks that have embraced retail banking as key economic drivers.

The bank’s profitability trends from 2008 to 2012 show varying degrees of growth with Equity Bank, KCB and Cooperative Bank exhibiting faster growth.

Market share

Equity Bank’s earnings grew by 263 per cent, while KCB and Co-operative Bank’s profits grew by 220 per cent and 200 per cent respectively.

However, Stanchart and Barclays bank exhibited slowed growth with their profits rising by 145 per cent and 62 per cent respectively.

Over a five-year period (2008-2012) Equity Bank’s pre-tax profit accelerated to Sh17.41 billion from Sh4.79 billion while KCB’s earnings rose to Sh17.2 billion from Sh5.39 billion in a similar period.

“Barclays and Stanchart are banks that have been conservative in their operations and have not been looking to take up risks in their balance sheets,” said Lugalia.

According to Mr Lugalia the inability by the two banks to take up new opportunities and make swift decisions are the key factors hindering their rapid growth locally.

“Their decisions have to come from above (parent companies),” he said. During the first quarter of this year (2013) Coop Bank’s pre-tax profit surged 31 per cent while KCB and Equity Bank Groups’ profit before tax (PBT) grew much slower at 26 per cent and 21 per cent respectively in a similar period.

However Barclays Bank of Kenya (BBK) and Standard Chartered Bank’s earnings fell by 17 per cent and 16 per cent respectively.

BBK’s Managing director Jeremy Awori attributed the decline in profitability to voluntary staff exit programme, which affected around 170 workers costing the bank Sh658 million.  “The impact of this exercise is seen in the non-recurring restructuring cost of Sh658 million recognised as an exceptional item in the first quarter of 2013,” he said

Awori said the bank is working on cutting edge products for its clients, which would be released in the market during the second half of this year. During the bank’s AGM, chairman Francis Okello sought to calm shareholders who felt the bank is being surpassed by its competitors in terms of profit growth.

He told shareholders that the bank’s growth pace is a deliberate strategy rather than an indication of declining performance. “We avoid growth for the sake of it, chasing numbers is a dangerous strategy,” he said. Stanchart Kenya posted a 16 per cent drop in pretax profit for the first quarter to Sh2.73 billion but the management maintained a brave face that the outlook is stilly rosy.

The bank, controlled by Standard Chartered Plc, said total operating expenses increased by about Sh400 million, driven by higher staff costs and loan-loss provisions.

“Although the first quarter results were substantially down, year-on-year, the good news is that we have seen a much improved performance so far in quarter two,” said Richard Etemesi, the Managing Director Stanchart Kenya.

“The quality of the asset book remains good and is well diversified and conservatively positioned. Wholesale Banking loans continue to remain well-diversified and largely short tenor. The consumer book is predominantly secured and we have selectively grown our unsecured portfolio.”

According to Mr Etemesi, the bank will stay focused on its strategy and on the key priorities for the rest of 2013.

These include maintaining the track record of delivery, sustaining the momentum in Wholesale Banking, and continued investment in Consumer Banking.

“We need to continue to deepen our relationships with our customers and ensure we continue our focus on the basics of banking – liquidity, capital, risk and cost discipline,” he said.

According to Lugalia, Coop Bank’s net interest margin has significantly risen over the past year due to the quality of the balance sheet while the cost to income ratio has also shrunk.

“Cost to income ratio is coming down at a much faster rate because of the bank’s policy of using existing staff in its expansion initiatives. What this means is that staff costs are coming down significantly,” said Lugalia adding that the bank is poised for further growth once some of its outlets that have been opened start to break-even.

Co-op Bank’s South Sudan operation scheduled to begin in a couple of weeks is also expected to contribute significantly in light of a joint venture with the Government of South Sudan.

Co-op Bank has sustained the strategic business and operational restructuring reflected in a Sh10 billion profit last year, marking a turnaround from a huge loss of more than Sh2 billion in 2001. The Bank has a growing network of over 120 branches and over 3.3 million customers.

Co-op Bank’s total earnings during the first quarter of 2013 rose to Sh3.23 billion from Sh2.47 billion in a similar period last year helped by growth in transaction-based income and prudent cost management.