Will CBA’s love for mergers quench expansion thirst?

NIC Bank Managing Director John Gachora (left) with his CBA counterpart Isaac Awuondo brief journalists in Nairobi last week. [Wilberforce Okwiri, Standard]

When Kenya’s two powerful bankers - Commercial Bank of Africa (CBA) Group Managing Director Isaac Awuondo and NIC Bank boss John Gachora - recently shared the stage as a show of equal footing in the merger of NIC Bank and CBA, questions were raised as to who will be left standing at the end of the year.

Head of banking research at Ecobank Capital, George Bodo voiced this question in the stormy waters of the merger as to how the management change.

“The governance structure will be subject to shareholder approvals, so we will go through the process and make announcements,” said NIC Bank Chairman James Ndegwa.

Besides the name and the new bosses, weaving together the country’s third-largest lender owned partly by the Kenyatta and the Ndegwa’s families looks like a piece of cake.

It is not. The deal needs to iron out perceptions, close ranks with unfinished business and even wade through uncertain waters that have always trailed mergers.

The first issue that would not go away was CBA’s dalliance with Jamii Bora Bank which has been seeking a strategic investor to navigate liquidity constraints in a tough market.

Jamii Bora which is said to have attracted the interest of one private equity firm, a local lender and telecoms company offers an understanding of the SME market, especially leveraging stock financing through the Boresha Stock loan. This has seen retailers and wholesalers of fast moving goods get weekly facilities to satisfy customer demand.

And for CBA which piggybacked on a partnership with Safaricom to launch M-Shwari that has won the hearts of many Kenyans, especially the youth with minimal branch networks, this looked like a real prospect.

This has been cemented by Kenya’s history of leveraging the small yet risky sector as witnessed by the success of Equity Bank Market analysts say Jamii Bora could offer an edge - having angled to ride on Uchumi Supermarket’s retail banking at low-cost locations and understanding of balance sheet financing.

Mr Awuondo noted that some of these overtures might now be abandoned to concentrate on the bigger picture - the merger. “I am not aware of that statement around our interest in Jamii Bora. I also read about it in the paper and as I said, we are always looking for opportunities to buy banks, to work with banks, to partner with banks. That process will continue because that is how businesses grow,” Awuondo said.

“What we do not like is for people to put in our mouths words which we have not spoken ourselves,” he said. CBA’s eye for a bargain was also seen when it bought a piece of Ugandan disgraced billionaire Sudhir Ruparelia’s Crane Bank Uganda which collapsed in 2016.

When the bank was sold to another Uganda lender DFCU, CBA bought its Rwandan subsidiary. This was meant to boost its presence in the region that had been established through the microfinance licence offering a mobile banking service, MoCash that the lender used to enter Rwanda in 2016.

Not that NIC has not had a desire for snapping up struggling lenders, the corporate asset financing lender which served as a receiver manager for Imperial Bank had expressed its intentions to buy the failed lender.

NIC Bank, which on June 21, 2016 was appointed to act as the asset and liability consultant for Imperial Bank had been speculated to have shown interest on the lender but later pulled out.

“As I said then when you look at Imperial Bank and I say today, our interest was stabilising the banking system that was the reason, that we continue to be the key reason. Our role as a large bank is to stabilise the sector, so we will continue to be active in that regard,” Gachora said.

When asked whether now that they are together the strategy may see them ride the wave of consolidation in picking out small lenders on the cheap, Mr Awuondo did not rule it out. “Our view is not looking at struggling banks, our view is looking at banks which add value to our business going into the future,” he said.

“I think it is also unfair to call these banks struggling because they are licensed by the Central Bank which knows what is happening to these institutions.”

The banking duo is known for being ‘pros’ at this game through in their risk analysis despite recent missteps that have exposed them to failing corporates such as Deacons for NIC Bank and the Crane Bank Rwanda acquisition.

“Risk is essentially the banks business, taking and managing it and we are pretty good at it and we are well equipped to deal with any challenges particularly credit risks,” Mr Gachora said.

But buying into smaller struggling lenders comes with its fair share of problems. The non-performing loans of the Rwandan entity, as of September 2018 reached Rwf464 million (Sh51 million), pushing up the NPL ratio to 9.18 per cent, which is above the five per cent central bank benchmark. There were material changes in the financial statements as a result of this transaction resulting in additional capital, property and equipment and escalating of expenses related to set up cost, according to the bank.

CBA Rwanda reported losses in the first nine months to September 2018 of Rwf2 billion (Sh220 million) from a loss of Rwf845 million (Sh94.8 million) during the same period in 2017.

Then the Rwandese authorities pushed for increasing minimum capital from Rwe5 billion (Sh559 million) to Rwf20 billion (Sh2.2 billion) in five years.

“The biggest challenge CBA shareholders face is to raise shareholders capital from current Rwf8.4 billion (Sh940 million) to Rwf20 billion in the next five years, after regulator raised the shareholder’s equity. This means the shareholders have to inject in Rwf2.3 billion (Sh257 million) annually for the next three straight years, to comply with the new Central Bank regulation,” the source said.

Mr Awuondo said this has seen CBA seek an extension of the deal to pump in more money into the lender which was approved by Finance Cabinet Secretary Henry Rotich. “The transaction has already been done, the exemption was to do with the number of investments we have made relative to our capital. We are not doubling capital but really to increase our capital. The extension is to June this year so it does not change anything so far as business in Rwanda is concerned, it is more of an issue for CBA Kenya as an investor of a bank in Rwanda,” Awuondo said.

“What issues with NPL? We are in the risk business, there is nothing we do which we do not know about,” he added. Actually, the bank’s assets expanded to reach Rwf18.6 billion (Sh2 billion) in the nine months to September, from Rwf12.9 billion (Sh1.4 billion) during the same period last year.

The management of the NIC and CBA remain upbeat that the Sh444 billion asset entity will leverage the strengths of NIC’s asset financing, CBA’s digital banking platform and the strengths of the two entities in corporate banking to enhance shareholder value.

The combined group holdings will carry nine per cent of the sector loans and 9.6 per cent of deposits, and also holds subsidiaries, including a stake in AIG, EAC footprint, investment bank, and securities brokerage firm.

The merged lender will have over 100 branches serving 40 million customers with an optimal level of staff at 2,300 - almost half of those employed by its close competitor Equity Bank, making the lender pretty efficient.

With consolidation in top gear, it will be interesting to see how other lenders will react to this move to seize up the Kenyan and regional market which has taken years for KCB Group, Equity Bank, and Cooperative Bank to dominate.

KCB is eyeing a portion of Sh35 billion Imperial Bank assets and will announce in March how much of the failed banks good books it will be willing to carry.

If the country’s largest lender by assets takes the entire portion, it will pull its assets to Sh719 billion. However, Mr Oigara only expressed interest in a fraction of the loans. Imperial Bank had about Sh85 billion balance sheet out of which Sh18 billion was paid out during its three years in receivership, leaving it with about Sh67 billion.