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Pressure from shareholders to deliver dividends and fixation with lenders’ positions in the market said to be key motivators of growing trend by Kenyan banks.
Daniel Kimotho’s bald head and his choice of attire are a reflection of the average age of the Kenyan investor in banking stocks.

At the recent Equity Bank Annual General Meeting, Mr Kimotho was all suited up in a striped navy blue suit and an orange tie to complete his rather curious ensemble that matched the bank’s corporate colours.

Listening to the speeches of the various shareholders, one could not help observing that besides their common denominator - age - they also appeared to be obsessed with dividends, freebies offered by the bank (a branded umbrella and cap) and the bank’s ranking against its peers.

“Let me start by congratulating the management; a balance sheet of under Sh600 billion, appearing top 11 in the world and having 13.5 million customers. I think that is good work,” started Mr Kimotho before going for the jugular while addressing the Group Managing Director Dr James Mwangi.

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“Please look at the dividend which you have reduced from 40 per cent to 38 per cent. Equity is now a grown-up kid Daktari. Why don’t you decide one day that out of this Sh19.8 billion, I will stand with these people who have stood with me and maybe give them Sh5?”

Mr Kimotho’s sentiments served a harsh reality of the expectations of the current crop of investors in banking stocks who are seeking quick returns and the task at hand for managers to deliver in a cut-throat environment.

This has seen a spate of big announcements about bank acquisitions that have helped prop their stocks at the Nairobi Securities Exchange (NSE).

For instance, Equity’s turnover soared 101.2 per cent to $840.8 million (Sh84.8 billion) on increased trading by foreign investors when it announced it was buying four banks.

Conversely, Co-operative Bank, which is the only top three lender to not have announced an acquisition, has been on a losing streak, falling seven per cent on foreign selling.

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“The lender has collectively slumped 15.1 per cent in nine sessions to close at Sh12.60 – a two-year low,” said Standard Investment Bank in a notice to investors.

Equity Bank, on the other hand, notched up 2.9 per cent after it announced that it had entered into a binding term sheet with Atlas Mara Ltd (ATMA) for a share swap that will see the lender get 62 per cent of Banque Populaire du Rwanda Ltd (BPR).

It also announced an acquisition of a 100 per cent stake in African Banking Corporation Tanzania Ltd (ABCTz), African Banking Corporation Zambia Ltd (ABCZam) and African Banking Corporation Mozambique Ltd (ABCMoz).

NIC Bank, which is set to merge with the Kenyatta family-owned Commercial Bank of Africa (CBA), has also seen its share price almost double from Sh22.4 on December 6, last year to Sh32.45 on Thursday last week.

The merger will make it the third largest lender in the country behind Equity Bank and KCB Group, overtaking Co-operative Bank that will now be relegated to fourth place.

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The Sh444 billion asset entity will carry nine per cent of the banking sector loans and 9.6 per cent of deposits and hold a host of subsidiaries, including a stake in AIG, regional footprint, investment bank and a securities brokerage firm.

The bank will have over 100 branches serving 40 million customers and an optimal level of staff of 2,300.

This is almost half of those employed by its close competitor Equity Bank, making the lender pretty efficient.

It’s perhaps in light of this that KCB Group has moved fast to finally close the deal with Treasury to acquire National Bank of Kenya, having already wrapped up another one to buy troubled Imperial Bank’s sound assets.

“KCB Group’s intention to acquire National Bank of Kenya has been on the cards since 2015. In fact, I remember when they first floated the idea to the National Treasury in November 2015. But back then, the Treasury never warmed up to the idea and instead reportedly opted to engage a consultant on the matter,” said Head of Banking Research at Ecobank Capital George Bodo in a commentary.

He said NBK’s strong public sector franchise would be a boost to KCB’s own liability strategy, especially the domiciliation of public sector-related liabilities.

“For instance, last year, NBK collected slightly over Sh100 billion in taxes, making it one of the top five largest collectors,” said Mr Bodo.

He, however, noted that there are concerns about the quality of the assets due to bad loans, although he is quick to add that this is, in essence, an industrywide problem.

Like Equity Bank, news of the impending acquisition saw KCB’s share climb one per cent between April 24 and April 26.

The rally was, however, short-lived. The news would later send the bank’s stock down to Sh42.1, a price last seen before the lender posted a Sh24 billion net profit for 2018.

NBK in its financial report for the 12 months to December last year only made Sh7 million net profit, a 98 per cent fall from the Sh410 million reported in a similar period in 2017.

Loans to customers during the period under review declined from Sh57 billion to Sh47 billion, out of which Sh31.46 billion was in default.

Anxious analysts pointed out that KCB Group could be required to inject tens of billions of shillings into NBK to service the State lender’s bad debts.

However, Deepak Dave of Riverside Capital reckons KCB could get a light touch treatment from the regulator - Central Bank of Kenya - which may cushion it from NBK’s bad books.

“It is a smart move to keep it all stock and subsume the old National Social Security Fund and Treasury stakes into capital. That’ll give a buffer to write off any skeleton bad debts that have been hidden,” said Mr Dave.

But questions linger as to whether investors will appreciate the role assumed by KCB in rescuing the State lender, having intervened as the caretaker manager of Chase Bank and buying Imperial Bank assets to settle the long-standing receiverships that have troubled the Central Bank of Kenya for over three years.


KCB offered 19 per cent of Imperial Bank deposits split into five tranches of 12.5 per cent twice and 25 per cent over three years to resolve the matter marred by litigation, desperate depositors and sour shareholders.

Some analysts like Bodo see this new role by KCB as positive to shareholders given the discount prices of such acquisitions.

“Coming hot on the heels of buying of unscorched assets from the defunct Imperial Bank designates KCB as a resolution vehicle. That designation comes with certain benefits to shareholders, top on the list being the fact that KCB can acquire an asset at no premium,” he said.

But Equity Bank’s new acquisitions are not doing very well under Atlas Mara that chose to sell them in February this year, with the lender admitting that the final prices will rely on further analysis of the health of their books.

Equity offered Atlas Mara Sh10 billion worth of shares in exchange for the banks, giving the London-listed investment company a 6.27 per cent stake or 252 million shares in Equity.

This is, however, subject to due diligence on the banks’ value.

“The actual aggregate consideration ultimately payable will be that set out in the detailed transaction agreements negotiated following completion of the confirmatory due diligence and may be subject to adjustment,” warned Equity in a note to investors.

Equity Bank boss, Mwangi, said the planned acquisitions will more than double its size in the markets and shield subsidiaries from risks.

Consolidation continues to be the most effective path for growth given the relatively mature Kenyan market and slower regional growth.

For instance, Diamond Trust Bank swallowed its affiliate Habib Bank Ltd Kenya and created an asset book of Sh357 billion.

The State Bank of Mauritius (SBM) became a tier two lender overnight when it bought Chase Bank’s books, increasing its assets from Sh11.7 billion to Sh75.3 billion.

When the Indian Ocean Island banker initially bought Fidelity Bank, it only ranked as a tier three lender with 14 branches. In June 2016, I&M bank started off the rout for building size from acquiring other lenders when it bought Giro Commercial Bank. Earlier, GTBank had bought Fina in November 2013.

Initially, Kenyan banks tended to take the route of regional expansion in establishing their dominance.

Currently, 10 local lenders have subsidiaries in the East African Community (EAC) member states as well as South Sudan.

These are KCB, Equity and Co-op, DTB, CBA, Bank of Africa (BOAK), Guaranty Trust Bank, I&M Bank, ABC and NIC Bank.

Regional assets have not been able to match the potential of the Kenyan market, making only a fraction of the group operations.

Regional bargains have also come with additional financial costs like in the case of CBA when it bought the disgraced Ugandan billionaire Sudhir Ruparelia’s Crane Bank Uganda which collapsed in 2016.

When the bank was sold to Development Finance Company of Uganda (DFCU) Bank, CBA bought its Rwandan subsidiary to boost its presence.

The non-performing loans of the Rwandan entity as of September, 2018, reached Rwf464 million (Sh51 million), pushing up the non-performing loans ratio to 9.18 per cent. This is above the five per cent central bank benchmark.

Additional capital

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.

Things then got more complicated when 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 shareholders’ 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.

CBA MD Isaac Awuondo said as a result, CBA had sought 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 amount 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,” Mr 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.

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