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Kenya’s crowded banking sector is ripe for consolidation, analysts say

By David Whitehouse
Posted on Wednesday, 12 May 2021 19:25

Kenya has a profusion of small banks in a market dominated by the major players. REUTERS/Thomas Mukoya

A raft of small, undercapitalised operators in a market dominated by the main players creates a recipe for consolidation in Kenyan banking, analysts say.

Renaldo D’Souza, head of research at Sterling Capital in Nairobi, points to the fact that Kenya’s nine largest banks account for 90% of the banking sector’s capital and reserves. Banks that are unable to meet the minimum capital requirements and reserves are “potential targets for takeovers by middle-sized and large banks,” he says.

D’Souza calculates that large and medium-sized banks account for 92% of total weighted market share. “This makes a case for about 20-25 banks,” he says.

Jee-A van der Linde, Kenya analyst at NKC Economics in Cape Town, points to the fact that the nine largest institutions have a market share of around 75% while the 21 smallest banks control just 8%.

“These smaller banks were also the ones that struggled most during the interest-rate-cap regime, as they tend to do business with more risky borrowers and the inability to charge a higher interest rates put some banks out of business or ripe for takeover,” he says. “It does look like the banking sector is somewhat overpopulated.”

Kenya scrapped the cap on the interest rates banks can charge in 2019.

Pandemic losses may accelerate the consolidation.

According to research published by Cytonn Investments in Nairobi in April, the current environment “could provide opportunities for bigger banks with an adequate capital base to expand and take advantage of the low valuations in the market” to buy out smaller banks.

It continued: “Consolidation will be key for most of the smaller banks that suffered losses during the pandemic and would also benefit larger banks with the opportunity to improve their asset base.”

Cytonn ranks Kenya’s banks using an assessment of the value of their franchises combined with a range of operating metrics. The banks in the strongest position on its measure are I&M Holdings, Equity Group and KCB.

Bottom of the list of the 10 largest banks are HF Group and NCBA Group.

International expansion

There has been a long-term decline in the prices paid to acquire Kenyan banks. According to Cytonn, the average acquisition multiple has dropped from 3.2 times book value in 2013 to 0.7 times in 2020.

That may indicate that there are ever fewer banks in Kenya worth paying up for.

  • “The large local banks instead would prefer to make bank acquisitions in neighbouring countries which offer better growth prospects,” D’Souza says.
  • The Kenyan banks that have shown aspirations to expand regionally are KCB, Equity and I&M. Equity is the keenest on regional expansion, he says. The Democratic Republic of Congo, Uganda and Rwanda are potential target countries, he adds.

The prospect of using Kenya as a platform for regional expansion may also attract new international entrants. Van der Linde says that Kenya’s economy is likely to achieve annual average growth of just under 5% over the next decade, nearly twice as much as South Africa long-term growth rate.

He continues: “Moreover, Kenya’s GDP per capita is forecast to grow at a rate of more than 3.5% a year over the long term, which is indicative of a rising middle class and implies healthy appetite for credit demand.”

Van der Linde argues that some international banks may use Kenya as a regional base to expand into other fast-growing East African markets. “East Africa’s contribution to total African GDP is set to increase over the next 10 years, so international banks that have not yet done so will want to establish a presence in the regional market, and Nairobi is arguably the nexus. ”

Bottom line

Scale will be a key to banking survival in post-Covid Kenya.

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