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KCB Group makes merger bid for National Bank of Kenya

In what could be the biggest bank merger in Kenyan history, KCB Group has made a takeover offer for troubled lender National Bank of Kenya (NBK).

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The offer, which proposed a 10:1 share swap for NBK, would see KCB Group strengthen its position as the biggest bank in East Africa by assets. KCB’s plan to absorb the state-owned lender was first reported in June 2017, although it was unclear at the time whether a formal offer had been made.

  • If the acquisition is completed, it will increase KCB’s asset base but also double its bad loans book while acquiring very few performing loans. NBK’s gross non-performing loans (NPLs) stood at KSh31.46bn ($310m) in 2018, up from KSh27.66bn in 2017.
  • The bank has also suffered crippling capital inadequacies and its shareholders agreed to inject new capital in early 2018. A market analyst in Nairobi told The Africa Report there was “no way for the bank [NBK] to survive as a separate entity”. By the time trading on both stocks was suspended on Thursday last week, NBK’s shares were trading at $0.05.

Public-sector deposits

For KCB, whose other takeover offer for Imperial Bank has already been approved, the acquisition of National Bank would mean increased access to public-sector deposits. KCB already holds substantial institutional deposits but NBK had exclusive access to several large depositors. It still retains significant deposits from institutions such as the Kenya Airports Authority, Kenya Revenue Authority and the Teachers Service Commission.

  • Explaining why KCB made the offer, CEO Joshua Oigara said: “The proposed transaction acquisition will accelerate the group’s growth ambitions and enhance value…” He added: “We have surplus capital and we don’t see the need to take new capital for the next few years.”
  • The Group’s appetite for growth through acquisitions follows a period of prolonged expansion. It now has operations in all six countries that make up the East African Community. It also has a representative office in Ethiopia and recently announced plans to open another in China.

National Bank of Kenya is one of six banks in Kenya with government involvement. It was established in 1968, two years before the state bought National & Grindlays Bank and renamed it Kenya Commercial Bank, as a fully-owned state bank.

  • The government reduced its shareholding in NBK in the mid-1990s but still retains a 22.50% stake, second only to the state pension fund NSSF’s 48.05% shareholding.
  • The government and the NSSF collectively hold 23.58% of KCB. Local individual investors hold 27.44% while foreign investors hold 22.86%, down from 29.25% two years ago.
  • The government has been considering merging three struggling banks in its porfolio – National Bank, Consolidated Bank and Development Bank – into a single entity. The KCB takeover proposal partially solves this problem for the Treasury.

No more life-support

When news of the takeover first broke in June 2017, business journalist Jaindi Kisero wrote: “A takeover of NBK will serve as a strong signal that those distressed state-owned banks will no longer be artificially kept alive.”

For the acquisition deal to go through, NBK shareholders will have to agree to convert their 1.1bn preference shares into ordinary shares at a ratio of 1:1, which would substantially increase the government’s shareholding while reducing the pension fund’s stake. This has been a sticking point in earlier plans to restructure the bank’s shareholding, but the presence of common shareholders in the latest proposal is bound to ease negotiations.

Restructuring for the whole banking sector

The proposal comes in the midst of extensive restructuring in Kenya’s banking sector. Treasury cabinet secretary Henry Rotich has in the past urged banks to merge to enhance their capital bases and create more stable entities.

  • The merger of mid-tier banks NIC and CBA is already under way, and will create the country’s third-largest bank by assets when it is completed in the second half of the year.
  • In 2018, the State Bank of Mauritius (SBM) acquired Chase Bank, while DTB and I&M Holdings acquired Habib Bank and Giro Commercial Bank respectively, in 2017.

Bottom line:

A bigger KCB will be even harder to beat, but the bank would first need to solve its newly acquired massive bad-loans book. It would also need to cut costs, which will most likely involve closing NBK’s branches in locations where the two banks are present. The government, on the other hand, will have got rid of a loss-making investment while increasing its shareholding in Kenya’s largest bank.

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