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Mergers defining state of Kenya’s banking sector

At least four banks have announced merger in the past six months, with some being acquired, shedding new light on state of country’s banking sector

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It’s an era that has seen a number of banks either merge or are acquired. On 18th April 2019, for instance, Kenya’s leading bank Kenya Commercial Bank (KCB) Group PLC gave notice of its intention to acquire 100 percent of shares of National Bank of Kenya (NBK), a government-owned bank.

The deal, which is subject to regulatory approval, would see KCB make the acquisition through a share swap of 10 ordinary shares of NBK for every 1 ordinary share of KCB, giving the latter full control of the state-owned bank.

“This transaction fits within KCB’s expansion strategy and gives it a stronger edge to play a bigger role in driving the financial inclusion agenda in the East African region. This will further consolidate the banking sector in Kenya and will create a stronger institution, enabling KCB to play a bigger role in the financial inclusion agenda,” said Joshua Oigara, the CEO of KCB Group.

The move would see KCB give the once vibrant state-owned bank lifeline, following a period of high indebtedness and legacy challenges that saw its financial returns take a toll. According to Jaindi Kisero, a leading Economics Editor and columnist, in his commentary published by a local daily this April, the merger will  see the end of one of the most troublesome chapters in the country’s banking sector.

While NBK has a weak balance sheet, he explains, the merger will bring to the table strong customer-facing assets for the combined entity. NBK has retained branches in exclusive locations at airports, ports of exit and entry into the country, giving it advantage when it comes to inter-trade business.

“Secondly, it has over the years retained exclusive viable public sector clients. In the past, NBK was the designated bank for receiving landing fees for all aircraft landing and taking off from Kenya. It retains a substantial part of the business,” Kisero says.

Other than the KCB-NBK merger, quite a number of banks have over the last decade entered into partnerships that have either resulted into acquisitions or mergers. About 36 Kenyan commercial banks have so far undergone mergers, 16 of which took place between 1999 and 2005.

According to data from the banking regulator Central Bank of Kenya (CBK), about six financial institutions merged in 2010. They included Savings and Loan (K) Limited, which merged with KCB, City Financial Bank Ltd with Jamii Bora Bank (K) Ltd and Equatorial Commercial Bank with Southern Credit Banking Corporation Ltd.

Three others acquired in 2017 were Giro Commercial Bank Limited acquired by I&M Bank, Fidelity Commercial Bank by SBM Bank Kenya and Habib Bank Kenya Limited by Diamond Trust Bank Kenya.

The latest entrant into a merger deal is Commercial Bank of Africa (CBA) and NIC Group PLC. On 17th April 2019, the two banks released a joint statement announcing that their shareholders had in separate Annual General Meetings approved the merger.

The approval would see NIC and CBA merge their operations and amalgamate the shareholding through which the shareholders of CBA would become 53 percent shareholders of NIC, upon regulatory approval by CBK, Capital Markets Authority and Competitions Authority, in a process expected to be concluded in the third quarter of this year (2019).

“I’m delighted that our shareholders share our vision and have overwhelmingly supported this important merger that will create a leading Tier 1 bank. The endorsement paves the way for completion of the merger that will deliver significant benefits to the Group stakeholders,” said NIC Chairman, James Ndegwa.

“Whilst a new name is yet to be selected, both NIC and CBA are jointly working with external brand consultants to identify a name that will reflect the identity, values and aspirations of the new merged entity.”

The combined bank is poised to be among the largest financial institutions in East Africa and the largest in Africa by customer numbers, summing up to over 41 million.

According to a statement from CBK, the mergers and acquisitions, especially for Kenyan commercial banks, are necessitated by the need to meet the increased levels of share capital, expand distribution network and market share and to benefit from best global practices among other reasons.

Henry Rotich, Kenya’s Cabinet Secretary for Treasury, lauds the mergers, saying they will enable local banks ‘become big players in Africa’s banking sector and compete other banks, more so from West Africa, which have expanded their roots to Kenya and East Africa.’

Despite these reasons, however, the mergers and acquisitions have led to heightened job cuts in a sector already confronted with new regulations and competitive investments in digital products. Collectively, industry reports indicate, staff size in banks has reduced by 6,020 employees in the last three years to December 2017, with more job cuts taking place in 2018 and 2019.

In the months leading up to 2017, collapse of three key banks- Imperial Bank, Dubai Bank and Chase Bank- dealt a huge blow to employees, pushing a massive number of workers to look for jobs elsewhere.

Chase Bank would be put under receivership and later taken over by Mauritius-state lender SBM Bank, after a prolonged duration of uncertainty for staff. The take-over led to the bank’s 10 branches to be closed.

Situation in other markets

Mergers and Acquisitions (M&As) are not just limited to Kenya’s banking sector alone. Last year in Ghana, the Central Bank (Bank of Ghana) merged five banks and created a new bank- the Consolidated Bank Ghana Limited- to serve their customers.

The banks, which included Unibank, The Royal bank, Sovereign Bank, Beige Bank and Construction bank, were declared insolvent and their assets and deposits transferred to the new bank, which took control of their 7 billion cedis worth of total assets and staff numbering over 2000.

In 2017, the Bank of Ghana (BoG) took over two commercial banks in an effort to strengthen local banking sector and to protect depositor’s funds. BoG had operating licenses of UT Bank and Capital Bank revoked and customers transferred to the state-owned Ghana Commercial Bank (GCB).

In an interview with a leading Ghanaian broadcast, Manfred Bressey, head of Merban Investment Holdings says the mergers and acquisitions help banks complement each other either in resources or strategy.

However, while mergers and acquisitions are mostly connected to the fear of job losses, Merban believes a properly planned M&A process could avert the negative implications.

“It’s not always the case that there will be job losses when institutions merge or are acquired. If the main intention is to mobilize resources or complement each other on various aspects and it’s done in a properly planned manner, then there should be roles to be played by everyone, except in cases where the roles are to be duplicated.”

But even as banks move to consolidate in Kenya’s vibrant industry, CBK Governor Patrick Njoroge warns that the process (of consolidation) should be done naturally and not in a forced manner.

“Consolidation should be done in the context of improvements in the business models that the banks are doing or would be doing. So we need to think, ‘what is this that I need to do different to improve my business model and also to be more resilient,” Dr. Njoroge says.

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