Majority of the deals are tier 1 banks going for struggling tier 2 and 3 lenders
Kenya’s banking sector is on an evolution path evidenced by the high number of mergers and acquisitions being witnessed; a trend the government is hoping will realign and strengthen the sector.
The most recent is last week’s offer by the country’s largest bank by asset-KCB, which has made a move to acquire a hundred per cent (100%) of the ordinary shares in National Bank of Kenya (NBK).
This is the sixth deal in the last nine months (between August 2018 and April this year) with a total 13 banking merger and acquisitions in the last six years.
Majority of the deals are tier 1 lenders going for smaller struggling banks in tier 2 and tier 3, in the market which has a total of 42 commercial banks and one mortgage finance institution-Housing Finance.
KCB, which is tier 1, is seeking to acquire NBK which is a tier 2 lender, both listed on the Nairobi Security Exchange (NSE).
In the deal which has a book value of Ksh6.6 billion (USD65.1 million), KCB offer will be by way of a share swap at a ratio of 10:1, 10 ordinary shares of NBK for one ordinary share of KCB, whose shares are currently trading at Ksh4.7 and Ksh45.0, respectively as at April 18.
Thus using the share swap ratio of 10:1, NBK’s 1.47 billion ordinary shares will be swapped for 147.3 million KCB shares.KCB will thus have to issue an additional 147.3 million ordinary shares to complete the share swap.
This will increase KCB’s total shares outstanding to 3.21 billion shares from the current 3.06 billion shares, and current shareholders will be diluted by 4.6 per cent.
“The acquisition of the Offer Shares by the Offeror is also stated to be subject to several conditions, including the Company delisting from the Nairobi Securities Exchange upon acceptance of the Offer, the conversion of the 1,135,000,000 preference shares in the capital of the Company to 1,135,000,000 new ordinary shares and procurement of regulatory approvals from, amongst others, the Capital Markets Authority, the Central Bank of Kenya, and the Competition Authority of Kenya,” NBK said in a public statement.
The deal comes barely four months after Commercial Bank of Africa (CBA) and NIC Group announced a merger plan, on December 6, 2018.
Last week, the shareholders of CBA approved the proposed merger and further approved and ratified the merger agreement and other key transactions documents between the merging entities.
READ: Kenya’s wealthiest families shake the local banking industry
“Following the shareholders’ approval and subject to applicable law, various conditions precedent set out in the mergers agreement as well as obtaining the necessary regulatory approvals, the boards of directors of the merging entities will now proceed with the consummation of the proposed merger through the preparation and execution of other ancillary or administrative agreements and documents which will be required to implement the proposed merger,” CBA management announced.
Industry players are now projecting more mergers and acquisitions as stronger banks court struggling lenders on the lower end, which are struggling to remain afloat in the wake of increased competition in the market.
This is in the wake of a tough business environment in the country where banks are struggling to navigate the capping of interest rates which came into place in 2016, a regulation that has denied banks the huge profits previously earned from their loan books.
The law caps interest rates chargeable by banks (on loans) at four percentage points above the Central Bank of Kenya (CBK) which is currently at nine per cent (9%). Previously, banks could charge as high as 42 per cent on a loan facility.
The mergers are not a surprise, according to investment firm Cytonn.
“The transaction (KCB-NBK) is in line with our expectation of increased consolidation in the banking sector as players with depleted capital positions become acquired by their larger counterparts or merge together to form well-capitalized entities capable of navigating the relatively tough operating environment induced by price controls on lending rates, and exacerbated by the stiff competition,” Cytonn says in its weekly review.
According to Cytonn Investment Senior Manager Johnson Denge, Kenya’s banking sector consolidation will continue to happen and it will lead to a more stable, safer banking sector.
“Smaller banks constrained in capital, and struggling in their operations are likely to continue receiving take-over offers, which would present the best case scenario to navigate the current competitive banking sector landscape,” Denge notes.
The investment firm notes that transactions are happening at “significantly cheaper valuations”, perhaps due to the smaller banks’ relatively poor performance, leading to liquidity constraints, which may warrant even further capital injections, hence the cheaper acquisition costs.
Recent major deals, apart from the KCB-NBK and CBA-NIC, include the acquisition of Jamii Bora by CBA Group in a transaction valued at Ksh1.4 billion(USD13.8 million). The 100 per cent acquisition was announced in January.
In the same month, AfricInvest Azure made a move on Prime Bank seeking a 24.2 per cent stake in a deal valued at Ksh5.1 billion (USD50.3million).
In December last year, KCB made an advance on under receivership Imperial Bank in an undisclosed deal. In August, SBM Bank made a move to secure 75 per cent of Chase Bank(undisclosed).
Others were Diamond Trust Bank’s move on Habib Bank where is took 100 per cent control in a Ksh1.8 billion (USD17.8 million) deal in March 2017.
This was after SBM Holding acquired Fidelity Commercial bank the previous year in a Ksh2.8 billion (USD27.6 million).
In the same year, M Bank had acquired a 51 per cent stake in Oriental Commercial Bank at Ksh1.3 billion (USD12.8 million) while I&M acquired Giro Bank at Ksh5 billion(USD49.3 million).
Other previous deals are the acquisition of a 75 per cent stake in Equatorial Commercial Bank by Mwalimu Sacco in 2015 at Ksh2.6 billion(USD25.6million).
In 2014, Centum acquired a 66 per cent stake in K Rep Bank at Ksh2.5 billion(USD24.7 million) while GT Bank acquired 70 per cent of Fina Bank Group in 2013 at Ksh8.6 billion (USD84.8 million).
CBK governor Patrick Njoroge has been calling on straggling banks to merge to form stronger lending institution which will go a long way in supporting growth in the country, mainly funding of mega projects where the government is forced to borrow heavily from external markets.
