Capital hitch could drive small Kenyan banks to seek buyouts
Kenyan banks have been reporting shrinking profit margins in recent times, with market analysts saying that several small and medium-sized lenders could soon seek buyouts to ease a financial strain that has left their shareholders with no returns.
The EastAfrican understands that Transnational had been looking for capital injection in exchange for equity to run its agribusiness segment, but managing director Sammy Langat said the call has since been rescinded after raising the required funds.
The banking sector has seen acquisitions of eight small and medium-sized lenders over the past five years, as their management and regulators sought to avoid a potential crisis prompted by depositors shifting funds to the big banks.
And things will only get worse, predicts Eric Munywoki, an analyst at Genghis Capital, when all banks will start making higher provisions on their lending in line with the new global accounting standard, IFRS9.
“The smaller banks will have to restructure their balance sheets. It is a painful but necessary process. Probably we would see foreign banks looking at Kenya’s small banks when they become stressed assets so that they can pick them at a much discounted price,” said Daniel Kuyoh, senior investment analysts at Alpha Africa asset managers.
“We are surprised that some of the smaller banks have managed to stand this long, as we would have expected weaker banks [that don’t serve a niche, or don’t have a clear deposit gathering strategy], to be forced to merge or be acquired,” said Cytonn analysts.
“We however expect that the sustained effects of the rate cap and the reduction in the transition period for IFRS 9 adoption to have an effect on profitability and capital levels going forward and therefore still lead to more consolidation in the industry.”
The National Treasury and the Central Bank of Kenya have put up a spirited fight to repeal the interest rates cap, but their efforts have been met with opposition from Parliament, which argues CBK has failed to enforce the law as required.
In March this year, the Central Bank lowered the policy lending by 50 basis points for the first time in 18 months to 9.5 per cent from 10 per cent pushing banks to reprice loans for existing borrowers from 14 per cent to 13.5 per cent.
The controlled interest rate regime has been blamed for stifling growth in private sector credit, as banks were unable to price risky borrowers in the set margins and instead opted to channel funds to government securities with higher returns.
“We expect this to continue going into 2018, as banks seek alternative sources of income to boost profitability. We believe revenue and product diversification is one of the core opportunities for the banking sector,” according to Cytonn Investments.