Jo’burg agency says CBA merger to drag earnings
South Africa agency Global Credit Ratings (GCR) expects the proposed merger between Kenyatta family-linked Commercial Bank of Africa (CBA) and NIC Bank to drag earnings for up to three years.
The agency says despite long-term benefits expected from the merger, operational and technical risks of combining two banking systems, funding structures and cultures may slow down future earnings.
The agency has changed the outlook of the two lenders from ‘stable’ to ‘evolving’ pending more information on the merger timelines and its medium to long-term financial and operational impact.
“We also anticipate the long-term integration costs to be material, causing a drag on earnings for a two- to three-year period, limiting the positive effect of the merger,” said GCR in latest separate ratings on the two entities.
“GCR also notes with caution that aggressive expansion on the back of increased scale of the combined bank could have adverse long-term effects on the bank’s performance and competitiveness.”
CBA’s nine-month profit to September 2018 fell 16 per cent to Sh3.36 billion while that of NIC dropped by 3.2 per cent to Sh3.3 billion during the same period.
According to GCR, potential increases in asset and liability exposure concentrations may also be an issue, especially considering the limited number of high-quality borrowers and depositors in the region.
The agency said there was a possibility of overlaps from both banks having large exposures to the same asset or liability counterparties.
However, the combined bank is expected to emerge as the third biggest lender in Kenya by total assets and the second biggest by customer deposits.
This may ultimately result in lower funding costs for the combined bank through improved ability to mobilise deposits, according to the rating agency.
“It may also increase the lending capacity of the bank to the private sector and government’s focus areas, which has come under pressure in Kenya since the introduction of interest rate caps,” said GCR.
However, if the merger proves to be difficult, raising operational risks and damaging the operating performance, capital and funding stability, GCR says it will lower the ratings.
CBA and NIC expect to conclude shareholder and regulatory approvals in the first and second quarter of 2019, respectively.