Kenya has witnessed consolidation of banks since independence, driven by different factors. In the recent period, the Government through Sessional Paper No.2 of 2012 on Kenya Vision 2030, and other legal frameworks, encourages Mergers and Acquisitions (M&As) within the banking sector with the primary objective to develop a sound and resilient financial system. A robust financial system underpins economic growth and sustainable development of the country by enabling funds to flow to the most productive uses.
With the global financial crisis in 2007-09, M&As have accelerated as governments, globally, took significant policy interventions in response to the systemic crisis which threatened the global financial system. Other policy measures advocated for in enhancing stability of the sector include increased capital requirements, change in business models, increased competition and increased cross-border operations, among others.
So far, a total of 47 M&A deals have been closed with about 7 M&A deals closed within the last six years as reported in the Table 1. The most recent most popularized deals are National Bank of Kenya (NBK) and Kenya Commercial Bank (KCB), and Commercial Bank of Africa (CBA) and NIC Bank.
Table 1: Mergers and acquisitions in the Kenyan banking sector since 2014
Source: Central Bank of Kenya website 2020) and Cytonn Investment Fund Reports (2014-2020
The Government has put in place legal and regulatory frameworks for continuous supervision and monitoring of M&As. The key statute of M&A is the Competition Act, which came into force in 2011. Other relevant legal and regulation frameworks and policy documents which support the M&A processes have evolved as outlined in Table 2. These frameworks provide guidelines and requirements of banks undertaking M&A in Kenya, COMESA and EAC. In providing the guidelines, the frameworks protect against systemic risk, which has a multiplier effect on all financial institutions leading to a greater effect of bank failure in the economy.
Table 2: M&A legal and regulation framework
The changing regulatory environment and need for business growth and expansion has played a significant role in M&As. For example, the Basel III framework sparked a major re-organization in the Kenyan banking sector. The framework, which was established in 2012 and was implemented in phases up to 2019, with its main thrust being enhancing safety and stability in the sector, required banks to build a core capital of at least Ksh 1 billion, improve the quality and quantity of liquidity standards, leverage ratios and enhance their operation and financial disclosures. The capital adequacy requirements prompted smaller banks or financially unhealthy banks with low capital base to seek alternative mechanisms for continued survival. Some of the mechanisms include: merging with fellow smaller banks, being acquired by bigger banks, increasing efficiency and effectiveness of the operations, and floating additional shares or bonds in the bourse. As envisioned by Basel III, M&A deals have been viewed as most preferred by small banks or the struggling banks in attempt to raise the required levels of capital.
One of the M&A deals which was accelerated by the Basel III requirement is the merger of KCB and the NBK. National Bank, which commenced its operations as a State bank before it went public, formerly closed its doors in September 2019 after considerable deterioration of its operational performance and declined profits leading to inadequate capital and liquidity. Its total capital to risk weighted assets ratio, which had declined over time since 2008, was severely below the statutory requirements by 2019, triggering the option to be acquired by a financially healthy partner. The ailing bank entered a deal on a share-swap basis for which every 10 shares of NBK were swapped with 1 share of KCB, enabling KCB to acquire 100% NBK and thus expanding its market share of 29.3% to 30.0%. Similarly, Fidelity Bank challenge in meeting the capital statutory requirement of capital adequacy and threshold liquidity level as per the Basel III requirements bolstered its acquisition by the SBM holdings.
The need for business growth and expansion of network especially with a focus on technology orientation has also contributed to the recent wave of M&As. Incorporation of technology in a bank’s operation reduces the cost of operations, increases operation efficiency and introduces new products or services to the existing bank’s portfolio. A good case in point of M&A transaction, which was technologically oriented is the merger between CBA and NIC Bank. Motivated by the need to enhance revenue growth, optimize its operations, and scale for growth, NIC bank sought to be acquired by CBA Bank, which has strong leadership in digital banking. The deal, which was executed in a share-swap basis of 53:47 ratio in November 2019 resulted into NCBA bank, a franchise whose value is envisioned to be ranked as a tier-one bank. Given that both banks previously engaged in corporate banking, the combined synergy accords the newly formed entity a possibility of becoming a market leader in the corporate banking segment in Kenya.
Furthermore, the need to scale to markets the regional and international markets has been highlighted to considerably influence the increase of M&As in the Kenyan banking industry. Expanding globally provides the new entities with new possibilities of finding new markets, accessing larger markets, acquiring greater financial power and influence, benefitting from various tax advantages, among other reasons. A good example of a bank that has sought to expand geographically through aggressive regional acquisition is the Equity Bank. Its geographical diversification to Uganda, South Sudan, Zambia, Mozambique, Tanzania, Rwanda with the latest acquisition being Banque Commercial du Congo in November 2019. So far, the massive acquisition has yielded positive results, which has enhanced its balance sheet agility with analysts predicting it to attract more banks for mergers and acquisition. Currently it has customers in excess of 13.7 million in Africa, making it be one of the largest commercial banks in terms of clientele base. Moreover, DTB acquired Habib Bank, Kenya whose presence in Nairobi, Mombasa and Malindi was inspired by the need to expand its customer base. Currently, DTBK has a presence in Kenya, Tanzania, Uganda and Burundi.
Portfolio diversification through M&A has gained traction within Kenya’s financial sector. Firms within the financial services sector have begun venturing into mainstream banking sector through M&As. For instance, Centum which is a leading quoted investment company has acquired 79.93% ownership of K-Rep Bank, which later rebranded to Sidian Bank. Such acquisition was geared towards increasing the diversification of the investment company in line with its strategic objective to increase its presence within the commercial banking services. Similarly, Mwalimu Sacco, an institutional savings and credit co-operative society, in quest of expanding beyond Sacco sector to mainstream banking services, acquired the low capitalized Equatorial Bank. The acquisition was to enable the Sacco to collect deposits from beyond its membership, access funds at lower rates, venture into trade finance and offer its members ATM services.
M&As have saved financially struggling banks in brink of collapsing, which would otherwise result to systemic risk within the sector. This, however, does not guarantee the improved performance of the resulting merger entity. While some banks benefit from the merger synergy, others struggle with their performance indicators dipping. Mostly, such failures have been linked to poor strategic fit between the merging entities. Their differences in the objective and strategies may lead to friction, which undermines the performance of the newly formed entity. In other cases, poor due diligence by the acquirer has been blamed to the conglomerate failure.
With continued regulatory and technological dynamics, it is possible that M&As continue to proliferate in the banking sector. Thus, it is important that the government streamlines the guidelines required for M&A process. Currently, the existing regulatory framework guiding M&As consists of multiple independent regulators, each controlling a portion of the M&A process. The need to comply with multiple requirements and seek multiple consent from each of the regulators increases the bank’s compliance cost since the banks have to pay fees to the regulators, and engage external legal counsel and M&A experts. Additionally, the procedural technicalities as a result of the fragmentation, which is often bureaucratically long, discourages potential banks, especially by foreign investors, to engage in the process. For instance, where there is conflict between various provisions, the Competition Act provisions are considered supreme. Addressing such fragmented legal and regulatory issues would increase their collaboration and synchronization, and reduce the complexity of the M&A process, which would contribute to increase M&As within the Kenyan banking sector.
Authors: Dr. Judith Nguli and Ms. Grace Kyule