Masaryk University Faculty of Economics and Administration Finance & Accounting

ASSESSMENT OF MERGERS AND ACQUISITIONS ON THE PERFORMANCE OF SELECTED COMMERCIAL BANKS IN KENYA

Master’s Thesis

Supervisor: Author: Ing. Petr VALOUCH, Ph.D. Brigid MUTAI

Brno, 2019 MASARYK UNIVERSITY Faculty of Economics and Administration

MATER’S THESIS DESCRIPTION Academic Year: 2018/2019

Student: Brigid Mutai

Field of Study: Finance (Eng.)

Title of the Thesis: Assessment of Mergers and Acquisitions on the Performance of Commercial Banks in Kenya.

Title of the Thesis in English: Assessment of Mergers and Acquisitions on the Performance of Commercial Banks in Kenya.

Thesis objective, procedure, and methods The aim of the master thesis is to assess the effect used: of mergers and acquisitions on the performance of Commercial banks in Kenya. The structure of the thesis and methods used: - Introduction: identification of the purpose of the thesis, illustration - of the research problem & statement of study objectives - Review of Literature on the Mergers & Acquisition: theoretical literature and empirical literature - Research methodology: the research design, data collection procedure, and method of data analysis. These will entail: - The quantitative analysis of the performance indicators (i.e. profitability, efficiency, solvency, lending intensity & risk profile) - Quantitative analysis of the data- estimation of multiple regression - equation to determine the effect of the independent variables on the dependent variable - Results of the study and discussion of the results - Summary of findings, conclusions based on the findings and recommendations

Extent of graphic-related work: According to thesis supervisors’ instructions

Extent of thesis without supplements: 60-80 pages

Literature: GATTOUFI, S. and AL-MUHARRAMI, S. Assessment of mergers and acquisitions in GCC banking. International Journal of Accountingand Finance, 2014, roč. 4, č. 4, s. 358-377.ISSN 1752- 8224. GHATAK, A. Effect of mergers and acquisitions on the profitability of India pharmaceutical. Research Journals of Social Science & Management, 2012, roč. 2, č. 6, s. 131-138. ISSN 2251-1571. RASHID, A. and NAEEM, N. Effects of mergers on corporate performance: An empirical evaluation using OLS and Bayesian methods. Borsa Istanbul Review, 2017, roč. 17, č. 1, s. 10-24. ISSN 2214-8450. HUH, K. The performances of acquired firms in the steel industry: Do financial institutions cause bubbles?. The Quarterly Review of Economics and Finance, 2015, roč. 58, č. 2, s. 143-153. ISSN 1062- 9769.

Thesis Supervisor: Ing. Petr Valouch, Ph.D.

Thesis Supervisor’s Department: Department of Finance

Thesis Assignment Date: 2018/12/13

In Brno, date: 2019/05/09

Author’s Name: Brigid Mutai

Thesis Title: Assessment of Mergers and Acquisitions on Performance of Commercial Banks in Kenya.

Department: Department of Finance

Thesis Supervisor Ing. Petr Valouch, Ph.D.

Year: 2019

Abstract:

The purpose of this thesis was to assess the effect of mergers and acquisitions on the performance of commercial banks in Kenya. Theory suggests that mergers and acquisitions improve performance. The improvements result from synergies such as economies of scale, enhanced market power, greater lending capacity, and enhanced technology. The research evaluated the pre-merger and acquisition performance of the banks, and the post-merger performance. The study covered the period 2008-2018. Performance in this study was indicated by profitability, efficiency, solvency, lending intensity, and risk. The performance measures were computed using ratios. The study established that mergers and acquisitions do not necessarily improve bank performance as in most cases this restructuring move resulted in deterioration of performance.

Keywords:

Merger, Acquisition, M&A, Bank, Kenya, East Africa, Lending Intensity, Solvency, Efficiency, Profitability, Risk Profile, ROA, ROE

Author’s Statement

I hereby certify that this is my original work, Assessment of Mergers and Acquisitions on the Performance of Selected Commercial Banks in Kenya, which I am submitting for assessment. The whole document is my own work developed under the supervision of Ing. Petr Valouch, Ph.D. Where the work of others has been used in the study, it has been acknowledged and properly referenced using APA notation. The data used in the thesis was seen and discussed with the thesis supervisor.

In Brno, 9th of May 2019

______Brigid Mutai

Acknowledgement

I would like to sincerely thank my thesis supervisor Ing. Petr Valouch who agreed to read drafts of my paper and gave feedback that enhanced the quality of the paper. Also, I would like to thank my friends for providing corrections and insight as well as my family for their constant encouragement and support.

Table of Contents

1. INTRODUCTION ...... 7 2. LITERATURE REVIEW ...... 8 2.1 Mergers and Acquisitions ...... 8 2.2 Types of Mergers and Acquisitions ...... 9 2.3 Trends in Mergers and Acquisitions in the Banking Sector ...... 12 2.4 Trends in Mergers and Acquisitions in the Banking Sector in Kenya ...... 13 2.5 Theoretical Underpinnings ...... 15 2.5.1 Synergy Hypothesis ...... 15 2.5.2 Hubris Hypothesis ...... 16 2.5.3 Differential Efficiency Theory ...... 18 2.6 Motives for Mergers and Acquisitions in the Banking Sector ...... 18 2.8 Valuation of Mergers and Acquisitions ...... 24 2.9 Mergers and Acquisitions and Firm Performance ...... 26 3. RESEARCH METHODOLOGY ...... 30 3.1 Conceptual Framework ...... 30 3.2 Firm Performance ...... 31 3.3 Research Design ...... 35 3.4 Population of the Study ...... 36 3.5 Scope of the Study ...... 36 3.6 Study Data ...... 37 3.6.1 Guaranty Trust Bank (Kenya) Ltd - Merger ...... 37 3.6.2 Equatorial Commercial Bank-Merger & Acquisition ...... 37 3.6.3 The Cooperative Bank of Kenya – No Restructuring ...... 38 4. RESULTS & DISCUSSION ...... 39 4.1 Presentation of the Statistics on Selected Banks’ Performance ...... 39 4.1.1 Equatorial Commercial Bank Ltd ...... 39 4.1.2 Guaranty Trust Bank Ltd ...... 42 4.1.3 Cooperative Bank of Kenya ...... 46 4.2 Assessment of the effects of M&As on Performance ...... 49 4.2.1 Effects of M&As on Profitability ...... 54 4.2.2 Effects of M&As on Solvency ...... 57 4.2.3 Effects of M&As on Efficiency ...... 59 4.2.4 Effects of M&As on Lending Intensity ...... 61 4.2.5 Effects of M&As on Risk Profile ...... 63 4.2.6 A comparison of Performance among the banks ...... 64 5. CONCLUSION AND RECOMMENDATIONS ...... 66 5.1 Conclusion ...... 66 5.2 Recommendations ...... 67 5.3 Limitations ...... 69 REFERENCE LIST ...... 71 LIST OF TABLES ...... 78 LIST OF FIGURES ...... 79 LIST OF APPENDICES ...... 80

1. INTRODUCTION

The Republic of Kenya has the largest economy in the East African region and one of the most diverse and most developed financial sectors in Africa and the world. As per 2016, the country had 44 commercial banks operating within the country with more than 5.43 branches per 100,000 adults. This number has more than doubled since 2004 to 2016 according to The World Bank. Over the last few years, there has been an increase in the number of mergers and acquisitions in the banking sector in Kenya. The mergers and acquisition are both local and foreign investments seeking to either expand their market or to enter the East African Market.

The increasing number of mergers and acquisitions has attracted various scholars who have researched various aspects of the topic. The main attention of the various academics is an understanding of the reasons and motivations for these mergers and acquisitions. Although various studies have been done on the topic, there seem to be different conclusions on the justifications and reasons for undertaking this strategic measure. As such, this study will investigate the effect of mergers and acquisitions on the financial performance of commercial banks in Kenya.

The study will be organized into various sections. The first section contains the literature review. In this section, various theories related to the topic of the study will be evaluated. The study will seek to investigate the validity of the theories. Further, in the literature review section analysis of various studies conducted to evaluate mergers and acquisitions both in Kenya and around the world will be presented. The study will also evaluate laws related to mergers and acquisitions. In this section measures of financial performance will be evaluated.

The second section of the study will contain the research methodology. This sets out the approach that will be used to fulfil the objectives of the study. In this section, the research population, location, data collection, and analysis methods will be provided.

The third section of the study will present the findings of the study, suggest recommendations and highlight the limitations faced while undertaking the research.

2. LITERATURE REVIEW

2.1 Mergers and Acquisitions

Reddy, Nangia, and Agrawal (2014) define a merger as a transaction that results in the consolidation of two legal entities while an acquisition as the process by which one firm takes ownership of another firm. The overall consequence of mergers and acquisitions is the consolidation of the assets and liabilities of two distinct entities. Mergers and acquisitions (M&A) can be hostile or friendly. This depends on the manner in which the proposal of the merger or acquisition is communicated to the target company.

Typically, M&As are handled confidentially, with the flow of information limited strictly to the board of directors as naturally publicly discussing a possible merger of two companies with an uncertain result might negatively influence both its employees’ performance and the trust in the bank’s products and services in the eyes of its customers. In situations where the M&A is friendly, the transactions are by the board of directors, but in situations where it is hostile, the board of directors of the target firm has no prior knowledge (Unoki, 2012).

The process of M&A usually begins with an official letter of intent sent by the bidder to the target party. This letter does not create a commitment on the part of the parties to the M&A but rather indicates that the parties commit to confidentiality and exclusivity. It is a measure to ensure that due diligence is applied as the transaction involves lawyers, accountants, advisors, and numerous other professionals. After due diligence is established, the merger agreement, share purchase agreement, or asset purchase agreement is drawn up. This agreement stipulates;

(i) Conditions which must be met by both the bidders and target firm. These conditions include the legal requirements and any issue that may significantly affect the target business;

(ii) Representations and warranties which are given by the target firm and pertain to the company position. These positions are taken to be true at the time of the transaction. The representations and warranties are often given with qualifiers, giving the information that is relevant. Typically, if the representation and

8 warranties are found to be false or misrepresentation, the buyer can claim a refund on a percentage of the purchase price (Avery & Crossley, n.d.).

(iii) A covenant which dictates the behaviour of the parties prior to and after closing the transaction. The covenant typically includes future income tax filings, tax liabilities, and post-sale restrictions between both parties

(iv) Termination rights which are put in the contract to mitigate against breach of contract or a failure to perform certain duties by the parties. These rights include fees and damages that must be paid in case the contract is ended by specific failures.

(v) Provisions pertaining to shareholders approval according to the country’s legislation.

(vi) Indemnification provision which stipulates that the indemnitor will indemnify, secure, and render harmless the indemnitee for losses that arise by the indemnitees as a result of the indemnitor’s failure to comply to the contractual obligations of the sales agreement.

2.2 Types of Mergers and Acquisitions

According to Martin (2015) firms take into consideration three factors when making a decision to go into an M&A. Firstly the firm considers the risk associated with the transaction. The firm evaluates the benefits versus the cost of M&A before taking any action. Secondly, the firms in an attempt to minimise the risks and to diversify, they undertake multiple bets in anticipation that some of the ventures may fail. Thirdly, the firm considers the changing business environment in which they operate. These considerations determine the type of merger and acquisition. The different types are:

(i) Horizontal Merger: This occurs when a firm takes over another firm that provides goods and services that are similar to those that are produced by the acquiring firms. The firms are in the same industry and at the same stage of productions. Usually, the firms are direct competitors. The main aim of this type of mergers is to eliminate competition. This will help the firm to increase its market share and increase revenues. Additionally, the firm will be able to achieve economies of scale as the cost of production reduces. The horizontal mergers also

9 result in cost efficiency particularly when administrative units and departments are merged into one. (ii) Vertical Mergers: This involves two firms within the same value chain coming together. The firms produce similar goods and services but have different stages of production. For example, a boutique could merge with a clothes factory. This would be considered a vertical merger considering the fact that the firms are in the same industry but have different production stages. One firm is in the primary sector while the other is in the secondary sector. A firm would prefer this type of merger as it would ensure a steady supply of goods and avoid disruption in the supply chain. Sometimes, this type of merger is undertaken with the aim of restricting supply to competitors. (iii) Concentric Mergers: These occur between companies that have the same customers in a given industry, but do not provide the same types of goods and services. The firms’ goods and services might be complements, for example, a company that produces DVD players might merge with a company that produces DVDs. The products of both firms are complementary. These mergers make it easier for consumers to purchase products as both goods and services go together. These mergers allow firms to reduce risks, provide access to resources and reduce marketing costs. (iv) Conglomerate Mergers: These types of mergers occur when firms operate within different industries and have different stages of production. These types of mergers are undertaken to diversify the firm’s business activities and to reduce risks. (v) Statutory mergers occur whereby the bidding firm maintains its legal status, but the target firm is dissolved and ceases to exist. The aim of this type of merger is to transfer the assets and capital of the target firm to the bidding firm without it being forced to maintain the target firm as a subsidiary. (vi) Consolidation merger occurs when the target and acquiring firms are dissolved and new legal entities formed. The aim of this type of merger is to diversify goods and services and capital investment (vii) Arm’s length mergers which are undertaken by disinterested directors and stockholders. In this situation, the directors are not acting effectively and

10 efficiently during the transaction process. They have no consideration for the stockholders. As the directors may not be faithful to the stockholders, it is important that the stockholders be interested in the bargaining process. (viii) Acquire-Hire, in this transaction, the acquiring firm is only interested in the target firm’s talent rather than its products and services. The target firm often shifts its focus from its day to day business to the acquiring firm. These types of transactions are common in technology firms such as Facebook, Twitter, and Yahoo that seek to get the talent of existing firms.

Mergers entail legal amalgamation of two or more firms. The merger transactions happen at the firm level and not at the shareholders level. For mergers to occur, there must be a consensus of all the owners of the firms involved; thus there are no hostile takeover mergers (DePamphilis, 2011).

Figure 2 presents a categorization of the M&A process. Merger by absorption occurs when one company sells its entire shares to one or more other entities and ceases to exist. Merger by establishment occurs when two or more firms come together to form a new entity. The merging firms are dissolved (Vomáčková, 2005). Figure 3 illustrates the restructuring process that accompanies the process of mergers and acquisitions.

Figure 2. 1 Corporate Restructuring Process

Corporate Restructuring

Operational Financial

Spin-Off Work Force Joint Strategic LBO Reorganization Takeover Buyout Divesture Stack Buyback Reduction Alliance MBO Liquidation Carve-Out

Friendly Hostile Takeover In Bankruptcy Takeover

Hoostile Acquisition of Outside Merger Consolidation Tender Offer Assets Bankrupticy

Statutory

StaSubsiary

Source: DePamphilis (2011)

11 2.3 Trends in Mergers and Acquisitions in the Banking Sector

Over the last few decades, the banking industry has become increasingly global, with geographic and territorial boundaries being significantly reduced. The need for mergers and acquisitions is driven by the growth in the competition that has been brought about by the liberalisation of capital movements, the integration of financial systems across borders, and financial innovations (Vispute, 2008). Owolabi and Ogunlalu (2013) indicated that two structural changes are driving M&A activities in the banking sector.

Firstly, banks and other financial institutions are consolidating to become bigger. Secondly, there has been a significant diversification in the financial service offered by single entities; this is achieved through mergers and acquisitions. The authors point out mergers and acquisition as one of the various strategies that can be taken by numerous institutions to achieve growth and increased market share. It is evident from the paper that M&As seems to be the best alternative used by financial institutions in their desire to achieve the firm’s objective. Most financial institutions tend to operate under similar terms and conditions, and as such, it is easier for such institutions to merge or acquire smaller firms.

Liang (2013) avers that consolidation and aggregation within the banking sector are now normal with firms that are competitors becoming one firm in a few years. This represents a trend in inorganic growth as banks are becoming more sophisticated and need to reduce the risks associated with their activities.

The M&As in the banking sector are also being spurred by the loosening of regulations in the financial sector developments allowing for bigger corporations (Mitema, 2014). In Africa, M&A activity is being driven by an increase in disposable income and the growth of the middle class, population growth which has increased the bankable population, growth of small and medium-sized enterprises, and financial innovations (Wanka, Maredza, & Gupta, 2017).

A report by Baker Mackenzie Johannesburg shows that the M&A activity in Africa is very robust but has been significantly impaired by corruption, political uncertainty, and instability across the continent (CNBC Africa, 2018). However, rapid developments in various economies have spurred the need for M&A as investors see

12 the potential in the continent. The organisation of financial services and their dependence on investment technology and innovation is seen to attract foreign investors. The report is important for this research as the author clearly pointed out the challenges that have hindered mergers and acquisition for quite some time and was keen on recognizing the potential that the continent has. The report thus points out the issues that may result in a reduced impact of mergers on the performance of the banks.

2.4 Trends in Mergers and Acquisitions in the Banking Sector in Kenya

In Kenya, the ability of the banking sector to be relevant and to fulfil its objectives has been continually punctuated by various vulnerabilities brought about by systemic distress, and macroeconomic shocks, which inevitably requires intervention by the monetary authorities and the government (Waweru & Kalani, 2009).

The banking sector in Kenya has undergone four stages:

(i) The first stage was during the pre-independence era where banking was guided by a Laissez-Faire framework. During this period there were no domestic banks.

(ii) The second stage was the post-independence period in 1966- 1985 where the Central Bank of Kenya (CBK) exercised control over the banking sector ensuring that only fit and proper entities were granted banking license subject to strict controls developed by the government.

(iii) The third stage was the structural adjustment programme (SAP) and the liberalisation of the economy. This stage saw the government liberalizing the interest rates, exchange rates and removing price controls this occurred during the period 1985-2003. During this period, there was free entry into the banking sector which was often due to political patronage.

(iv) The fourth stage is the current stage whereby there has been an emphasis on consolidation with stress being on recapitalization, financial inclusion, financial stability, and financial innovation (Nyasha & Odhiambo, 2012).

According to the CBK (2018), there are approximately forty commercial banks operating in Kenya as at 31st July 2018. According to the Central Bank of Kenya (2018),

13 there have been a series of merger and acquisitions in the banking sector in Kenya due to the need to meet the increased capital requirements, increase the operating area and market share, and increased globalization of banking sector.

Appendix 1 provides a schedule of M&A in Kenya’s banking sector. In 2008, the government of Kenya reviewed the minimum core capital for banks from Ksh 250 million to Kshs. 1 billion. Subsequently, commercial banks merged or acquired others in order to meet capital requirements. In addition to the capital requirements, commercial banks in Kenya merge with or acquire other banks as they hope to expand the distribution networks and market shares. The purpose of this study is to assess the effect of mergers and acquisitions on the performance of Commercial banks in Kenya.

Mergers and acquisitions in Kenya are governed by a number of legal statutes including the Capital Markets Act, the Capital Markets Regulation, the Competition Act, and the Companies Act (Mugo, 2015). In Kenya, all companies wanting to undertake a merger are by law required to notify the relevant authorities in writing. In the notification the firms are required to provide a signed copy of the purchase and sale agreement; the audited financial statements for the last three fiscal years; resolutions of the boards; list of employees; and any documents pertinent to the M&A (MMAN Advocates, 2017). The competition authority in Kenya sometimes requires the firms to supply additional information as and when it sees fit.

After receiving notification of an intended M&A, the relevant authorities in Kenya are given sixty days to review the documentation and give approval or denial. The authorities in Kenya have the right to hold conference hearings with all parties in order to ensure that all matters pertaining to the merger and acquisition are well spelt out. Where M&A’s are considered to be very complex, the law in Kenya allows for an extension of the review period to 120 days (MMAN Advocates, 2017).

In Kenya, where the acquisition is friendly, it is referred to as a structured negotiation offer. These negotiations could be either formal or informal with investors being allowed to subscribe for new share, which results in the dilution of existing shareholding. For firms listed on the Nairobi Securities Exchange, acquisitions are regulated by the Capital Markets Authority (CMA). The CMA regulations require that

14 the bidders should accumulate a specific percentage of ownership by way of single acquisition or creeping acquisition (Rebelo and Kaniaru, 2015).

In Kenya, in order to ensure competition, the government through the Competition Authority provides protection for small, viable, and locally owned entities from the possible aggressive action of larger entities which may engage in M&A in order to create a monopoly. The law prohibits restrictive trade practices, monopolies, and the concentration of the ability to determine the price and economic power of a few firms.

Analysis by Gill (2015) indicates that Kenya leads the East African region in the M&A market. The country offers an entry point for companies hoping to expand into the East African region due to the countries strategic geographical position, thriving private sector, conducive conditions provided by the government, good infrastructure, and highly skilled human capital. Trend analysis indicates that deal volumes have been significant particularly in the financial sector with sectors such as manufacturing, tourism, and healthcare seeing little M&A activity. The banking and insurance sector has seen significant changes in the regulatory frameworks that have presented fertile ground for M&A. Additionally, the banking sector has seen growth due to enhancement in finance-related technology services which have increased the avenues for banking.

2.5 Theoretical Underpinnings

There are various theories that explain the reason why firm choose to engage in M&A activities. The study discussed three theories to be discussed hereafter.

2.5.1 Synergy Hypothesis

Corporate synergy is achieved when firms interact with each other congruently either through mergers or acquisitions (Megginson & Nail 1998). Sirower (1997) defines synergy as an increase in the competitiveness and the returns resulting from the merger or acquisition of two firms beyond the level the firms would have achieved had they been operating independently.

The word synergy arises from the Greek phrase ‘sunergos’ which means separate entities are working together. According to Sevenius (2003), the positive effects and results of synergies are the primary motivation for M&A. The synergies involve the

15 gains achieved from the improved efficiency at different levels in a firm. Ombaka and Jagongo (2018) identified different types of synergies including:

(i) Financial Synergies: The amalgamation of the two firms each with different cash flows and investment opportunities often produces financial synergies. These synergies include lowering the cost of capital, and tax savings. Additionally, the debt capacity of the new firm is higher than that of the individual firms.

(ii) Operational Synergies: These are realized from horizontal, vertical, and conglomerate mergers. In this theory, it is taken that economies of scale are present before and after the merger.

This theory is relevant to the study as it indicates the benefits that the firm receives from mergers or acquisitions. This study, however, hopes to test this hypothesis.

2.5.2 Hubris Hypothesis

The Hubris hypothesis was put forward by Richard Roll in 1986. The aim of the hypothesis was an attempt to explain the reason why mergers and tender offers are made by firms and to establish if they brought an increase in the aggregate market value. It was an expansion of the work of Jensen and Ruback (1983). In the hubris hypothesis Roll (1986) advanced the explanation for corporate takeover. Hubris was investigated from the point of view of the decision maker whereby the bidding firm offered a price higher than the market valuation of the target firm thus creating positive price valuation error. Roll (1986) took the approach that the takeover gains are often overestimated if they exist at all. Thereby raising the question as to why managers undertake mergers and acquisitions.

To demonstrate the point, Roll (1986) evaluated the M&A process:

(i) Firstly, the firm identifies the potential target company

(ii) Secondly, a valuation of the value of the target firm is undertaken in some instances non-public information is taken into consideration.

(iii) Thirdly, the value computed is compared with the current market price.

Where the value computed is less than the current market price, and then the bid is abandoned. If the value computed is higher than the current market price, then the bid

16 is made. However, in some instances where there are no potential synergies or other discernible synergies identified but none the less the bid is made. Roll (1986) considered that the price was an average and that not all individuals behave rationally.

An example of positive price error occurred in 1991 when AT&T acquired NCR for $ 7.5 billion which was $4.2 billion above the current market price of NCR of $ 3.3 billion. Prior to the merger, AT&T had lost more than $ 2 billion. However, the company paid the overvalued price.

This according to Keller (1990), Shefrin (2002) and John, Liu, and Tafller (2010) can be described as hubris of management. Similarly, Stone (2014) and Hof (2014) indicated that the purchase of Whatsapp for $19 billion was an example of management hubris. Stone (2014) and Hof (2014) indicated that paying $ 19 billion of Whatsapp was overly optimistic.

According to Roll (1986), the behaviour of the management to overpay can be explained by psychologists who indicate that individuals do not often make a rational decision, particularly when faced with uncertainty. Roll (1986), relied on the work of Oskamp (1965), Tversky and Kahneman (1981), Kahneman, Slovic, and Tversky (1982) when making this argument. Roll concluded that M&As reflect the individual decisions of the management. John et al., (2010) demonstrated that hubris could be used to explain the premium paid and the value destruction in M&A deals. John et al., (2010) confirmed the findings of Malmendier and Tate (2008) that the market marks down the prices of the stock of the acquiring and target firms in situations where the management of both firms are exhibiting signs of hubris.

According to Malmendier and Tate (2008), the hubris hypothesis is a psychological explanation of why M&As occur. The management of the acquiring firm is prone to overestimate their ability to evaluate a possible takeover target. This overconfidence on the part of the management typically results in incorrect pricing of the target and wrong decisions. This affirms the findings of Hayward and Hambric (1997) that overconfidence of management enhances the probability of overpricing of an M&A transaction, which would leave the winning bidder with the winner’s curse which significantly increases the probability of failure (Dong, Hirschleifer, Richardson, & Teoh, 2006).

17 The Hubris theory is a psychological approach to the explanation of mergers and acquisitions. Roll (1986) argues that the managers might not necessarily act rationally in all situations hence contradicting one of the major tenets of finance and economics. In both finance and economics, the individual agents operating in the economy are assumed to be rational; making decisions that maximize their utility. Further, the review of the literature has established that most studies have not confirmed hubris behaviour. Additionally, most of the studies have been in advanced economies. In order to draw broad conclusions, it is necessary to test the hubris postulations in developing countries.

2.5.3 Differential Efficiency Theory

In this theory, where the management for company X is more efficient than that of company Y, if company X acquires company Y, the efficiency of company Y is enhanced raising it to the par of company X. The increase in efficiency is thus attributed to the M&A. According to this theory firms that operate below their potential are typically the target for M&A. Companies with higher efficiency are able to identify companies in their industry that are operating below their potential and make bids. However, there is potential for failure if the acquiring firm is not able to improve the efficiency of the target firm.

This theory suffers from one major setback. It is assumed that the performance of the acquiring firm will improve after the consolidation without indicating the changes that should be put in place in the acquiring firm to improve performance. The factors that impair performance in the acquiring firm may be transferred to the target firm.

2.6 Motives for Mergers and Acquisitions in the Banking Sector

Focarelli, Penetta, and Salleo (2002) identified four reasons for M&A of companies. Firstly, there are strategic factors which include enhancing the firm’s strategic position, increasing market share, and improving the firm’s resources. Secondly, there are economic factors such as establishing economies of scale. Thirdly, there are the personal motives which have to do with the agency problem and management hubris. Fourthly, there are market motives such as entering into new markets and acquiring additional capabilities.

18 Pasiouras, Tanna, and Gaganis (2011) and Kaur (2014) highlight that there are various reasons for M&A in the banking sector this includes increase in the market share and power, lower the risk level, expansion of opportunity, replacement of structures and units that are inefficient, diversification of products and services, economies of scope and scale, and hubris and managerial process.

According to Ayadi, Baussemart, Leleu, and Saidane (2013) banks use M&As to meet two objectives namely operating synergies which involve increasing the level of revenue and reducing costs, and financial synergies which entails lowering the cost of capital. Beccalli and Frantz (2012) state that banks M&As are driven by the economic environment, laws, and regulations with central bank decisions influencing the integration and restricting practices.

Al-Muhrrami and Gattoufi (2014) found that there was significant M&A activity in the member countries of the Gulf Cooperation Council (GCC). This was discovered to be stimulated by the high levels of liquidity in the banking sector which was brought about by revenues from oil and gas. Initially, the banking sector in the individual GCC countries was characterized by relatively small units. However, due to the ambitious development programmes developed by the government of the GCC the banks were encouraged to consolidate through M&A. These consolidations have been ongoing since the early 1990s. Further, Al-Muharrami and Guttoufi (2014) indicate that M&A transactions in the GCC have been stimulated by their membership of the World Trade Organisation (WTO).

The rules of the WTO require that member states open up their economies to foreign investments. Prior to joining the WTO, the United Arab Emirate (UAE) had put in place restriction on the licensing of foreign banks and the number of branches they could operate. Similarly, the government of Saudi Arabia had restricted the number of foreign banks in the country. However, since joining the WTO, the members of GCC had opened up their economies allowing foreign companies to operate.

In the Czech Republic Sedláček, Hýblová and Valouch found that mergers and acquisitions in the banking sector were driven by economic factors. These factors included simplification of management and administration of firms, tax advantages,

19 operational synergy, a fusion of control structures, enhancement of market positions, simplification of ownership, and better access to financing.

Kocmanová and Šimberová (2011) indicate that firms in the Czech Republic merge in order to enhance their profitability position, ensure continuity, and manage costs associated with usage. Maditinos, Theriou, and Demetriades (2009) assert that the changes in the regulatory frameworks specifically International Financial Reporting Standards, Basel II, and Financial Conglomerates Directives have stimulated banks in Greece to undertake M&A activities. Additionally, banks in Greece are merging and acquiring other banks was an attempt to reduce concentration in the local sector.

Selvam, Gayathri, Vasanth, Lingaraja, and Marxiaoli (2016) aver that firm performance is a relevant construct in the management of firms across the globe and is frequently the main objective of the firm. However, despite the relevance of firm performance, a review of the literature indicates that there is no consensus on firm performance.

Long (2015) indicated that firm performance could be indicated by profitability. Long (2015) argued that profitability is a good measure of performance as it indicates the ability of the bank to manage risks and expand its activities. Long (2015), measured profitability using traditional accounting measures such as return on equity (ROE) and return on assets (ROA).

These indicators were important for both management and for investors. According to Long (2015), ROE is an important indicator of performance as it indicates the direct assessment of the financial return of the shareholders’ investment; is easy to compute thus effortlessly available to investors and management and allows for comparison with other companies. Vanitha and Selvam (2012), indicate that profitability is a measure of the firm to earn revenue and pay its expenses. Cho and Pucik (2005) assert that profitability is a firm’s past ability to generate income.

Market Value is an indicator of the external assessment and expectation of the future performance of the firm. Lingaraja, Selvam and Vasanth (2015) aver that market value is determined by profitability and growth rates and indicates future expectations of market changes and competitive moves.

Table 2.1 provides various indicators of firm performance.

20 Table 2. 1 Indicators of Firm Performance

Firm Performance Sample Indicator

Return on Equity, Return on Investment, Gross Profit, Net Profitability Income, Economic Value Added

Tobin's Q, share prices, Dividend Yield, Volatility of Stock Price, Market Value Earnings per Share, Market Value Added (Market Value/Equity)

Increase in the volume of assets, increase in income, growth in Growth the number of employees, growth of market share

Turn-Over, Expenditure on Employee Development and Employee Satisfaction Training, Salaries and Rewards, Career growth, Organisational Culture

Variety of Products and Services, Number of repeat customers, Customer Satisfaction Customer Retention, Number of Customer Complaints, New Products and Services Launched,

Number of Project Meeting Environmental Standards, Recovery Environmental Performance of Environment, Use of Recyclable Materials, Rate of Recycling,

Green Policy, Environmental Compliance Report, and Environmental Audit Performance Environmental Review

Board Size, External Directors, Independence of the Board, Corporate Governance Insider ownership

Corporate Social Responsibility, Affirmative Hiring Policies, Social Performance Cultural Projects, Consumer Protections, Number of lawsuits filed against the firm

Source: Santos, & Brito (2012)

Often, the diversification of the firm seeks to reduce the level of risk and to maximize the returns given to the firm. Tsung-UuanTsay and Yeong-Jia (2006) indicate that maximization of shareholders and investors value is achieved through the better performance of the firm which is revealed on the stock market by an index of financial statements and other required information by the stock market.

Growth indicates the firm past ability to increase its size. Even though the size of the firm increases but the level of profits remains the same, the anticipated absolute increase in the amount of profit and cash generation will reflect in future periods (Rajesh et al., 2015). Employee satisfaction is an indication of the employees’ contentment to their jobs, duties, and responsibilities, their work environment, and their management. Selvam, Indhumathi, and Lydia (2012) indicate that it is important

21 to find out from the employees what they value the most and which skills need to be developed in order to enhance their skills and make them more productive.

According to Harter, Schmidt, and Hayes (2002), the level of satisfaction of employees is determined by the human resources policies in place at the organization. Satisfied employees translate to the firm being able to achieve and supersede its goals and ensure low turnover rates.

Customer satisfaction is an indication of how products and services produced by the firm meet the expectation of the consumer. It is one of the key indicators of firm performance. It indicates the intentions of the consumers to continue purchasing and their loyalty to the firm. According to Barney and Clark (2007) customer satisfaction increases the probability that the customer will be willing to pay for the firm’s goods and services, this willingness adds value to the firm and enhances its performance.

Abdulazeez, Suleiman, and Yahaya (2016) indicate that firm performance, particularly for banks and the financial institution, can be measured in various ways including financial ratio analysis, benchmarking, actual performance versus budget performance. Most of the literature on bank performance indicates that the objective of the banks is to ensure that earnings are at a level that ensures profits and minimise the risks taken when earning the returns.

Orlitzky, Schmidt, and Rymes (2003) indicate that there are three broad measures of performance of commercial banks namely market based (which indicate the return the investors earn), accounting based, and perceptual measures. Cochran and Wood (2009) suggest that accounting measures such as ROA, ROE, and Earnings Per Share are good indicators of bank performance as they indicate the efficiency of the bank.

These accounting indicators are subject to the discretion of the managers’ allocation of funds to different activities undertaken by the bank and reflect policy choices which are based on the internal decision-making capabilities. According to Cochran and Wood (2009), the accounting measures are a good indicator of management’s performance rather than the industry or external markets.

Reiman (2005), Conine and Madden (2006), as well as Wartick (2008) indicate that perceptual measures are good indicators of bank performance. These measures are obtained by asking respondents to indicate the bank’s soundness, financial position, 22 use of corporate assets, or financial goals achieved against those achieved by other industry participants.

Economic Value Added (EVA) is a key performance indicator (KPI) that was introduced in the early 90s by Stern Stewart & Co. It aims at measuring the true economic profit of the company by determining the financial performance of firms through the residual wealth. EVA is given by the difference between the cost of capital and the operating profit, adjusted for taxes (Venanzi, 2011). In other words, it is the economic profit of a firm.

This far we have only mentioned the traditional key performance indicators that have been widely used when comparing company performance. Most of these key indicators tend to focus on the growth and performance of the bank from an accounting perspective. However, EVA could be used in measuring the value that the M&A gives to the shareholders for investing their funds in the business. One disadvantage of emphasis on profitability may make managers who have been put in charge of shareholders’ funds to focus on short term opportunities that project good performance at the expense of shareholder’s wealth. Most firms are in business to make profits and to maximize shareholders’ wealth. As such, a review of investment strategies cannot be complete without the measure of the effect on the owner’s wealth.

Although there has been lots of support for Economic Value Added as a superior key performance indicator, Dodd and Chen (1997) had a different opinion on this. They argued that that ROA explained stock returns slightly better than Economic Value Added. From their analysis on the effectiveness of EVA as a tool for measuring performance, they recommended the use of residual income instead.

They suggested that if a company wants to adopt the philosophy of EVA as a corporate performance measure, it might want to consider using Residual Income instead (Maditinos, Šević & Theriou, 2007). Their argument and ultimate rejection of EVA as a superior tool was mainly contributed by the fact that almost 80 per cent of their sample’s stock returns could not be explained by this technique. As such, they made a conclusion that economic value added is not the only performance measure to tie with stock returns and in addition it did not prove to be a complete one.

23 Dodd and Chen conducted another research in 2001 to determine which metric between operating income, residual income & EVA was more value relevant. Again, the findings did not support the assertion that EVA is the best measure for valuation purposes. In contrast, the operating income seemed to have more relevant information as compared to the two. EVA, however, was concluded to be the least relevant. Other researchers are also in support of Dodd & Chen’s findings as some propose the use of multiple mechanisms when analysing the changes in stock returns.

The formulae for determining the Economic Value of the bank is hereby stated as:

��� = ����� − ��� ������ �� ������� �������� ∗ ����

��� ������ = ����� ������ − ������� ����������� where the WACC (weighted average cost of capital) is determined by multiplying the cost of debt by the percentage of debt then adding this to the cost of equity multiplied by the percentage of equity i.e.

������ ����� �� ������ ���� ���� = ∗ ���� �� ������ + ( ����� ������� ����� ������� ∗ ���� �� ����)

2.8 Valuation of Mergers and Acquisitions

Firm valuation is one of the main phases in the M&A process. The valuation is based on information obtained during the process of due diligence. There are various methods of valuation including:

(i) Going Concern Approach - the target firms are valued based on the information available on the date of valuation regarding its future existence. The future expectations are considered but only to the extent to which it can influence the prediction of potential performance.

(ii) Valuation Based Strategy - this method considers all the future intentions of the owners and managers. This valuation includes both enhanced earning and cost reductions depending on the synergies that will be realized.

(iii) Cost Methods - this method focuses on three groups. Accounting value where the worth is based on the financial accounts and statements of the target firm. This approach looks at the assets and liabilities. Substantial value whereby the 24 sum of the individual prices of the assets is computed. According to Radomir (2015), this is a useful approach particularly when the acquirer is trying to determine whether to buy an existing entity or to start a new one. This approach assumes that the firm will not discontinue its operations. Last is the liquidation value where valuation is based on the value that could be realized from the immediate sale of the firm’s assets. The assumption is that the target will discontinue operations.

(iv) Revenue Methods - Discounted Cash Flows: Present value of an investment refers to the current value of future incomes. The expected cash flows to be generated by the firm are discounted at a given rate (the rate captures riskiness and uncertainty of the cash flows) (Kislingerová, 2007). Economic Value Added is computed by deducting the cost of the capital time value from the firm’s net profits. The resultant value is discounted to future periods (Kislingerová, 2007).

(v) Comparison Methods entail two approaches, that is, comparable enterprises where the value is determined by considering the actual sales of similar firms and comparable transactions in which the value is determined with reference to the market price. This approach is normally used for publicly traded firms.

Table 2. 2: Advantages of Valuation Methods

Method Advantages Disadvantages

Discounted Allows for modelling of the expected cash flows This approach does not Cash Flow and evaluation of sensitivities indicate pricing trends in the market Highlights the relationship between cash flows and balance sheet items

Comparable Allows for comparison with actual transactions The data about the transaction Transactions may not be complete; most Identifies the other rival bids, it provides insight M&A deals may not be into alternative competitive bids published. Additional each transaction is unique

Comparable Allows for benchmarking of the way public This approach ignores the Companies markets view the target firm expected future returns

Liquidation This approach is relevant when the firm is being This approach does not identify Analysis taken over for its underlying assets as opposed the firm’s economic value to being taken over as a going concern.

Source: Radomir (2015) 25 2.9 Mergers and Acquisitions and Firm Performance

One of the main objectives of M&A is to achieve growth at the strategic level by increasing the size of the firm and customer base. In the banking sector, for banks to realize strategic gains, growth in the operations and minimization of expenses are key objectives (Long, 2015). These have led many banks, both domestic and international to engage in M&A activities. Over the years, various academics have studied the impact of M&A on performance before and after. The value of this methodology was to evaluate the benefits and negative effects of the M&A. This section provides a summary of such studies.

Vitale and Laux (2012) evaluated M&A of 105 banks in the United States after the 2007/8 banking crisis. The study established that after the M&A, the profitability of the banks declined significantly. However, the assets were found to have increased marginally. The return and capital adequacy ratios showed very little improvement. Vitale and Laux (2012) concluded that M&A in the post-financial crisis era did not improve the performance of the institutions. Knapp and Gart (2013) investigated the effect of M&As on the credit risk of banks in the United States during the period 1991- 2006. The study established that non-performing loans and the loan charge-offs increased significantly during the post-merger period.

Ayadi et al., (2013) assessed the effect of M&As on the productivity of European banks over the period 1996-2003. The target population of the study included 42 M&A transactions which were compared to 587 non-merging banks. The study found that the firms that undertaken M&A had better management and economic efficiency and were highly productive.

The productivity arose from the restructuring of the banking operations specifically management and employee integration. Colombo and Turati (2012) evaluated why acquiring banks in mergers focus on well-developed areas. The study focused on the relevance of regions on M&A in Italy during the period 1995-2006. The study established that regional, economic, and social characteristics affected M&As in Italy. The M&A had positive effects on the robustness of the banks, profitability and efficiency.

26 Rasiah, Tan, and Hamid (2014) evaluated the effect of the forced merger of Malaysian domestic banks in 1999. The study established that the involuntary mergers had efficiency gains. The performance including profitability and value creation increased significantly. This showed that the M&A had produced economies of scale and enhanced efficiency. After the mergers, there were only nine commercial banks. Sufian, Muhammad, Ariffin, and Yahya (2012) investigated the effect of M&As on the efficiency of commercial banks in Malaysia. The study evaluated performance during the pre-M&A period which covered 1995-1996 and the post-M&A period 2002-2009. The study sampled 34 commercial banks. The analysis of data was done using the Data Envelopment Analysis (DEA). Sufian et al., (2012) established that revenue efficiency did not significantly improve after the M&As.

Sinha, Kaushik, and Chaudhary (2010) evaluated the effect of financial efficiency of 17 commercial banks and five financial institutions in India during the pre-and post- M&A period. The study established that over fifty percent of the merged financial institutions showed significant increases in their financial performances. The key performance indicators of those firms exhibited increased cash flows and savings during the post-M&A period. Kaur (2014) compared the financial performance of merged and non-merged banks in India during the period 2001-08. The study established that there were significant gains for target companies, but on the other hand, the acquiring firm indicated negative or nil gains.

Abbas, Hunjra, Saeed, Ehsan, and Ijaz (2015) investigated the performance of commercial banks in Pakistan during the pre- and post-M&A period. The study sampled ten banks during the period 2006-2011. The study established that there were no significant improvements in the banks’ financial performance after the M&A. Further, the study established that profitability, efficiency, liquidity, and leverage ratios decreased significantly after the M&A. Similarly, when examining the effect of M&As on the cost efficiency of Taiwanese banks, Lee, Liang and Huang (2013) established that initially the cost efficiency decreased, but after three years, the resultant entities realized cost efficiencies.

While studying the performance of banks after M&A during the period 1981-2013 in Nigeria, Amu and Chigbu (2015) determined that there were significant improvements in the performance than had been prior to M&A. There were significant 27 increases in deposit levels and net assets held. However, the findings of Amu and Chigbu (2015) contradicted the findings of Okpanachi (2011) who established that gross earning, profit after tax, and net assets did not change significantly after M&A in Nigeria.

Muita (2011) conducted a study whose objective was to determine the effect of mergers and acquisition on the financial performance of commercial banks in Kenya. The aim of the study was to test the theoretical propositions that improved company performance occurred after M&A due to synergies. The study covered the period 1999- 2005. The study performed a comparative analysis of performance before and after the M&A. The study established that there was improved performance after M&A of commercial banks in Kenya. This study continues the work of Muita (2011) by extending the study period from 1999-2005 to 2006-2018.

Gwaya and Mungai (2015) investigated the role of M&A on the financial performance of commercial banks in Kenya during the period 2000-2014. The study analyzed the effect of M&A on the shareholder’s value and company profitability. The study variables included shareholder’s value given earnings per share; profitability was indicated using return on equity, synergies and operating efficiency. The study evaluated the effect of government regulations by introducing a moderating variable. The study used qualitative data collected from officials of the 14 commercial banks which had merged during the period 2000 -2014. The study established that M&As increased the shareholders’ value and profitability of the firms. This study differentiates itself from the study by Gwaya and Mungai (2015) by using quantitative data and expanding the study variables.

Ombaka and Jagongo (2018) evaluated the effect of mergers and acquisition on the financial performance of commercial banks in Kenya. The study evaluated the influence of operating synergy, differential efficiency, risk diversification, and market share development on financial performance. The study established that the independent variables had significant effects on the financial performance of the firm. This study is similar to the study of Ombaka and Jagongo (2018) but differs in approach. Ombaka and Jagongo used primary data collected from the top management of the six commercial banks sampled in the study. This study will use quantitative data collected from the financial statements of the study sample and data 28 collected from supervision reports of the Central Bank of Kenya. Additionally, this study will do a pre-performance analysis and a post-performance analysis.

The literature review section provides information that provides the basis for this research study. Firstly, it provides key constructs; i.e. mergers and acquisitions, reasons for mergers and acquisitions, legal framework, and corporate performance. The theories that support mergers and acquisitions were also discussed. The study will seek to test the hypotheses associated with these theories. Previous studies were reviewed in order to identify the experience of other firms in and outside Kenya, and the experiences of firms in and outside the banking sector. The review helped to establish the conceptual, contextual, and methodological research gaps. The literature review provides a justification for this research study.

29 3. RESEARCH METHODOLOGY

This section of the study provides the research methodology. The conceptual framework is presented, and thereafter, the research hypotheses are formulated. The main variables of the study are defined, and their measurements are given. The research design and methods that will be used for sampling are presented.

3.1 Conceptual Framework

The aim of the study is to assess the effect of mergers and acquisitions on the financial performance of commercial banks in Kenya. According to Gwaya (2015), the conceptual framework presents an illustration of the relationship between the predictor and explanatory variables.

The conceptual framework is illustrated in Figure 3.1

Figure 3. 1 Conceptual Framework

Source: Researcher (2018)

30 Arising from the conceptual framework are the study objectives which include:

1. To determine the effect of mergers and acquisitions on the profitability of commercial banks in Kenya 2. To determine the effect of mergers and acquisitions on the solvency of commercial banks in Kenya 3. To determine the effect of mergers and acquisitions on the efficiency of commercial banks in Kenya 4. To determine the effect of mergers and acquisitions on the lending intensity of commercial banks in Kenya 5. To determine the effect of mergers and acquisitions on the risk profile of commercial banks in Kenya

3.2 Firm Performance

A review of the literature indicates that there are two major ways to evaluate the impact of M&As on the performance of firms. These approaches include operating performance and market methodology.

Following the approach used by Al-Muharrami and Gattoufi (2014), this study will use operating performance approach with the focus being on accounting data. The study will compare the performance of the M&A firms before and after. This will be done so as to determine whether the consolidation actually results in positive or adverse changes in the reported financial performance.

The study will use financial ratios. Financial ratios are typically used as they allow creditors and investors to evaluate the financial health of the firm easily, hence making informed choices on their investment options. Additionally, the financial ratios allow for comparison between the banks as well as provide trends over a given period. The study will evaluate five categories of financial ratios:

Profitability: this indicates the firm’s ability to generate income and earnings from its core business activity. Most firms are in operation to make profits by maximizing on their returns while they minimize the costs. As this is the core reason for starting a business, there are various techniques that can be used to see how businesses use their resources to earn profits. When analysing the profitability of the banking industry, there are three main ratios that can be used. For purposes of our study, we will 31 incorporate the Return on Equity (ROE) and Return on Assets (ROA) ratios in measuring the profitability of the banks and determining the impact of M&As on the banks’ attempt to meet this objective.

The first measure of profitability will be net profit margin or in other words return on assets. The study settled on the use of net profit margin in measuring profitability since all costs are factored in, that is, the profit margin excludes all operation costs and as such showing the actual financial benefit of M&A to the banks.

In addition, the size of banks is normally measured as the natural logarithm of the value of total assets (Sjoberg̈ & Goteborgs̈ Universitet. 2007). In addition, assets are the main and costly investments in any firm especially during mergers; therefore, the use of return on assets to check the effect on the merger on the bank performance.

To determine the return on assets, we divide the net profit after tax by the total assets owned by the bank for each given year

��� ������ ����� ��� ��� = ����� ������

Return on Equity: It is also essential to measure the returns the shareholders are getting from investing in various projects. As M&As involves the use of investor funds with the aim of maximizing their wealth, it is essential to measure the returns these strategies give. Most individuals buy company stock with the aim of multiplying their earnings through share price growth as well as receiving dividends. As such, ROE is an efficient tool for measuring the ratio of income a shareholder receives for investing their funds. A more sophisticated approach to measuring the returns to shareholders is Economic Value Added.

The recommended ROE for most industries is 15% to 20%. A firm with such level of ROE means that the investors are earning more than the average cost of capital; hence there are getting more return. Firms with higher ROE tend to use the shareholder’s funds effectively to generate additional profits and returns on funds invested. The only drawback for this ratio is that it can be quite high in cases where the bank uses debt although not all the returns are attributed to equity.

32 The formula for determining ROE is:

����� ��� = ������

Solvency: which indicates the extent to which the bank can manage losses before filing for bankruptcy. Solvency will be indicated using the shareholder equity ratio. It is vital to measure the ability of the bank to meet its obligations when they fall due. This can be achieved by computing the ratio between shareholders’ equity and the total assets. The shareholder equity ratio is a suitable measure of solvency as the M&A is supposed to increase the value of the assets. For banks, the most important asset is capital that is used to secure lending activity and to mitigate against insolvency.

The formula below will be used in determining the owner’s equity ratio of the selected banks.

���� ������ �ℎ���ℎ����� ������ ����� = ����� ������

Efficiency: evaluating the ratio of the cost to income before and after the mergers. This aims to determine whether Mergers and Acquisitions contribute to an economical but efficient way of financial service provision. Most corporations are searching for approaches to serve their customers in an efficient way such that they continue to improve the quality of their products and services but manage to save on costs and time. In this case, a ratio of costs versus the income is computed to determine the effect of the restructuring. To determine the efficiency of the bank over time, we compute the ratio of total costs to the income generated using the formula below.

����� ����� ���� �� ������ ����� = ����� ������

Lending Intensity: evaluation of the net loans to total assets. When the banks merge, the assets are combined; hence there is a significant increase in total assets owned by the bank. To determine the impact of the merger on the lending capacity of the banks, therefore, there is a need to determine the ratio in which the net loans increases in comparison with the increasing assets.

33 The ratio, therefore, shows the extent to which the performance of the bank increases as shown by the increase in its increase or decrease in lending intensity. To determine the lending intensity of the banks, therefore, we apply the below formula.

��� ����� ������� �������� = ����� ������

Risk Profile: some of the main risks that the banks are facing are credit risks. These risks will be evaluated using the ratio of total capital to the total risk-weighted assets of the bank. As the banks grow, and their business expands, the exposure to risk also widens.

For the purpose of this study, the ratio of the total capital of the bank against the risk- weighted assets is used as a suitable indicator of the risk profile of the company. In case of distress, capital is used as a cushion to cover losses and other risks that firms may face. As such, comparing the rate at which the capital of the bank increases as the risk-weighted assets increases shows the performance of the banks with regards to the management of losses. This is mainly because the ratio shows how protected the bank is against losses. The higher the ratio, the higher the risk profile of the banks.

It should also be noted that the financial institutions with a relatively higher loan-to- assets ratio tend to gain most of their income from interest and as such are mainly affected when the interest rates go down. Such banks, for example, were highly affected when the central bank introduced a cap on the interest rate which was significantly lower than what most banks were using.

On the other hand, the banks with lower levels of loans-to-assets ratios have diversified their investments and are earning income from other sources other than income. In cases of the downfall of interest rates, these banks can still survive as they earn revenues from the other sources. Most financial institutions tend to venture in asset management as well as trading.

To determine the banks’ willingness and ability to take up risks, we apply the below formula.

����� ������� ���� ������� = ���� ����ℎ��� ������

Table 3.1 provides a summary of the measure of performance to be used in the study.

34

Table 3. 1 List of Performance Measures

Parameter Ratio

Profitability Return on Assets = Net Profit After Tax / Total Bank Assets

Solvency Shareholders Equity Ratio = Equity / Total Assets

Efficiency Cost to income ratio = Total Costs/Total Income

Lending Intensity Lending Activity = Net Loans /Total Assets

Risk Profile Risk Profile = Total Capital / Risk-weighted Assets

Source: Researcher (2018)

For the purposes of this study, profitability, solvency, efficiency, lending intensity, and risk ratios were used to indicate the banks’ performance. The rationale behind the use of these ratios is based on the objectives of mergers and acquisitions identified during the literature review. Extant literature suggests that banks merge or acquire other entities in order to improve profitability, increase their capital base, increase their ability to lend and customer base, and as a means of risk management. As such, these ratios are indicators of the reasons for the adoption of M&A as a viable option to improve performance.

The financial statements of the commercial banks in Kenya are formulated in accordance with the requirements of the International Accounting Standards (IAS). This will make the comparison of the findings easier, and it will be possible to draw sound and logical conclusions on the performance of the banks.

3.3 Research Design

Creswell (2013) identified three types of research methods namely quantitative, qualitative, and mixed methods. In the quantitative approach, the investigation and conclusion of the study are based on a statistical and numerical method. In a qualitative method, the study is conducted on the basis of existing knowledge. The research hypotheses of the study require that the study uses mathematical and numerical data; hence this study will be quantitative in nature.

35 Following the approach used by Maylor and Blackmon (2005), the approach of the study can be described as scientific in nature and the research type analytical. The study seeks to establish the effect of mergers and acquisitions on the financial performance of selected commercial banks in Kenya. According to Brains, Willnat, Manheim, and Rich (2011), the most appropriate research design for this study is explanatory research. Brains et al., (2011), advise that in order to establish the effect of the independent variables on the dependent variables it is important to observe the independent variables and then measure the variation in the explanatory variable.

3.4 Population of the Study

David (2018) defines the population of the study as a group of people, objects, or entities that the researcher hopes to generalize the findings of the study. The population of this study is all the commercial banks in Kenya which have merged or acquired other banks or financial institutions. Due to the comprehensive nature of the study, the research paper will analyze a subset of the population. The subset is the study sample. For purposes of this study, the performance of the three main banks in Kenya will be evaluated over a period of 10 years, that is, before and after the restructuring. The study sample was chosen using a judgmental sampling technique. Settling on these three banks was mainly as a result of the characteristics they attribute as they highly represent the banks operating in Kenya as per the time of the study.

3.5 Scope of the Study

The study will cover the period from 2008 to 2018. During that period there were quite a number of mergers and acquisitions. The study period was chosen as it reflects the implementation of the law enacted by the government in 2008. This ten-year period incorporates five years of post-merger and acquisition and five years of pre-M&A.

This will aid in determining if there is any significant increase in post-M&A performance of the commercial banks in comparison to the duration prior to their mergers and acquisition. Some researchers have argued on the necessity to incorporate a long period in the analysis in order to capture a positive outcome that can only be achieved in the long run (Conine & Madden, 2006). This will eliminate the possibility of dismissing the contribution of the M&As to firm performance.

36 In addition, there will be a clear and objective conclusion on the effects of M&As. In addition, as the restructuring of the two banks occurred in different times of the study period, this gives the option to compare one bank with the other in a certain year, where one went through an M&A and the other not.

3.6 Study Data

The study will use secondary data collected from the published financial statements of the sample. The data will be collected from the website of the institutions. The data from the financial statements posted by the respective banks in their websites will be supported by the data from the published annual supervision reports published by the CBK. The data will be analysed using descriptive statistics.

3.6.1 Guaranty Trust Bank (Kenya) Ltd - Merger

Guaranty Trust Bank (Kenya), mostly referred to as GT Bank Kenya is a commercial bank operating in Kenya. The bank is part of Guaranty Trust Bank Plc operating in a number of African countries with its headquarters in Lagos, Nigeria. In 2013, the bank acquired 70% shares in Fina Bank Kenya Ltd in an attempt to increase its presence in the African Market.

The bank believes that this expansion into East African market is in line with the Bank’s spirit of being ‘Proudly African and Truly International’ (User, 2019). After the acquisition, Fina Bank Kenya Limited rebranded to reflect the change in ownership hence adopting the name Guaranty Trust Bank (Kenya) Ltd. Guaranty Trust Bank Plc acquired Fina Bank Ltd in the years 2013 and adopted the name Guaranty Trust Bank (Kenya) Ltd. Fina Bank Kenya Ltd was incorporated in 1986 as a non-banking financial institution and converted to a fully functional commercial Bank in 1996 following a government of Kenya (GOK) directive for all the NBFIs to either change to commercial banks or close shops (Ngugi & Kabubo, 1998). The bank has been chosen for analysis as it represents the medium focusing on small and medium-sized enterprises.

3.6.2 Equatorial Commercial Bank-Merger & Acquisition

Equatorial Commercial Bank Ltd was established in 1983 as a financial institution, and following the directive of the GOK, it converted to a complete commercial bank in 1995 (Ngugi & Kabubo, 1998). The bank later merged with Southern Credit Banking

37 Corporation Ltd to become Equatorial Commercial Bank Ltd in 2010. This move was mainly inspired by government regulation on the minimum capital requirement for commercial banks. The banks merged in order to meet this threshold.

In 2014, Mwalimu Sacco Society Ltd acquired 75% of the shares in the bank in its quest to expand its business opportunities. Through the acquisition, the SACCO would be in a position to collect deposits from the public and not just the members. It would also get access to funds at reduced rates hence enhancing its performance.

3.6.3 The Cooperative Bank of Kenya – No Restructuring

The Cooperative Bank of Kenya has been in operation since 1965 where it was established as a cooperative society and later issued a banking license in 1968. However, following the directive of the government of Kenya for all cooperatives to transfer its deposits to the Commercial Bank, the bank converted to a fully operational commercial bank in 1989. In 2008, the bank was listed on the Nairobi Securities Exchange with its shares trading under the symbol COOP (COOPBK, 2014).

The Cooperative Bank of Kenya did not go through any merger or acquisition, and as such it will be used for comparison purposes in order to ascertain whether the changes in performance is due to the restructuring or just an economic situation in the country. In this case, it was chosen for analysis in an attempt to compare the bank performance and eliminate the possibility of performance being influenced by the economic situation in Kenya. The bank represents all the commercial banks in Kenya that have not gone through any mergers or acquisition.

38 4. RESULTS & DISCUSSION

The main objective of this study was to assess the effect of mergers and acquisitions on the performance of a select number of commercial banks in Kenya. This section, therefore, presents the results of the data observed and analyzed. The data is presented per institution, and then a comparative analysis is made between the data from the three banks in order to arrive at a conclusion.

For purposes of this study, therefore, we observe the immediate impact (up to two years) of the mergers and acquisitions on the performance of the firms as well as the long-term impact (five to ten years). The positive impact of the M&A on the financial performance might take longer period to achieve hence the necessity to analyse a longer period.

4.1 Presentation of the Statistics on Selected Banks’ Performance

4.1.1 Equatorial Commercial Bank Ltd

Table 4.1 below presents the Equatorial Commercial Bank Ltd aggregated data extracted from the bank’s financial statements ranging from the years 2008 to 2018.

These results are graphically shown in Figure 4.1 where the selected key performance indicators of the bank are presented. A clear picture of the trends can be deduced showing the struggling performance of the bank as it experienced the two major restructuring strategies over the ten years.

A review of the general performance of the bank a few years prior to the merger, there is a 1.06% increase in the return on assets between 2008 and 2009 indicating an increase in the profitability. This can be interpreted that if the assets of the bank are increased by 1 % in 2008, the profits will rise by 0.1% as compared to a 1.15% increase in 2009. In 2010, the bank merged with SCBC bank resulting in a negative return on assets. This can, however, be explained by the capital investment that comes with restructuring.

The bank seems to struggle in terms of profitability for the next three years until the bank was acquired by Mwalimu Sacco Society Ltd at the end of 2014. The outcome of the acquisition also seems to drive the firm’s performance further down as observed from the decreasing return on assets. From the statements, it is evident that a slight

39 reduction in its assets results in massive losses hence a possibility of poor performance after the merger and acquisition.

Table 4. 1 Equatorial Commercial Bank Ltd Statistics

Source: Financial Statements

The shareholders’ equity ratio of the bank portrays an increasing trend before the merger, with approximately 10% change between 2008 and 2009. The financial statements show that over the years, the firm’s investments were being financed by equity as opposed to debt. However, this changed in 2010 when the bank merged with SCBC signifying that the merger was mainly financed by debt. Post-merger period, therefore, is characterized by a reducing ratio of equity to assets which is also experienced by the bank after the acquisition period.

In order to determine the effect of mergers on the efficiency of the bank, we observe the movement of the costs to income ratio during the three phases. The ratio is reducing in the period prior to the mergers, followed by up and down movement of the ratio as the firm works on working as a new firm.

40 The measure of the proportion of the cost to income after the merger depicts a rise in the operating costs as the merging firm attempts to achieve normal operation. Before the bank could stabilize its operations, it experienced another major restructuring when it went through the acquisition. The next phase, that is, post-acquisition phase does not seem to be any better from the post-merger phase as the ratio appears to decrease at an increasing rate with the highest ratio of cost to income being experienced in 2018 at 335.6 %. This shows that the restructuring resulted in high operating costs while on the other hand, the income is reducing.

Figure 4. 1 Equatorial Commercial Bank Ltd Graph

Source: Financial Statements

Net loans to assets ratio was also determined in order to measure the impact of the M&A on the liquidity of the bank. The reports of Equatorial Bank over the years show an unfavourable situation, that is, the rate was upward for the first two years. This is also evident in the period after the merger.

The period after the acquisition, on the other hand, portrays a positive trend as it is characterized by a decreasing ratio between the net loans and assets hence indicating that a smaller percentage of the bank assets are tied up in loans.

41 Figure 4. 2 Equatorial Commercial Bank Ltd Graph

Source: Financial Statements

In this case, a lower ratio means that the bank is more liquid and has more cash available for new loans. The amount of loans held by the customers decreases at a slightly higher rate as compared to the reduction in the total assets owned by the bank. However, this ratio is more less stable throughout the years ranging from 46% to 62%.

The last indicator of performance that we observed for Equatorial Bank is the ratio between the total capital and the risk-weighted assets in view of determining whether the merger resulted in an increase in the risk factor. As presented in table 4.1, the ratio of capital and the risk-weighted assets were above the recommended limit.

However, the rate increases over the years as the bank goes through the changes. This signifies that both the merger and the acquisition reduced the financial stability of the bank as seen by the decreasing ratio.

4.1.2 Guaranty Trust Bank Ltd

The second bank we analyzed is Guaranty Trust Bank Kenta Ltd (GT Bank). In this section, we present the observation of the performance of GT Bank over a 9-year period as reasoned from its financial statements over the period. An overview of Fina banks’

42 financial position prior to its acquisitions shows a positive trend in terms of profits, assets, deposits as well as the growth in shareholder’s wealth. This is clearly presented in the table below which gives us a basis for analyzing the effect of the acquisition implemented by GT Bank.

Table 4.3, on the other hand, presents the Guaranty Trust Bank data extracted from its Financial statements ranging from the years 2009 to 2018. This data is extracted from the financial statements of Fina Bank for the years before the acquisition and from the financial statements of GT Bank for the periods after restructuring.

Table 4. 2 Fina Bank Financial Highlights (2007-2011)

Source: Fina Bank Financials

In terms of profitability, pre-acquisition is characterized by an increasing return on assets, which is mainly attributed to the growing profits at a faster rate compared to the rate of accumulation of assets. Post-acquisition, however, is characterized by a decrease in the return on the assets. In this phase, the assets of the bank are reducing as well as the profits although the profits tend to reduce at a higher rate. A review of the equity to total assets ratio reveals that both the pre and post-acquisition phases are characterized by an increasing inclination with a drop during the acquisition year. 43 From this point of view, it can only be inferred that the acquisition did not have any great impact on the capitalization proportion. This is because the shareholder’s equity grew at a significant rate similar to the growth in the total assets of the bank. It can also be assumed that the restructuring process involved minimal utilization of debt.

Table 4. 3 Guaranty Trust Bank Ltd

Source: Financial Statements

An overview of the cost to income ratio is also vital in showing the effect of the mergers on Bank’s efficiency. In the case of GT Bank, it is perceptible that the operating costs of the bank have been growing more after the acquisition as compared to the period before. For the first two years, this observation would be understandable as the merged banks are working on the logistics of operating as one entity which would automatically result in higher operational costs.

However, the situation appears to be permanent as the bank’s costs increase, but there is no substantial growth in its income. Capital restructures are typically expected to result in increased costs at the beginning but then these costs are later offset by

44 increasing revenue once the bank stabilizes and it offers the services in the most efficient way (Okpanachi, 2011).

Figure 4. 3 Guaranty Trust Bank

Source: Financial Statements

Figure 4. 4 Guaranty Trust Bank

Source: Financial Statements

45 GT Bank presents approximately 50% net loans to assets ratio over the period under study. With regards to the movements of the ratio, there seems to be an insignificant change which is characterized by an upwards movement in both phases. The ratio rises, reaches a maximum point in the last years before the acquisition, where it drops by about 7% before resuming the upward growth one year after the alteration.

As the ratio is more or less average throughout the period, it can be reasoned that the lending intensity of the bank remained intact.

Lastly, we observe the risk profile of the bank over the years, by comparing the situation before and after the merger. From the financial, it can be presumed that the risk profile of the Bank improves after the merger as presented by the increase in the capital adequacy ratio. The Tier1 and Tier2 capital of the firm increases as the risk- weighted assets increase. However, the percentage change in capital higher than the percentage change in net weighted assets.

4.1.3 Cooperative Bank of Kenya

In this section, we present the observation of the performance of Co-op Bank over a 10-year period as extracted from the audited annual financial statements. Table 4.4 presents a summary of the performance of Co-op from the year 2007 to 2018. This data will help us understand whether the reduction in the performance of Equatorial bank and GT Bank after undergoing the restructuring was due to the M&A or merely a depression in the Kenyan economy.

The bank enjoys increasing profitability as shown by the increasing return on assets with a significant reduction in 2014. The return on assets between 2013 and 2014 experienced a 1% reduction which is quite material as the overall ROA was 3% to 4%. The assets are increasing in all the years, but the 2014 profits dropped by about 1 million Kenya shillings. This may only imply that there was financial distress in the country in 2014 hence lowering the profitability. However, the overall performance of the bank is positive and characterized by increasing performance with regards to profitability.

With regards to solvency, co-operative bank portrays a fluctuating trend characterized by a sharp increase between 2007 and 2008 followed by a decreasing capitalization ratio. The main reason for an increase in 2008 is that the bank started trading on the 46 Nairobi Securities Exchange in 2008 hence many people bought shares thus increasing the equity of the bank drastically while the total assets took a steady growth. However, for the next four years, the situation stabilized with steady growth in both the assets and the shareholder’s equity. The banks appear to perform better in the last five years as the equity to total assets is characterized by an increasing rate.

Table 4. 4 Cooperative Bank

Source: Financial Statements

Analysis of the efficiency of the bank over the ten years shows a positive growth as the banks start off with a cost to income ratio of 83% in 2007 and by 2018 there is a slight reduction to 77.5%.

This means that the bank became more efficient hence utilizing fewer costs by the year 2018 as compared to 2007. This may have been characterized by innovation and adoption of better service provision approached that saves on costs. Although there is a positive trend in the efficiency of the bank, the Cooperative Bank has not yet achieved the recommended efficiency rate of 50%.

47 Figure 4. 5 Cooperative Bank Graph

Source: Financial Statements

The bank also seems to be performing better and better over the years with regards to the lending intensity. The bank experiences a slightly positive trend as shown by the net loans to total assets ratio. This shows that as the assets of the bank grew over the years, the bank was able to increase its loans to and advances at a higher rate. The increase in loans and advances at a higher rate than the growth in assets indicates that the bank was earning more interest hence more profits.

As the bank assets grew, it was able to attract more customers and issue the loans hence not having idle assets and losing on the returns. The second half of the study period is characterized by a higher average of loans to assets ratio.

The last indicator of performance is the risk profile of the bank. The measure of the risk profile enables us to conclude whether the trend in risk was mainly attributed to bank performance or the political and economic risks in the country. From the financial statements, it is evident that on average, the Co-operative Bank improved its risk profile over the years as the growth in capital outweighed the growth in risk-weighted assets.

48 Figure 4. 6 Cooperative Bank Graph

Source: Financial Statements

Over the last five years, the bank would be able to cover its risks more as compared to its ability to manage these risks in the past five years. Although the risk-weighted assets grew, thus exposing the bank to more risks, there was a significantly higher growth of tier I and tier II capital hence the increase in the cushion for risks.

4.2 Assessment of the effects of M&As on Performance 4.2.1. Equatorial Bank Assessment

Table 4. 5 Pre and Post M&A Mean – Equatorial

Equatorial Mean Pre M&A Post Merger Post Acquisition Profitability Ratio 0,62 -1,03 -10,84

Solvency Ratio 15,78 7,75 12,32

Efficiency Ratio 94,61 106,17 189,84

Lending Intensity Ratio 56,97 54,26 51,64

Risk Profile Ratio 20,92 12,19 6,09 Source: Financial Statements

In this section, we are going to analyze the data from the three banks and present a comparison between the performance of these banks over the period under study. This

49 will involve a comparison of the trends in their performance as presented by the mean of the ratios discussed. The means are also graphically presented for the three banks.

Figure 4. 7 Graphical Presentation of the Mean - Equatorial

Source: Financial Statements

For the Equatorial Bank, we have divided the data into three, that is, pre-M&A, post- merger and post-acquisition. These represent the three phases the bank went through in the ten years under study. Due to three phases, the graph presents a V-shape indicating a sharp turn of events after the merger.

50 Figure 4. 8 Graphical Presentation of the Mean - Equatorial

Source: Financial Statements

4.2.2. GT Bank Assessment

Table 4. 6 Pre and Post M&A Mean – GT Bank

GT Bank Pre M&A Post Acquisition

Profitability Ratio 1,11 0,76

Solvency Ratio 10,26 19,12

Efficiency Ratio 92,38 93,86

Lending Intensity Ratio 51,90 48,35

Risk Profile Ratio 16,84 25,07

Source: Financial Statements

For the GTB Bank, we only have pre-merger and post-merger as there was only one major restructuring activity. As such, the mean is computed for the pre and post- merger. The graphs show a declining efficiency (rising graph), decreasing profitability, increased solvency, decreasing the lending intensity and an increasing risk profile.

51 Figure 4. 9 Graphical Presentation of the Mean- GT Bank

Source: Financial Statements

Figure 4. 10 Graphical Presentation of the Mean- GT Bank

Source: Financial Statements

52 For Cooperative we have computed the mean for the first and last five years in order to facilitate the comparison. Mean for Co-operative bank indicates a positive performance as it is characterized by increased profitability, solvency, increased efficiency, improved risk profile and increased lending intensity. Other than efficiency, all other graphs have a positive slope.

Table 4. 7 First & Last Five-Year Mean – Co-operative Bank

Co-operative Bank 2007-2012 2013-2018

Profitability Ratio 2,98 3,33

Solvency Ratio 13,56 16,37

Efficiency Ratio 78,25 77,42

Lending Intensity Ratio 59,65 62,35

Risk Profile Ratio 19,34 20,84

Source: Financial Statements

Figure 4. 11 Graphical Presentation of the Mean- Co-Operative

Source: Financial Statements

53 Figure 4. 12 Graphical Presentation of the Mean- Co-Operative

Source: Bank Financial Statements

4.2.1 Effects of M&As on Profitability

The mean of the ROAs before and after the restructuring activities as presented in the table shows that after the merger and acquisition, the profitability of the banks reduced significantly. For Equatorial Bank, the mean of the ROA before the merger or acquisition was 0.6%, and after the merger, it dropped to -1.0% meaning there was a significant reduction in the profitability of the banks after the merger.

The reduction in the profitability of the bank continued in a downward slope even after the bank was acquired. This is evidenced by the post-acquisition mean of -10.8%. This descending trend is also visible from the reduced ROA for GT Bank as we can see that the pre-merger ROA was 1.1% as compared to a ROA of 0.9 % after the merger. This can only be explained that the merger reduced the performance of both banks hence resulting in reduced profitability.

54 Table 4. 8 Table of Profitability Ratios

Profitability 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Equatorial Bank 1,15 -0,65 0,12 -3,57 0,36 -1,95 -3,36 -5,45 -10,10 -24,45

GT Bank 0,60 0,64 1,37 1,85 0,69 0,98 0,95 1,08 0,53 0,24

Co-operative Bank 2,68 2,97 3,19 3,85 3,94 2,81 3,61 3,60 2,95 3,08

Source: Financial Statements

Figure 4. 13 Profitability Ratios Graph

Source: Financial Statements

To determine the profitability of the banks and the effects if the M&As on the profitability, we analysed the Return on Assets for the banks before and after the restructuring exercise. The ROA is the best in this case as it is often used in comparisons pertaining to the companies with similar features as well as comparison of performances for one company to its previous years’ performance. The main reason being that ROA takes into account a company’s debt unlike return on Equity (Adams & Mehran, 2003). The conclusion of the effect of the merger is based on the arguments presented by previous authors regarding effects of M&As. According to Kocmanová

55 and Šimberová (2011), higher profitability of the resulting entity arises from the decreased costs because of the synergy, improved market position. Rhoades (2013) also claimed that acquisitions increase profitability through cost efficiency with little or no improved profit efficiency. However, the results presented from these two banks did indicate otherwise. Unfortunately, the cost efficiency might not have been achieved given that the profitability of the banks decreased after the merger or acquisition.

In addition to the return on assets it is also essential to analyse the trend in the return on equity over the years under study. As presented in the table and the graph below, it is evident that the merger and acquisition worsened the performance of Equatorial bank. In 2009, the bank had a return on equity of 7.7%.

However, there is downward slope to -218.93% in the year 2019. The bank performance did not just deteriorate but rather it is declining at an alarming rate. This decline in the performance has led to massive losses which have eventually exhausted the shareholder’s equity. As at now, the bank is at a financial distress and its capital below the minimum capital requirement hence it is risking it’s trading licence if the shareholders do not raise additional capital.

As for the GT Bank, there is an insignificant reduction in the return on equity. The bank had a growing ROE prior to the merger. The return on equity grew from 5.87% between 2009 to 2012; this being the highest ROE achieved by the bank. However, after the merger in 2013, there was a fluctuation in the returns to the shareholders before the returns finally taking a downward slope. As per 2009, the shareholders could only get a 1.19% return on the equity capital invested. A further review of the financial statements shows that the bank has not issued dividends in a long while as it tries to pump bank the earnings into the business in form of reserves.

Co-operative Bank on the other hand seems to be stable in terms of its return on equity. The return on equity for this bank is within the recommended rate as it ranges between 16% and 23%. The bank performs relatively well and manages to maintain a return on equity despite the changes that occurred over time. The bank opted to open more branches in its growth strategy hence there was stability with regards to capital and revenue growth.

56 Table 4. 9 Table of Return on Equity Ratios

2 009 2 010 2 011 2 012 2 013 2 014 2 015 2 016 2 017 2 018

Equatorial 7,07 -7,01 1,31 -69,69 4,06 -27,97 -23,51 -41,36 -94,80 -218,93 Bank

GT Bank 5,87 6,62 13,28 17,03 3,92 6,23 4,95 5,39 2,59 1,19

Co-op Bank 18,22 22,24 25,60 26,30 24,90 18,69 23,74 20,84 16,39 18,22

Source: Financial Statements

Figure 4. 14 Graph of Return on Equity Ratios

Source: Financial Statements

4.2.2 Effects of M&As on Solvency

For this study, we computed the mean of the pre-M&A and post-M&A shareholder equity ratios for the two banks. This will enable us to make a comparison and see if there was an improvement in the solvency due to the synergy effect. The Equatorial bank had a pre-M&A mean of 15.8% meaning that about 16% of the company assets were financed by shareholder’s equity. However, this ratio drops to 7.7%, a significant

57 drop in the ratio by more than half. From this observation, it can be concluded that the bank financed the merger activity through share swap which significantly reduced its shares while the assets increased as a result of the merger.

The mean of the ratio, however, increased to 12.3% after the bank was acquired by Mwalimu Sacco hence increasing the solvency of the bank slightly. The shareholdings of the company increased as the new owner, Mwalimu Sacco pumped in more capital in terms of assets to the company with minimal or no use of long-term debt in the financing the processes.

Table 4. 10 Table of Solvency Ratios

Solvency 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Equatorial Bank 16,26 9,28 9,32 5,12 8,81 6,96 14,30 13,17 10,65 11,17

GT Bank 10,17 9,66 10,34 10,85 17,61 15,73 19,18 20,02 20,51 20,17

Co-operative Bank 14,72 13,34 12,45 14,64 15,82 15,02 15,19 17,29 17,98 16,90

Source: Financial Statements

This seems to be the same for Guaranty Trust Bank as the post-merger mean ratio is greater than the pre-merger. As shown in Table 4.6 this mean ratio increased from 10.26% to 19.12% hence the improvement in the solvency level of the company. These findings tend to conform with the findings of Mboroto & FINANCE, 2013 who concluded that M&As tend to have an insignificant increase the solvency rate of a firm.

However, for both banks, it should be noted that although there is an increase in the ratio as a result of the restructuring, this rate is quite low. The closer the ratio to 100% the higher the solvency level of a given firm. As such, an ideal rate is one that is as close as possible to 100%. The solvency ratios of the two banks help us in determining whether the banks are in a better position to meet all their financial obligations should they go bankrupt.

Any entity can achieve this if they have enough assets to cover their long-term and short-term liabilities (Vanitha & Selvam, 2012). Net Assets is equal to long-term liabilities plus the shareholder’s equity. In the two cases, the long-term debt comprises about 80% to 90% which is not a viable ratio. 58 Figure 4. 15 Solvency Ratios Graph

Source: Financial Statements

4.2.3 Effects of M&As on Efficiency

Table 4. 11 Table of Cost to Income Ratios

Cost to Income 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Ratio

Equatorial Bank 89,95 106,00 98,89 122,37 97,26 111,98 123,58 137,14 163,00 335,63

GT Bank 95,30 95,43 90,14 88,64 94,43 90,92 92,82 92,06 95,46 98,03

Co-operative Bank 78,82 75,16 76,89 76,19 73,53 80,44 76,88 77,24 78,90 77,51

Source: Financial Statements

Another measure of performance we analyse in this case is the efficiency of the bank. This is done through a comparison of the cost to income before and after the M&A. The efficiency shows how the merged bank is able to generate income more than the individual banks could. The lower the cost to income ratio, the better the performance of the bank as it means the bank is generating more income with a significantly lower cost. To begin with, we see the trend of the ratio for Equatorial Bank for the three 59 phases and make a conclusion on the performance prior to and after the merger and the acquisition. As shown in Table 4.5, in the beginning, before any strategic change, the Bank had a rate of 94.6%. This rate increases after the merger to 106.2% and a further increase to 189.8% after the Acquisition. The increase after the merger is about 10% which is insignificant and can only represent the increasing operational costs that come with the merger. However, there was a further 85% increase after the acquisition. This indicates that the bank was incurring more costs than the income it was getting.

For the GT Bank, the pre-merger ratio was 92.4% while the post-merger ratio was 92.8%. This is a slight increase in the ratio indicating an insignificant drop in the efficiency of the bank. However, as the merger was meant to increase the efficiency of the bank, this outcome goes against the expectations. An ideal rate if the cost to income ratio is 50% which is not the case for these banks. The operational costs of the banks are expected to rise in the first few years, but then once the operation stabilizes and the banks are synchronized, then the efficiency should increase significantly.

Figure 4. 16 Cost to Income Ratios Graph

Source: Financial Statements

60 These findings, therefore, show that the merger and acquisition resulted in a decreased efficiency of the banks hence disapproving the synergy hypothesis. The Equatorial Bank became worse off in terms of efficiency after both the merger and the acquisition as the ratio portrayed more than 100% deviation from the ideal rate.

4.2.4 Effects of M&As on Lending Intensity

Table 4. 12 Table of Lending Intensity Ratios

Lending Intensity 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Equatorial Bank 61,63 46,37 51,33 53,43 58,02 60,69 57,51 53,86 46,99 48,20

GT Bank 50,69 48,54 52,27 56,13 49,11 42,47 47,86 48,31 51,22 51,87

Co-operative Bank 56,02 56,11 64,76 59,38 59,29 62,89 60,90 66,03 65,63 59,36

Source: Financial Statements

With regards to the lending intensity, we analyse the effect of mergers and acquisitions on the ratio between the net loans and the total assets. As earlier mentioned, we need to see how the net loans increased as compared to the increasing assets driven by the merger or acquisition.

The pre-M&A mean for Equatorial Bank was 57% as compared to the post-merger mean of 54.3% and post-acquisition mean of 51.6%. The bank experienced a decline in its lending intensity over the years which shows a reduced performance. This decline in the lending intensity is also experienced by GT Bank as the mean drops from 51.9% to 47.5%. Ideally, as a result of synergy, the banks should be able to loan more and earn higher interests on loans after the merger as this is the main reason they are in operation. The main source of revenue for the banks is interest on loans hence the need to increase this capacity through M&As.

61 Figure 4. 17 Lending Intensity Ratio Graph

Source: Financial Statements

However, from the analysis, the banks’ assets were increasing significantly, but the net loans increase but at a lower rate. On the face value, one would think that the net loans are increasing but once compared with the total assets, the true picture of the merger can be seen. As bank’s core business is lending money and earning from the interests on the loans, the observation on the declining lending intensity can be concluded that the banks experience a lower performance after the M&A. The bank’s liquidity increased, but this has a negative impact on the profitability as the bank loses the return on the liquid assets as there is an inverse correlation between profitability and liquidity. However, there should be a predetermined optimal level in which the bank should keep its’ assets liquid in its quest to maximize profitability. As such, each bank should determine the acceptable and viable level of liquidity beyond which profitability may decline (Charmler, Musah, Akomeah & Gakpetor, 2018).

62 4.2.5 Effects of M&As on Risk Profile

Table 4. 13 Table of Risk Profile Ratios

Risk Profile 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Equatorial Bank 20,77 14,49 14,39 8,87 13,32 10,71 17,45 16,27 12,65 -22,01

GT Bank 14,43 17,06 19,01 16,86 32,51 23,35 26,49 25,65 23,87 25,97

Co-operative Bank 21,01 16,54 16,42 23,79 21,06 21,65 21,26 22,77 21,96 16,36

Source: Financial Statements

Finally, we assess the effect of M&As on the risk profile of the banks. In this case, we evaluate the movement of the ratio between the total capital of the firm in comparison to the risk-weighted assets. Based on the computed mean, the two banks tend to portray different results. In the case of the Equatorial Bank, there capital adequacy ratio is declining. The mean of the ratio before any restructuring was 20.9%. This ratio decreases to 12.2% after the merger and a further reduction to 6.1% after the acquisition. This indicates that the merger and acquisition resulted in a lower capacity of the bank to deal with the financial risks.

These findings tend to disagree with previous findings that mergers and acquisitions decrease the risk profile of the banks as portrayed by an increasing CAR (Gaughan, P. A. 2007). This means that the capital increases, but the risk increases but at a lower rate hence enabling the bank to meet its financial risks easily. In the case of GT Bank, however, there was a significant increase in the ratio from 16.8% to 24.8% indicating an improvement in the performance of the bank with regards to the management of risks.

The ratio between the total capital and the risk-weighted assets helps in determining the bank's capacity to meet its obligations such as payment of the liabilities on a timely basis as well as management of risks such as credit risks and operational risks. When computing the ratio, we incorporated both Tier one and Tier two capital so as to calculate how the company can manage its risks both in cases of going concern and during bankruptcy. Ideally, the capital adequacy rate should not go below 10% (Francis & Osborne, 2012). However, the acquisition of Equatorial Bank drove the CAR to a rate of 6% which is significantly lower than the minimum limit. This means that 63 the capital of the bank does not cushion the bank from potential losses, and as such failing to protect the bank's depositors and other lenders. As such the restructuring lowered the performance of Equatorial bank with regards to risk management and on the contrary increased the performance of Guaranty Trust Bank. Due to the differing outcome, the study only showed that it could not be claimed with certainty that mergers and acquisitions improve the performance of banks as the situation varies from one firm to another depending on various other factors.

Figure 4. 18 Risk Profile Ratios

Source: Financial Statements

4.2.6 A comparison of Performance among the banks

To facilitate an objective conclusion on the effects of M&As on the performance of commercial banks on Kenya, we compare the performance of the three banks. The performance of Equatorial bank deteriorated significantly after the acquisition resulting in massive losses and reduced efficiency. The bank’s performance went down slightly after the merger, but the last strategic movement of acquisition and rebranding made the situation even worse. For the case of GT Bank which only underwent a merger and rebranding, the aftermath was also unfavourable as the post-

64 merger performance seemed to decline. By comparing the declining trend of the two banks with an improved performance of the Co-operative Bank over the years, we eliminate the possibility that the economic situation of the country was declining. Co- operative bank which did not undergo any merger or acquisition was performing well as opposed to the banks that opted to merge in an attempt to increase their market presence and benefit from the effect of synergy.

Analysis of the performance of the three banks also indicates that the graphs for GT Bank and Cooperative bank tend to portray some similar trends for all the financial performance indicators. In addition, the change in the declining performance of GT Bank is not as significant as that of Equatorial. As such, it is clear that acquisitions have adverse negative effects as compared to mergers. This can also be observed from the performance of Equatorial bank after the merger as compared to the outcome after the acquisition.

65 5. CONCLUSION AND RECOMMENDATIONS

5.1 Conclusion

The process of mergers and acquisitions in Kenya, especially in the banking sector, has gained momentum over the years. In the banking sector, the process is aimed at restructuring the business entity. Following the liberalisation of the economy in the early 1990s, international companies have entered various sectors of the economy. This increased competition has stimulated local banks to merge or acquire other banks. Although M&As have been a significant element of corporate strategy across the globe for many years, research on M&As in Kenya has not been extensive enough and has not provided sufficient and conclusive results on whether they enhance performance.

The literature section of the study reviewed the various process of mergers and acquisitions of banks in Kenya over a ten year period from 2008 to 2018, motivations for mergers and acquisition, the theories that hypothesis the reasons for M&A activities, the valuation methods used in M&A are analyzed, the various measure of financial performance, and empirical literature. The methodology section highlighted the approach that was used to achieve the objectives of the study.

The study aimed to assess if performance improved after the merger had taken place. The study analyzed the pre-merger performance and compared it to the post-merger performance. The study found that in the case of the merger of Savings and Loans and KCB their outcome was improved profitability, increased solvency, increase in lending intensity, and reduction in the risk levels.

This research aimed to ascertain the effects of M&As on the performance of commercial banks in Kenya. From the observations of the results depicted by the three banks, it is evident that after implementation of the merger, there seems to be an adverse effect on the performance of the banks as depicted by the results presented in their annual financial statements. This outcome goes against the synergy hypothesis. As earlier discussed, corporate synergy is achieved when firms interact with each other (Megginson & Nail 1998). The interaction should result in increased competitiveness positive outcome that should exceed the combined result of both companies if they were to operate separately.

66 Like findings from other previous researchers who did their studies in different industries and markets, this study only confirms that Mergers and Acquisitions do not automatically guarantee improved performance as a result of synergy. This is because, for two companies which have different visions and shared values to operate as one entity, it takes efforts from both parties. Synergy can only be achieved if the M&A is coupled with a positive attitude and great leadership which will facilitate an expedited adaptation to the changes and the environment. As such, the findings outline that synergy is not assured when two companies come together because in some cases the opposite may arise.

There are various reasons why several M&As of commercial banks in Kenya result in adverse performance. One of the main contributing factors for the failure of M&As to improve performance include overpricing of the deals which makes it difficult for the firms to recoup their invested funds (John, Liu, & Taffler, 2010).

It seems that the banks invest vast amounts of funds to facilitate the capital restructuring which in the end impact on their operations resulting in adverse results. Capital investments, as well as increased operations costs, seem to be the main drivers of this adverse results of the mergers and acquisitions. The increased operational costs, for example, pushes the total costs of the banks up resulting in losses in the short run.

Rebranding of the banks to match the new owners also tend to contribute to the declining performance. Both banks analyzed in this study rebranded after the M&A, similar to most other banks that went through M&As over the years. The performance of the banks prior to the restructure may be attributed to the brand; hence rebranding takes away this benefit hence reduced performance. Furthermore, most banks in Kenya were being acquired by or merged with foreign banks. As such, there is a possibility that the poor performance could be attributed to the culture clash between the operations of the banks and not necessarily caused by the M&A itself.

5.2 Recommendations

Although most M&As are to improve performance, there are various reasons that need to be considered. Having analyzed the impacts of M&As on the financial performance of commercial banks in Kenya, it was noted that M&A results in poor performance. Literature analysed affirmed the causes of failure of M&As. As such this research can 67 be useful for other banks and financial institutions intending to enter the African market especially the East African market through mergers and acquisitions. Any financial institution planning on taking over the ownership of another bank should do this with caution as M&As do not guarantee improved performance.

One of the significant mistakes that result in failure of M&As is overprizing whereby an acquirer pays somewhat a high price to take over the ownership. Should the bank being acquired be overvalued resulting in a high transaction multiple, it can take significantly longer for the acquirer to recoup its invested funds. As such, proper due diligence should be conducted to ensure that the price paid is commensurate to the assets acquired.

An analysis conducted by Citonn Investments company on the listed commercial banks in Kenya reveals that the Fina Bank had the highest transaction multiple (P/Bv multiple) of 3.2* followed by Equatorial Bank with 2.3* (Investments, 2018). These findings confirm one of the reasons why M&As resulted in adverse financial performance.

Table 5. 1 Summary of M&A Key Transactions between 2013-2018

Acquirer Bank Acquired Book Value at Transaction Transaction P/Bv Date Acquisition Stake Value Multiple (Kshs bns) (Kshs bns)

SBM bank Kenya Chase Bank ltd Unknown 75 % Undisclosed N/A Augi-18

Diamond Trust Bank Kenya Habib Bank Limited Kenya 2.38 100 % 1.82 0. 8x Mar-17

SBM Holdings Fidelity Commercial Bank 1.75 100 % 2.75 1.6 x Nov-16

M Bank Oriental Commercial Bank 1.80 51 % 1.30 1.4 x Jun-16

I&M Holdings Giro Commercial Bank 2.95 100 % 5.00 1.7 x Jun-16

Mwalimu SACCO Equatorial Commercial Bank 1.15 75 % 2.60 2.3 x Mar-15

Centrum K-Rep Bank 2.08 66 % 2.50 1.8 x Jul-14

GT Bank Fina Bank Group 3.86 70 % 8.60 3.2 x Nov-13

Average 80.3 % 1.8 x Source: Investments (2018)

Another recommendation to foreign banks planning to enter African Market is the need for in-depth analysis of the contributions of the target bank brand on its performance. The local bank brand may be the reason for its positive results and as

68 such rebranding is a gamble as the new brand may not be accepted in the local market. The acquirer should consider maintaining the local brand especially in cases where the target is performing well. The overview of Fina Bank’s financial statements over the period of the past five years prior to the merger shows an upward trend in financial performance. The performance, however, declined after the rebranding to GT Bank despite the fact that Guaranty Trust Bank PLC is performing well in West Africa where the bank’s headquarters is based.

The financial institutions may adopt the strategy used by Vienna Insurance Group (VIG) in its M&As, where they maintain the local brand. VIG is among the market leaders in Austria, the Czech Republic, Slovakia, Romania, Bulgaria, Albania and Georgia (Aichner, 2014) after acquiring some of the leading insurance companies in these countries.

The main reason for their positive performance in most of these countries is that they maintain the local brand. The firms should only rebrand if the target bank is on the verge of insolvency or bankruptcy. In this case, the rebranding will be a strategy to salvage the performance of the targets. In addition, should it be necessary to rebrand in cases where the target is performing well, this should be done in such a way that the original brand is not lost entirely. The process can be done gradually over a long period so that to ensure that the new brand being introduced is accepted.

5.3 Limitations

While working on the thesis, various limitations were experienced as highlighted in this section of the paper.

1. Compiling the data from the respective banks was a challenging exercise as there were various sets of data arising due to restatement of the financials for some period. As such, it was a challenge settling on the data to be analysed. 2. Another challenge was that some of the acquired firms ceased to exist thus making it difficult to determine what would be their outcome if they had not been acquired. 3. The study compares the pre- M&A performance to the post-M&A performance. However, some of the differences in the levels of performance could be due to factors such as monetary policy, state of the economy, and in a country like 69 Kenya, the political developments. Studies have shown that performance in Kenya is significantly impacted by the political cycle (Masai, & Financial Sector Reforms Forum, 2006).

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77 LIST OF TABLES

Table 2. 1 Indicators of Firm Performance ...... 21

Table 2. 2: Advantages of Valuation Methods ...... 25

Table 3. 1 List of Performance Measures ...... 35

Table 4. 1 Equatorial Commercial Bank Ltd Statistics ...... 40

Table 4. 2 Fina Bank Financial Highlights (2007-2011) ...... 43

Table 4. 3 Guaranty Trust Bank Ltd ...... 44

Table 4. 4 Cooperative Bank ...... 47

Table 4. 5 Pre and Post M&A Mean – Equatorial ...... 49

Table 4. 6 Pre and Post M&A Mean – GT Bank ...... 51

Table 4. 7 First & Last Five-Year Mean – Co-operative Bank ...... 53

Table 4. 8 Table of Profitability Ratios ...... 55

Table 4. 9 Table of Return on Equity Ratios ...... 57

Table 4. 10 Table of Solvency Ratios ...... 58

Table 4. 11 Table of Cost to Income Ratios ...... 59

Table 4. 12 Table of Lending Intensity Ratios ...... 61

Table 4. 13 Table of Risk Profile Ratios ...... 63

Table 5. 1 Summary of M&A Key Transactions between 2013-2018 ...... 68

78 LIST OF FIGURES

Figure 2. 1 Corporate Restructuring Process ...... 11

Figure 3. 1 Conceptual Framework ...... 30

Figure 4. 1 Equatorial Commercial Bank Ltd Graph ...... 41

Figure 4. 2 Equatorial Commercial Bank Ltd Graph ...... 42

Figure 4. 3 Guaranty Trust Bank ...... 45

Figure 4. 4 Guaranty Trust Bank ...... 45

Figure 4. 5 Cooperative Bank Graph ...... 48

Figure 4. 6 Cooperative Bank Graph ...... 49

Figure 4. 7 Graphical Presentation of the Mean - Equatorial ...... 50

Figure 4. 8 Graphical Presentation of the Mean - Equatorial ...... 51

Figure 4. 9 Graphical Presentation of the Mean- GT Bank ...... 52

Figure 4. 10 Graphical Presentation of the Mean- GT Bank ...... 52

Figure 4. 11 Graphical Presentation of the Mean- Co-Operative ...... 53

Figure 4. 12 Graphical Presentation of the Mean- Co-Operative ...... 54

Figure 4. 13 Profitability Ratios Graph ...... 55

Figure 4. 14 Graph of Return on Equity Ratios ...... 57

Figure 4. 15 Solvency Ratios Graph ...... 59

Figure 4. 16 Cost to Income Ratios Graph ...... 60

Figure 4. 17 Lending Intensity Ratio Graph ...... 62

Figure 4. 18 Risk Profile Ratios ...... 64

79 LIST OF APPENDICES

Appendix A: Schedule of Mergers and Acquisitions in Kenya

80 Appendix A: Schedule of Mergers and Acquisitions in Kenya

Table A1: Commercial Bank Mergers in Kenya

Date No. Institution Merged with Current Name approved All 9 Financial Institutions Consolidated Bank of 1 9 Financial Institutions 1989 Merged together Kenya Ltd Indosuez Merchant 2 Banque Indosuez Credit Agricole Indosuez 10.11.1994 Finance 3 Transnational Finance Ltd Transnational Bank Ltd Transnational Bank Ltd 28.11.1994 4 Ken Baroda Finance Ltd Bank of Baroda (K) Ltd Bank of Baroda (K) Ltd 02.12.1994 First American Finance First American Bank (K) 5 First American Bank Ltd 05.09.1995 Ltd Ltd 6 Bank of India Bank of India Finance Ltd Bank of India (Africa) Ltd 15.11.1995 7 Stanbic Bank (K) Ltd Stanbic Finance (K) Ltd Stanbic Bank Kenya Ltd 05.01.1996 8 Mercantile Finance Ltd Ambank Ltd Ambank Ltd 15.01.1996 9 Delphis Finance Ltd Delphis Bank Ltd Delphis Bank Ltd 17.01.1996 Commercial Bank of 10 CBA Financial Services Commercial Bank of Africa ltd 26.01.1996 Africa ltd 11 Trust Finance Ltd Trust Bank (K) Ltd Trust Bank (K) Ltd 07.01.1997 National Industrial Credit African Mercantile Banking 12 NIC Bank Ltd 14.06.1997 Bank Ltd Corp Giro Commercial Bank 13 Giro Bank Ltd Commerce Bank Ltd 24.11.1998 Ltd First National Finance Bank 14 Guardian Bank Ltd Guardian Bank Ltd 24.11.1998 Ltd Diamond Trust Bank (K) Diamond Trust Bank (K) 15 Premier Savings & Finance Ltd 12.02.1999 Ltd Ltd National Bank of Kenya National Bank of Kenya 16 Kenya National Capital Corp 24.05.1999 Ltd Ltd Standard Chartered Bank Standard Chartered Financial Standard Chartered Bank 17 17.11.1999 (K) Ltd Service (K) Ltd Barclays Bank of Kenya Barclays Bank of Kenya 18 Barclays Merchant Finance Ltd 22.11.1999 Ltd Ltd 19 Habib A.G. Zurich Habib Africa Bank Ltd Habib Bank A.G. Zurich 30.11.1999 20 Guilders Inter. Bank Ltd Guardian Bank Ltd Guardian Bank Ltd 03.12.1999 Paramount Universal 21 Universal Bank Ltd Paramount Bank Ltd 11.01.2000 Bank Kenya Commercial Bank 22 Kenya Commercial Bank Kenya Commercial Finance Co 21.03.2001 Ltd 23 Citibank NA ABN Amro Bank Ltd Citibank NA 16.10.2001 Date No. Institution Merged with Current Name approved Southern Credit Banking Corp. Southern Credit Banking 24 Bullion Bank Ltd 07.12.2001 Ltd Corp. Ltd Co-operative Merchant Co-operative Bank of 25 Co-operative Bank ltd 28.05.2002 Bank ltd Kenya ltd Investment & Mortgage Bank Investment & Mortgage 26 Biashara Bank Ltd 01.12.2002 Ltd Bank Ltd Commercial Bank of 27 First American Bank ltd Commercial Bank of Africa ltd 01.07.2005 Africa ltd East African Building 28 Akiba Bank ltd EABS Bank ltd 31.10.2005 Society 29 Prime Capital & Credit Ltd Prime Bank Ltd Prime Bank Ltd 01.01.2008 30 CFC Bank Ltd Stanbic Bank Ltd CFC Stanbic Bank Ltd 01.06.2008 Savings and Loan (K) Kenya Commercial Bank Kenya Commercial Bank 31 01.02.2010 Limited Limited Limited 32 City Finance Bank Ltd Jamii Bora Kenya Ltd Jamii Bora Bank Ltd 11.02.2010 Equatorial Commercial Southern Credit Banking Equatorial Commercial 33 01.06.2010 Bank Ltd Corporation Ltd Bank Ltd

Source: Central Bank of Kenya (2018)

Table A2: Commercial Bank Acquisitions in Kenya

No. Institution Acquired by Current Name Date approved 2 Credit Agricole Indosuez Bank of Africa Kenya Ltd Bank of Africa Bank Ltd 30.04.2004 (K) Ltd 5 K-Rep Bank Ltd Centum Ltd K-Rep Bank Ltd 29.10.2014 9 Habib Bank Kenya Ltd Diamond Trust Bank Diamond Trust Bank Kenya 01.08.2017 Kenya Ltd Ltd 1 Mashreq Bank Ltd Dubai Kenya Ltd Dubai Bank Ltd 01.04.2000 3 EABS Bank Ltd Ecobank Kenya Ltd Ecobank Bank Ltd 16.06.2008 4 Fina Bank Ltd Guaranty Trust Bank Plc Guaranty Trust Bank 08.11.2013 (Kenya) Ltd 7 Giro Commercial Bank Ltd I&M Bank Ltd I&M Bank Ltd 13.02.2017 6 Equatorial Commercial Mwalimu Sacco Society Equatorial Commercial 31.12.2014 Bank Ltd Ltd Bank Ltd 8 Fidelity Commercial Bank SBM Bank Kenya Ltd SBM Bank Kenya Ltd 10.05.2017 Ltd

Source: Central Bank of Kenya (2018)