Kenya Listed Banks FY'2019 Report, & Cytonn Weekly #16/2020 Focus of the Week Following the release of the FY’2019 results by Kenyan listed banks, the Cytonn Financial Services Research Team undertook an analysis on the financial performance of the listed banks and identified the key factors that shaped the performance of the sector, and our expectations of the banking sector for the rest of the year. The Banking sector witnessed a number of consolidation activities in FY’2019 as players in the sector were either acquired or merged. We still maintain our view that Kenya remains overbanked as the number of banks remains relatively high compared to the population. Increased consolidation will reduce the number of banks in the country which currently stand at 38, thus reducing the commercial banks to population ratio from the current 0.8x. We expect an increase in consolidation activities going forward which will lead to the formation of relatively larger, well-capitalized and possibly more stable entities. As such our report is themed “Increased Consolidation in the Banking Sector” as we assess the key factors that influenced the performance of the banking sector in 2019, the key trends, the challenges banks faced, and areas that will be crucial for growth and stability of the banking sector going forward. As such, we shall address the following: i. Key Themes That Shaped the Banking Sector Performance in FY’2019, ii. Summary of The Performance of the Listed Banking Sector in FY’2019, iii. The Focus Areas of the Banking Sector Players Going Forward, and, iv. Brief Summary and Ranking of the Listed Banks based on the Outcome of Our Analysis. Section I: Key Themes That Shaped the Banking Sector Performance in FY’2019 Below, we highlight the key themes that shaped the banking sector in FY’2019, which include regulation, consolidation, asset quality, revenue diversification, SME Focused Services, and rebranding: 1. Regulation - The impactful regulations of the banking sector included the Repeal of the Interest Rate Cap (Banking (Amendment) Act, 2019), IFRS 9, Demonetization and the implementation of the Banking Sector Charter: a. Repeal of the Interest Rate Cap (Banking (Amendment) Act, 2019): During the year, President Uhuru Kenyatta signed the Finance Bill, 2019 into law in effect repealing Section 33B, which pertained to the interest rate cap, citing that while the purpose of the capping, introduced in September 2016 through the enactment of the Banking (Amendment) Act 2015, was to address the widespread concerns about affordability and availability of credit to Kenyans, it had instead caused unintended consequences that were significant and damaging to the economy and Micro, Small and Medium Enterprises (MSMEs). The National Assembly failed to raise a two- thirds majority to overturn President Uhuru’s memorandum to repeal the interest rate cap. Read our most recent report focusing on the interest rate cap here. b. IFRS 9 - The effects of IFRS 9 to banks continued to be seen as more banks used the 18-months to 24-months window to comply with the requirements of the new standards. With the implementation of IFRS 9, which took effect from 1st January 2018, banks were expected to provide both for the incurred and expected credit losses. The CBK had given commercial banks a one-year earnings protection window for the implementation of the IFRS 9 to charge the higher provisions against the retained earnings in the balance sheet and not on the profit and loss account. The banking industry experienced the effects in 2019, recording an increase in NPL Coverage to 58.5% in FY’19, from 54.6% in FY’18, as a result of increased provisioning, c. Demonetization: During the year, the Central Bank of Kenya concluded the withdrawal of the older Kshs. 1,000 banknotes and introduce new notes in an effort to track and curb illicit financial flows. After the demonetization exercise, which had little impact on inflation or the exchange rate, Kshs. 7.4 billion, or 3.0% of the total value in the circulation of Kshs. 1,000 notes, was rendered worthless. In some cases, this exercise tightened liquidity in the money market thus prompting people to seek alternatives on digital platforms, thus, increasing NFI from fees and commissions. The Central Bank of Kenya (CBK), under Sections 9 and 51 of the CBK Act and following approval by the CBK Board, recently announced that it had transferred Kshs 7.4 bn from its General Reserve Fund to the Government Consolidated Fund in support of the fight against Coronavirus. The transfer was executed by crediting the Ministry of Finance’s Deposit Account at CBK. As such, by issuing the Kshs 7.4 bn to the Treasury, the CBK effectively put the same amount it had withdrawn back into circulation. d. Banking Sector Charter Act: The Central Bank of Kenya (CBK) proposed to introduce a Banking Sector Charter that will guide service provision in the sector. The Charter aims to instill discipline in the banking sector in order to make it responsive to the needs of the banked population. The Central Bank of Kenya set a clear vision for the banking sector guided by the four pillars, namely, risk-based credit pricing, transparency, customer centricity, and ethical culture. By May 2019, all banks had submitted their time-bound plans to implement the Banking Sector Charter Act and CBK is now monitoring implementation. 2. Consolidation: Consolidation activity remained one of the key highlights witnessed in FY’2019 as players in the sector were either acquired or merged, leading to the formation of relatively larger, well-capitalized and possibly more stable entities. The following were the major M&A’s activities witnessed during the year: a. On 6th September 2019, KCB Group finalized the take-over of 100.0% of all the ordinary shares of National Bank of Kenya (NBK) through a share swap of 1 ordinary share of KCB for every 10 NBK shares, after the Capital Markets Authority approved the acquisition. For more information on the transaction, see Cytonn Weekly #36/2019, b. On 27th September 2019, the Central Bank of Kenya announced the merger of Commercial Bank of Africa Limited and NIC Group PLC, effective 30th September 2019, following attainment of all regulatory approvals. For more information on the transaction, see Cytonn Weekly #39/2019, Other mergers and acquisitions activities announced recently include; i. Equity Group Holdings, in its expansion strategy, has various on-going acquisitions in the region having entered into a binding term sheet with Atlas Mara Limited to acquire certain banking assets in 4 countries in exchange for shares in Equity Group which are inclusive of: a. 62.0% of the share capital of Banque Populaire du Rwanda (BPR); b. 100.0% of the share capital of Africa Banking Corporation Zambia (ABCZam) Ltd; c. 100.0% of the share capital of Africa Banking Corporation Tanzania (ABCTz), and; d. 100.0% of the share capital of Africa Banking Corporation Mozambique Ltd (ABCMoz). These acquisitions will allow Equity Group Holdings an easy penetration into these four African countries. Further, the lender is set to acquire a 66.5% controlling stake worth Kshs 10.9 bn in the Congo-based lender, effectively valuing BCDC at Kshs 16.4 bn. Successful completion of the above transactions will likely see Equity expand its regional footprint, aiding the bank’s performance. Read more information on the same here, ii. Commercial International Bank (an Egyptian private-sector bank) sent an application to the Competition Authority of Kenya propositioning to acquire a controlling interest in Mayfair Bank, a Tier III Kenyan bank. Mayfair is the fourth-smallest lender in Kenya and it recorded a loss of Kshs. 0.4 bn in FY’2019, iii. In January 2020, the Central Bank of Kenya gave a go-ahead to Nigerian lender, Access Bank PLC to acquire a 100% stake in Transnational Bank PLC for an undisclosed amount. Read more information on the same here, iv. Co-operative Bank of Kenya announced it has opened talks to acquire a 100.0% stake in Jamii Bora Bank Limited. The announcement came months after Commercial Bank of Africa (CBA), dropped its cash buy-out offer and instead, merged with NIC Bank to form NCBA Group. Read more information on the same here, Below is a summary of the deals in the last 5-years that have either happened, been announced or expected to be concluded: Book Value at Transaction Transaction P/Bv Acquirer Bank Acquired Acquisition (Kshs. Date Stake Value Multiple Bns) Co-operative Jamii Bora Bank 3.4 100.0% Undisclosed N/A Mar-20* Bank Access Bank PLC Transnational Bank 1.9 100.0% Undisclosed N/A Jan-20* (Nigeria) PLC. Commercial International Mayfair Bank 1.1 Undisclosed Undisclosed N/A Dec-19* Bank Oiko Credit Credit Bank 3.0 22.8% 1.0 1.5x Aug-19 National Bank of KCB Group 7.0 100.0% 6.6 0.9x Sep-19 Kenya CBA Group NIC Group 33.5 53%:47% 23.0 0.7x Sep-19 CBA Group** Jamii Bora Bank 3.4 100.0% 1.4 0.4x Jan-19 AfricInvest Azure Prime Bank 21.2 24.2% 5.1 1.0x Jan-19 KCB Group Imperial Bank Unknown Undisclosed Undisclosed N/A Dec-18 SBM Bank Kenya Chase Bank Ltd Unknown 75.0% Undisclosed N/A Aug-18 DTBK Habib Bank Kenya 2.4 100.0% 1.8 0.8x Mar-17 Fidelity Commercial SBM Holdings 1.8 100.0% 2.8 1.6x Nov-16 Bank Oriental Commercial M Bank 1.8 51.0% 1.3 1.4x Jun-16 Bank Giro Commercial I&M Holdings 3.0 100.0% 5.0 1.7x Jun-16 Bank Equatorial Mwalimu SACCO 1.2 75.0% 2.6 2.3x Mar-15 Commercial Bank Centum K-Rep Bank 2.1 66.0% 2.5 1.8x Jul-14 GT Bank Fina Bank Group 3.9 70.0% 8.6 3.2x Nov-13 Average 75.7% 1.4x * Announcement date **Deals that were dropped The number of commercial banks in Kenya has now reduced to 38, compared to 43 banks from 5- years ago.