Category Archives: Bank rankings

Bank Rankings 2018 Part 1: Kenya’s Top 10 Banks

2017 was a more challenging year for Kenyan banks, and borrowers due to interest rating capping, elections affecting Kenya’s economy, the crunch in South Sudan, while 2018 will be more interesting with IFRS9. Here is a ranking of Kenya’s top banks, and the rankings are by bank assets as at December 2017 – and compared with the previous years’ rankings (in brackets):

1 (1) KCB: Assets of Kshs 555 billion and a pre-tax profit of Kshs 27. 5 billion. Have 13 million mobile customers, and 57% transactions were done on mobile devices, 15% by bank agents and 10% at bank ATM’s. However, KCB did not roll out a new digital strategy direction in 2017 as earlier announced. Combined group assets were Kshs 646 billion (US$6.4 billion).

2 (2) Equity Bank:  Focused on fee income, transaction processing and treasury business over interest income, and their CEO said micro-lending will only resume after interest rate caps are lifted.

3 (3) Cooperative Bank.

4 (5) Standard Chartered Kenya.

5 (4) Barclays launched Timiza app in 2018 which should enable a big retail banking leap. It will also begin a process of rebranding to Absa.

6 (6) Diamond Trust: Bought Habib bank.

7 (8) Stanbic Bank (formerly CFC Stanbic)

8 (7) Commercial Bank of Africa: Now in five countries after using M-shwari to expand to Ivory Coast and Rwanda – where they recently acquired Crane Bank Rwanda.

9 (10) NIC Bank.

10 (9) Investment & Mortgages (I&M):  Assets of Kshs 184 billion, and pre-tax profits of Kshs 7.5 billion. They have fully absorbed Giro Bank and are now in Kenya Tanzania, Rwanda, and Mauritius. Group assets of Kshs 202 billion (US$ 2 billion)

11 (11) National Bank.

More rankings to follow. 

Banking History in Colonial Kenya

This morning there was a talk given by Christian Velasco of Warwick University on A Colony of Bankers: New Approaches to Commercial Banking History in Colonial Kenya. He said there have been very few books written about the early banking history of Kenya and East Africa and he had sourced information from the Kenya National Archives in Nairobi, and scattered bank archives in the UK, South Africa, or Australia, but that many records were now lost.

Excerpts 

There were the banks that came before the first World War and a raft of banks that started after the end of the Mau Mau war – and the banks could fall into three categories: Colonial banks (state-supported banks that were the only ones that could handle government accounts, and which disappeared after independence), Imperial banks (less dependent on government business, and who focused more on trade and agriculture) and multinationals (who had most of their business abroad).

The story is of Kenya’s colonial banking era is really about three banks – the National Bank of India (NBI), Standard Bank of South Africa (SBSA) and Barclays. The arrival of Barclays in Kenya changed the banking sector greatly as it sought to end the long relationship that the National Bank of India had with colonial government in Kenya. Also when Barclays arrived, they found that the Standard Bank controlled many of the white accounts, so they set out to include more Africans as customers. Africans had bank accounts from around 1926, and by the 1950’s Barclays had more African accounts than settler accounts. 

Banks were mostly found in urban areas and with the ending of the Mau Mau uprising, there was an expectation that Kenya would remain a British colony for many decades. This resulted in several new banks setting up in Kenya in the 1950’s. Meanwhile, NBI, SBSA, and Barclays all expanded by 100% opening up in new places around the country, even with mobile bank units to attract customers. Despite the arrival of the new banks, the main competition remained between these three established big banks, and in 1954, Barclays sent a memo to the colonial government complaining about the unfair practice of them favouring the NBI who retained a monopoly of new business that dated back 60 years. 

All banks eventually had to break with colonial past and the British empire, and a big loser in the period was SBSA which had concentrated on the white settler population. Kenyan politicians tried to engineer boycotts of businesses related to South Africa due to the Apartheid regime and African customers now shunned it. Officials at the bank wrote to their headquarters about the problem and as a result, the name was changed by dropping “South Africa” from the name, and SBSA became “Standard Bank.”

However Africanization of staff did not start until quote late – Barclays had 1,000 employees, and just 70 were Africans with many more who were Indians. There was a hierarchy in banks of having whites being top managers, middle jobs were done by Indians and Africans, the clerical jobs – and this was because customers did not want to deal with African staff.

Citi’s outlook on Kenya Banking

Citi Bank has been producing some insightful research reports on companies they watch like KCB, Equity and Safaricom for their investment clients.  The latest one (Will it stay or will it go? — Awaiting clarity on the Banking Act) is an outlook on Kenya banking, based on the financial results that all banks released for the third quarter of 2017 which is exactly a year after Kenya’s Parliament passed a law, which the President then signed, that capped all Kenya banking loan rates at a maximum of 14% per year.

Citi’s findings:

  • Despite the Banking Act of 2016, Kenya’s leading banks maintain among the highest margins (8~9% NIMs) and returns (ROTE 20~23%) of any frontier market, coupled with strong capitalization, a stable currency and an improving political environment.
  • While there is little clarity on the future of the Banking Act, we acknowledge that many investors are interested in that “what if?” case if the legislation was to be amended, and hence provide a sensitivity analysis to gauge the upside from changes to the regulatory regime.
  • The Kenya banking sector is fairly concentrated with the top 5 banks controlling just under half of the assets (48%), KCB is the largest bank with a 14% market share, followed by Equity Bank and Cooperative bank with 10% each. A similar story for deposits, with the top 5 banks accounting for 50% of the market, KCB is the largest player with a 15% share, followed by Equity Bank at 11% and Cooperative bank at 10%.

The Citi report notes that KCB who grew loans by 9% in the third quarter despite the interest rate cap has a diverse client base that makes it easier for the bank to navigate the challenging environment. KCB has expressed interested in acquiring smaller banks like National Bank, as it also it pulled back from volatile South Sudan in May 2017, where it only retains a license.

Equity has put brakes on lending, with flat loans growth in the third quarter. The bank’s Equitel is now Kenya’s second largest mobile money platform after Safaricom’s M-Pesa, with 4% of customers and 23% value of transactions. Equitel appeals to customers as it has no internal charges. Meanwhile, mobile loan growth fell in the half year at Equity as the bank tightened lending standards, while KCB’s grew. Still, Equity disbursed 1.6 million mobile loans through Equitel in the first half of 2017.

The Citi report also notes that KCB lags Equity in the digital push, with mobile phones accounting for 70% of transactions at Equity and  57% at KCB. Elsewhere, 86% of all customer transactions at Co-op Bank are done on alternative delivery channels mainly mobile banking, ATMs, internet and agency outlets. Another finding was that the large banks have benefitted from the flight to safety by depositors following the collapse of three smaller banks in 2015-16.

The Citi Report looked at the Kenya banking interest rate caps under three scenarios with the first  being that the caps are extended even further to bank charges. The report mentions that the Kenya banking regulator, the Central Bank (CBK), had rejected 13 out of 16 commercial bank applications to increase charges, all pointing to tough times for banks in a slow loan growth environment. The second scenario was that the interest rate cap remains as is, and the third scenarios was that the caps are loosened by excluding some loan segments which will allow banks to lend at higher rates to riskier segments like SME’s, retail and micro-finance clients. However, Citi finds that the interest rate caps are not going away soon, and they are here to stay, probably for a few years. 

Finally, the Citi report (published on 19 November), rates KCB as a ‘buy’ with a target share price of Kshs 47 (current price on December 8 is Kshs 43), while they are neutral about Equity Bank which they value at Kshs 38.5 per share (current price is Kshs 41) as they think it is fairly valued.

Interest Cap Impact and Bank Resilience

The end of August marks the deadline for Kenyan banks to publish their unaudited half-year results (January to June 2017). Those of most banks are done and there are some trends, some concerns and some resilience areas seen in what’s been a challenging year for the sector that has for a long time been seen as one that earns super-profits for its shareholders.
The interest rate capping bill was signed last August, and while its initial impact was not fully seen in the 2016 results, one year later these can now be interpreted. The law has had far-reaching impacts on different banks, their performance, operations and strategic directions. Overall, there has been a decline in bank results due to a mix of interest rate caps and digitization, as phones have taken over from branches as the main point for the bulk of customer transactions.
Some observations: 
  • Less traditional banking: there has been a decline in assets as more banks have turned to digitization to cut costs, and increase efficiency. At Equity, deposits were flat between March and June, which also marked the third straight quarter of overall loan declines
  • Lower interest income: e.g. 45% down at Family Bank, plunging it to a half-year loss
  • A buildup of government debt: Equity now has Kshs 105 billion, KCB 100 billion, and Diamond Trust 83 billion.
  • More closure of branches e.g. Barclays, Standard Chartered, Bank of Africa and Ecobank. But it’s not all gloom as some banks like Cooperative and Diamond Trust have announced plans to open new branches.
  • Job cuts have been announced at KCB, Standard Chartered, Barclays, Family Bank, National Bank of Kenya, NIC Bank, Ecobank, Bank of Africa, First Community Bank and Sidian Bank.
  • With nowhere to go, banks are giving money back to shareholders. Some banks have reduced capital, while KCB with profit flat at the half-year will pay a rare interim dividend confirming analysts’ view that some banks will return more capital to shareholders at a time when they have curtailed lending to riskier customers. 
  • Big banks are okay, small ones, not so much:

  • Losses, not profits. E.g. Family and Sidian, went into the red at the half year, despite layoffs and closures, while Ecobank managed to stay above water. These have mainly been attributed to reduced interest income.
  • Declines in loans and deposits at tier ii banks, and T1 equity
  • Mortgage declines: Buy Rent Kenya said that there has been a major drop in the number of mortgage applications over the past year and that those that the cap was meant for are currently the biggest losers as banks are skeptical to give credit to most individuals as they now have numerous terms and conditions that are not easy to meet.
  • Local banks converting debt to equity at Kenya Airways: This has been a reluctant move, with three banks delaying the Ksh 23 billion conversion that will see a consortium of Kenyan banks become the second largest shareholder at the airline.
  • Equity announced they will no longer lend unsecured loans to salaried Kenyans, cutting off a product feature that has brought them great popularity.
  • New business lines:  Banks have looked to other sources of income this year. Co-operative Bank which has net interest income and pre-tax profit that was down 10% in the half-year, received regulatory approval from the Central Bank of Kenya to enter into a joint venture with Super Group, a leading South African leasing company and together they will target major infrastructure projects, government vehicle leasing, oil & gas exploration, and other leasing opportunities. Elsewhere, National Bank entered a partnership with World Remit to allow remittances to be paid directly into bank accounts at NBK, Barclays is funding solar mini-grids in Turkana while Standard Chartered bucked the trend on Equity and will step up unsecured lending. 
  • Non performing loans (NPA’s) are up: At NBK, they are up to 29 billion, half the 57 billion loan book. NBK is awaiting a Kshs 2.9 billion NSSF (shareholder) loan to shore up capital.
  • NPA’s have also gone along with increased provisions e.g. 1.8 billion at Stanbic at the half-year.

Atlas Mara Prospectus Peek

Atlas Mara is selling 44.44 million new shares at $2.25 each to raise $100 million. Atlas Mara is acquiring 13.4% equity in Union Bank Nigeria (UBN), from Clermont Group for $55 million, increasing its stake to 44.5%.

This offer aims to raise $30 million from Fairfax Africa (a Canadian investment holding company that is listed on the Toronto Stock Exchange) by selling them 13.33 million shares at $2.25 each. Fairfax will also sign up for $100 million of mandatory convertible bonds due in 2018. It is intended that the funds raised from the issue of the mandatory convertible bonds will be used to fully fund the UBN purchase and the remainder be used to fund the bank (expansion of the market, treasury and fintech business lines and product offerings) and participate in the UBN rights issue.

Atlas Mara is a company incorporated in the British Virgin Islands (largely a tax-free territory – no income, withholding or capital gains taxes) and is the holding company for a group that provides bank and financial services across sub-Saharan Africa which they intend to disrupt. Atlas Mara was formed in November 2013 by Atlas Merchant Capital LLC and the Mara Group, led by Robert E. Diamond Jr. and Ashish J. Thakkar, respectively. In 2016, Atlas Mara had $2.7 billion assets and $ 9 million profit in 2016.

Africa footprint: Besides UBN, they also own 100% of Finance Bank of Zambia (the 5th largest bank in Zambia, serving 2 million people), and 62.1% of Banque Populaire du Rwanda (swelled by a merger with BRD Commercial Bank). Also ABC Holdings – Botswana (owned 62.13% by the Company and 37.87% by Atlas Mara Financial) owns 100% of African Banking Corporation Zambia, 100% of ABC Holdings (Zimbabwe), 68% of Tanzania Development Finance Corporation, 97% of African Banking Corporation of Tanzania, 100% of African Banking Corporation of Mozambique SA, and 100% of African Banking Corporation of Botswana

Atlas shareholders are Guggenheim Partners Investment Management (11.22%) Wellington Management Company, LLP (9.91%) Owl Creek Asset Management, LP (7.99%), Trafigura Holding (6.23%), UBS Asset Management: O’Connor (8.10%) Janus Capital Management LLC (3.92%). Of the founders, Atlas – AFS Partners LLC has 0.5% and Mara Partners FS has 0.13% while Mr. Diamond beneficially owns 1,000,000 Founder Preferred Shares and Mr. Thakkar beneficially owns 250,000 Founder Preferred Shares.

UBN is a mid-tier bank with about 3% market share of assets and loans and deposits in Nigeria. It was established in 1917 and rescued from insolvency in 2009 along with other banks. It now has 3 million customers, 900 ATM’s and 414,000 mobile banking users and, in 2017, UBN  signed agreements with Visa and MasterCard

UBN Plans: While Atlas Mara is not going for a majority stake in UBN (though they may choose to do this), they will;
– Push UBN to be a leading Tier II bank in Nigeria
– This will be done using fintech and treasury initiatives
– They will use UBN to secure more lending
– After 2019, they will push UBN to be a Tier I bank by acquiring another Nigerian bank

Risks facing UBN: Nigeria has recently experienced significant depreciation of the Naira, inflation and economic recession. Also, UBN’s loan book is exposed to the oil and gas sector which comprises 47% of its lending. Also, there is currently a 12.9% free float of UBN’s shares, which is below the mandatory 20% free float requirement prescribed by the Nigerian Stock Exchange Listing Rules.

Fees: $1.9 million will be paid to Atlas Merchant Capital LLC, the investment fund co-founded by Bob Diamond, upon completion of the transaction.

The deal deadline is 29 August.

Extracts from the Atlas Mara prospectus.

EDIT August 30 Atlas Mara is pleased to announce the closing of the offer period for the recently launched Placing and the Open Offer on 29 August 2017. The Placing and Open Offer, together with the recently announced strategic investment from Fairfax Africa (comprising a Mandatory Convertible Bond and a Firm Placing) constitutes “the Strategic Financing”. The Strategic Financing will support Atlas Mara’s growth initiatives in the acquisition of additional equity interests in Union Bank of Nigeria Plc (“UBN”) and scaling up the Markets and Treasury and Fintech business lines. ..Bob Diamond, Chairman of the Board of Atlas Mara, said: “We are thrilled to have Fairfax Africa as our long-term partner. This transaction puts Atlas Mara in a very strong position to deliver on our strategic goals. We remain focused on execution and delivering on cost discipline and profitability.”