Local bank acquisitions are now happening at cheaper valuations owing to the effects of the interest rate cap.
“Earlier bank acquisition announcements, such as Fina, K-Rep and Equatorial Commercial Bank were at 3.2, 1.8 and 2.3 times the price-to-book ratio respectively, while recent acquisitions are happening at between 0.8 to 1.7 times the price-to-book ratio,” investment analyst at Cytonn Investment Caleb Mugendi said. “It is a great time to be an acquirer.”
At least seven mergers and acquisitions have taken place in the banking sector in the last few years including the acquisition of Habib Bank by Diamond Trust Bank Kenya, Fidelity Commercial Bank by SBM Holdings and Oriental Commercial Bank by M Bank.
Others include K-Rep Bank by Centum, Equitorial Commercial Bank by Mwalimu Sacco, Giro Bank by I&M Holdings and Fina Bank Group by GT Bank.
“We are already witnessing increased consolidation in the banking sector, with smaller, uncompetitive banks being acquired,” Mugendi said. “We shall continue to witness increased consolidation.”
Mugendi said other factors contributing to the high merger and acquisition activity in the financial services sector were deterioration in asset quality coupled with increased non-performing loans which have gone up 11 per cent during the first half of the year.
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“The industry will become more stable where only banks with a strong competitive advantage, either in capitalisation, deposit gathering or niche shall remain,” Mugendi said.
Cytonn Investment” Banking Sector Report for the first six months shows that the capping of interest rates led to reduced profitability with margins coming down to a decline of 13.8 per cent compared to last year’s growth of 15.5 per cent.
He said that in order for banks to be able to compete and survive in the new environment, they also had to diversify their income streams through new products such as bancassurance to increase their non-funded income that is not under the interest rate cap.
Mugendi welcomed the decision of the Central Bank of Kenya to campaign for the repeal the interest rate cap law that has been in effect for a year now adding that it did not achieve its intended objective.
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