Analysts at Cytonn Investments have welcomed the move by NIC Group and Commercial Bank of Africa (CBA) to explore the possibility of a potential merger, saying it would enhance growth of the new entity in various aspects of banking and wealth management by consolidation of CBA’s strength retail banking given that it has approximately 21.5 million accounts, and NIC’s corporate banking expertise, with the banking having approximately 116,000 accounts
If successful, the move will also leverage on the new entity’s sturdy balance sheet brought about by capital consolidation and strong liquidity, to capture strategic growth opportunities, providing the capability to undertake large transactions, Cytonn says its its weekly report.
The merger of the two banks, which are owned by the Duncan Ndegwa and Kenyatta families respectively, is subject to due diligence processes and approval from shareholders, the regulators such as the Capital Markets Authority (CMA) and Central Bank of Kenya (CBK), and other stakeholders. CBA is a Tier 1 bank with an asset base of Ksh 242.6 bn while NIC is a Tier 2 Bank with an asset base of Ksh 201.0 billion as of Q3’2018.
CBA’s total assets stood at Ksh 242.6 billionn as at Q3’2018 compared to NIC’s Kshs 201 billionn indicating that both banks have a strong asset base. Net loans and advances stood at Ksh 115.1 billion for CBA and Ksh 114.9 billion for NIC during the same period while investment in government securities was at Ksh 77.3 billion and Ksh 60.2 billionn respectively. However, NIC seems to be generating higher interest income than CBA as indicated by the higher yield on its interest earning assets of 10.8% compared to CBA’s 4.9%, and consequently a higher Net Interest Margin (NIM) of 5.8% compared to CBA’s 4.9%.
CBA has a higher deposits mobilization capacity compared to NIC, with customer deposits coming in at Ksh 191.3 billion and 145.0 billionn as of Q3’2018, respectively, which is mainly attributable to CBA’s mobile application platform M-Shwari. Data from the Central Bank of Kenya (CBK) shows that CBA had about 21.5 million deposit accounts in the period ending September 2018, compared to NIC’s 116,000 accounts during the same period.
Cytonn says the merger is likely to lower the new entity’s cost of funds due to availability of cheaper funding and greatly benefit NIC whose cost of funds stood at 5.6% in Q3’2018 higher than the industry average of 3.1%.
It notes that NIC had a poorer asset quality with the ratio of non-performing loans coming in at 13.3% in Q3’2018 compared to CBA’s 9.9% over the same period. NIC also had a lower NPL coverage ratio of 51.4% compared to CBA’s 67.7% indicating that the bank was less positioned to write off bad loans. The potential merger is therefore likely to improve the new entity’s asset quality by employment of better credit profiling capabilities possessed by CBA.
CBA had a higher total operating income of Ksh 15.5 billion versus NIC’s Ksh 11.0 billion mainly driven by a higher proportion of non-funded income of Ksh 8.3 billion equivalent to 53.4% of total operating income compared to Kshs 3.4 bn generated by NIC, equivalent to 29.9% of total operating income in Q3’2018. We expect the merger to diversify and strengthen the revenue streams of the new entity backed by NIC’s strong returns from its loan book and CBA’s operational capabilities to generate non-funded income, thereby resulting in a higher bottom line.
“In conclusion, we expect that the merger will provide an opportunity for the new entity to grow by tapping into both retail and corporate banking. With a potential combined market share of 10.9% by total deposits, the new entity upon merger would be the second largest by market share, second only from KCB Bank that commands approximately 14.7% market share as per the Central Bank of Kenya’s (CBK) Banking Supervision Report 2017,” Cytton says.
“This would place the new entity on a strong position to play an important role in the Kenyan banking sector. We are of the view that the industry should and will see more consolidation, as smaller banks with depleted capital positions are acquired as their performance deteriorates due to the sustained effects of the Banking (Amendment) Act 2015. We note that the industry needs fewer but stronger players to ensure the sector remains stable. We expect consolidation to continue in the near term in Kenya’s banking sector,” it adds, noting that the Kenyan market remains highly overbanked.