Kenya’s banks lose investor appeal as interest caps bite

Chase Bank’s hopes of attracting new capital have been dashed by interest rate caps that were effected two months ago, taking the lustre from Kenya’s banking sector in the eyes of investors.

Industry players said three banks that had shown interest in injecting money into the troubled lender, under a revival plan being overseen by the Kenya Deposit Insurance Corporation, had developed cold feet, citing interest rate caps and the valuation of the bank as the key sticking points.

“Local banks are no longer interested in Chase Bank because they have realised that they need to utilise their reserves to deepen their digital banking platform as a result of the interest rate controls,” said Amish Gupta, the chief executive of AG Capital Ltd.

KCB, which KDIC appointed to stabilise operations soon after it took over the management of Chase Bank in May, had openly said it would be in the running to acquire the bank. The bank did not respond to our questions on its interest despite promises to do so. KDIC acting chief executive Mohamud Mohamud did not respond to our queries either.

Mr Gupta said the foreign investors’ interest in Chase Bank has cooled significantly because they have realised that they need to revaluate their strategies and change their business model to be competitive in Kenya.

Chase Bank was put under receivership in April 2016 after the management under-reported insider loans by Ksh8 billion ($77.31 million), triggering a run on deposits.

The capping of interest rates has made banking a volume-driven business that requires players to effectively manage overheads and funding costs, and to have a stable funding base in order to minimise balance sheet refinancing risks.

Prior to the enforcement of interest rate controls on September 14, the Central Bank of Kenya said it had received more than five offers for Chase Bank.

Qatar National Bank (QNB) and Bank of Mauritius were among the institutions that had shown interest.

Regulatory uncertainties facing investors have been compounded by a moratorium announced by the Central Bank a year ago on licensing of new banks, which has been read as a signal that Kenya is overbanked and consolidation should be encouraged. The moratorium has put two banks — Dubai Islamic and Mayfair — which had been licensed provisionally, in a quandary.

Dubai Islamic Bank said it had already spent $30 million on mobilising for the business, and is awaiting a response from the regulator. While Mayfair has yet to comment, it reportedly spent substantial amounts of money to hire staff and set up outlets. 

The Central Bank was expected to announce the new strategic investor in Chase Bank by last month, after KCB’s transitional role ended in August. KCB reorganised the institution and helped pay depositors up to $10,000 each. When KCB was appointed to the job in May, KDIC said the bank would also conduct due diligence and decide whether it would acquire a strategic stake in Chase Bank.

Apparent pressure from shareholders forced KDIC back to the drawing board, announcing at the end of KCB’s management that bids would be invited for a stake in Chase Bank. KCB chief executive officer Joshua Oigara said at the time that the bank would compete for majority ownership with other bidders.

Besides interest rate caps, industry sources said the pricing of Chase Bank had become a deal-breaker.

“As for Chase Bank, the value proposition as an acquisition target is no longer compelling. And given that its franchise has also nearly collapsed, it will be an uphill task getting a strategic buyer,” said  George Bodo, the head of banking research at Ecobank Capital Ltd.

Analysts said it would be increasingly difficult to sell a bank at a premium over its book value because valuations have dipped. Smaller interest margins — the major source of revenue for banks — and the plummeting returns on shareholders’ equity have also put off investors.

“The deal breaker could have been the pricing of Chase Bank at three times its book value. At this point in time, when we have a new law on interest rates, the level of returns from banking investments is low and that obviously explains why some buyers are not keen to put their money in Chase Bank,” said a source.

According to sources, Chase Bank shareholders refused to take a haircut on asset values further putting off buyers.

Market data from Cytonn Investments Management Ltd shows that in the first six months (January to June) of this year, the combined return on equity (ROE) of Kenya’s top 11 banks fell to 20.6 per cent from 23.8 per cent in the same period last year. Analysts at Ecobank Capital expect the ROE for the entire industry to slide to as low as 20 per cent by next year (2017).

The 11 banks were Standard Chartered, HF Group, I&M, Stanbic, Co-operative Bank, Equity  Group, KCB group, DTB Bank, NIC Bank, Barclays Bank and National Bank. 

Analysts at Exotix Partners said the average ROE of Tier 1 banks such as Co-operative Bank, Equity and KCB would decline from a historical average of 26.8 per cent to 19.8 per cent.

According to Francis Mwangi, head of research at Standard Investment Bank, the banking sector faces reduced earnings and lenders need to review their business models by reducing their overreliance on interest income from loans and advances.

“Currently,  for listed  banks  the return on equity is very low and while that in itself would dampen demand, sellers also have to adjust their selling price to reflect the current realities on the ground,” said Mr Mwangi.

“It is difficult for banks to justify the selling price of 2.5 to three times their book value in the current environment of interest rate capping,” he added.

Some analysts said returns on equity of as low as 15 per cent would still be attractive to investors from mature markets if they were ready to shrug off the risk premium often associated with sub-Saharan Africa. They cited Ghana, Zambia and the DRC as markets that could benefit from hesitation on Kenya.

Lenders such as Family Bank, Ecobank and Sidian Bank are undertaking cost-cutting measures through lay-offs to remain relevant in the market.

According to Mr Bodo, banks should review their business plans towards being volume driven, manage their overheads and funding costs, and have a stable funding base.

“With pricing regulations, both on the funding and asset side, risk appetites have collapsed. The battle now is about good customers, and they aren’t many,” said Mr Bodo.