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Now cash-rich Kenyan banks look beyond the EAC for new business

Saturday August 23 2014
coop

A Co-op Bank branch in Nairobi. But even as Kenyan banks look to venture outside the region, analysts say they will need to refine their strategy given their relatively limited success in the EAC market. PHOTO | W. OERI

Cash-rich Kenyan banks are increasingly looking at entering new markets outside East Africa and compete with Nigerian and South African lenders for control of the continent’s banking sector.

Co-operative Bank and DTB are the latest Kenyan lenders to announce plans to venture outside East Africa as they seek to grow earnings amid increased competition at home.

Co-op Bank, which launched operations in South Sudan last year, said it was targeting the Ethiopian and Ugandan markets, while DTB said it has its sights on Malawi and Mozambique.

The move is driven by growing balance sheets resulting from increased capital sizes, a maturing market and growing shareholders’ pressure to boost earnings.

Ernst and Young (EY) estimates that for every $1 in GDP, the country’s lenders hold $0.6 of banking assets. In Tanzania, Uganda and Rwanda, the figure stands at $0.3, $0.2 and $0.12 respectively.

Taking on competition

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The shift to markets outside the EAC will put Kenyan banks in direct competition with South African and Nigerian lenders, who on average, have more capital. For example, the local units of Stanbic and Barclays Bank each have larger capital base than Kenya’s top five banks combined.

But where Kenya lacks for capital, it makes up for in experience. Whereas South African banks are big on large corporate and large ticket financing, Kenyan banks have experience in the retail market, a factor that could help them grow their units in markets such as Malawi.

“The key is to focus on the retail end… the South Africans focus to a large extent on corporate deals… also, given that a sizeable number of their existing clients will have businesses in these markets, East African banks can look at servicing them,” said Kuria Kamau, an analyst at Kestel Capital.

The experience of using technology to increase access to the unbanked could be especially crucial. Top Kenyan lenders like Equity, KCB and Co-operative Bank now allow their customers to open, save and borrow money through their phones without having to physically visit branches.

“Lessons learnt from launching these mobile-based products can prove a key differentiator as can partnerships like the Equity and Airtel one. These can make them more competitive in the retail space,” said Mr Kamau.

READ: Equity-Airtel deal steals Safaricom’s thunder with money-transfer platform

But repeating the success in new markets like Malawi could prove a challenge. According to a Finscope survey on the Malawi banking sector, 80 per cent of the population is unaware of mobile money and out of the remaining 20 per cent who are aware, only 22 per cent use the service.

In Kenya, 80 per cent of the population is registered with mobile money services. And mobile phone penetration in Malawi is at about 30 per cent.

The uses of alternative delivery channels are also important in reducing the cost to income ratio and growing customer satisfaction.

For example, more than a third of all banking transactions done by KCB, Co-operative and Equity are through either agency or mobile banking, with the former putting the figure at 50 per cent.

But there are numerous challenges.  For example, Southern African companies have struggled to break into the Kenyan markets, a factor that has largely been blamed on the different management cultures in the two countries, while Nigerian banks operating in Kenya continue to struggle.

“The key to a business entering new markets is to try to be as local as possible… in terms of things like whom you hire. You also have to build genuine relations with employees, government and supplies,” said Philip Kinisu, the former chairman of PwC Sub-Saharan Africa.

“Also, it’s important to always remember that just because it worked in one of your markets doesn’t necessarily mean it will work in another market,” added Mr Kinisu.

But even as Kenyan banks look to venture outside the region, analysts say they will need to refine their strategy given their relatively limited success in the EAC market.

While the regional market remains under-banked— less than 40 of Tanzanians and slightly above 40 per cent of Ugandans have access to formal banking— Kenyan lenders have struggled to grow their industry market and profit share.

Four of the nine Kenyan banks operating in Uganda reported losses. The banks that found the going tough included NIC, Commercial Bank of Africa (CBA), Bank of Africa (BOA) and Imperial while KCB, Equity, DTB, ABC and Guaranty Bank, formerly Fina Bank, all made profits.

Overall, the 11 Kenyan banks with subsidiaries outside the country made a pre-tax profit of Ksh5.2 billion (59 million) in the year to December 2013, compared with Ksh5.1 billion ($58 million) in the same period in 2012.

Part of the reason is the concentration in the region’s banking sector. For example, in Tanzania, CRDB and NMB control over 40 per cent of the country’s banking assets. In Malawi, Standard Bank and National Bank control 52 per cent of the country’s banking assets.

The banks will also have to prepare for volatile country and regulatory risks. For example, according to data from the Malawi Reserve Bank (MRB), the average lending rate in the country was 37.13 per cent in March, compared with an average of 19 per cent in the region. The country’s high lending rate has pushed non-performing loans to 15 per cent.

Moreover, the Malawi kwacha has been volatile, shedding 10 per cent of its value in the six months to March.

But despite the risks in these new frontier markets, there is immense opportunity. For example, the MRB puts the return on assets (ROA) in the Malawian banking sector at 5.3 in 2013.

The 2013 ROA for Kenyan, Uganda, Tanzanian and Rwandan banks stood at 3.5, 2.6, 1.6 and 1.2 per cent respectively.

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