Co-op Bank joins other big lenders in takeover binge

Sunday March 15 2020

Customers queue outside a Co-operative Bank branch in Kenya. The lender has a market share of 9.63 per cent, with 159 branches in Kenya and South Sudan. PHOTO | FILE | NMG


Co-operative Bank of Kenya, classified among the country’s biggest lenders, is the latest to announce plans to acquire Jamii Bora Bank, the second-smallest by market share, deepening ongoing takeovers of struggling financiers. 

Co-operative Bank is Kenya’s fourth-largest lender holding assets worth Ksh450 billion ($4.5 billion), while the loss-making Jamii Bora Bank (JBB) has an asset base of Ksh12.5 billion ($125 million). The proposed transaction, which is still subject to both shareholders and regulatory approvals, will see Co-op Bank acquire 100 per cent shareholding of JBB, which controls 0.12 per cent of the market.

Last year, KCB Group — the country’s largest lender — acquired the struggling National Bank of Kenya, and is also in the process of partially taking over assets of the collapsed Chase and Imperial Banks. Commercial Bank of Africa (CBA) and NIC Bank merged during the year, creating the third-largest bank in the country and in the region by assets, NCBA Group Plc. Diamond Trust Bank also bought out Habib Bank, while Equity Bank — the second-biggest lender by assets — is in the process of taking over four banks in Rwanda, Zambia, Mozambique and Tanzania from London-listed investment firm, Atlas Mara.


The Kenyan lenders have intensified acquisitions to bolster their balance sheets, increase efficiency and reduce operating costs to survive tough competition, which has seen revenue growth through an increase of costs of products and services become an uphill task.

The buyouts have helped the big banks to grow deposits and protect revenues that have come under pressure largely due to ballooning bad debts and the implementation of the new international financial reporting standards (IFRS) 9 that demand higher provisioning for all loans before they turn to bad.


Medium-sized lenders are also not left behind in the wave of mergers and acquisitions. I&M Bank bought out Giro Bank, Fidelity Commercial Bank (SBM), Equatorial Commercial Bank (Mwalimu Sacco) and Fina (Guaranty Trust).

The Kenya Bankers Association (KBA) — the industry’s umbrella body — says mergers and acquisitions are inevitable in the industry as lenders strive to remain viable and ensure decent returns to shareholders.

“Almost the entire market has become price conscious. It is unlikely that you will have much room in increasing the prices and hence the only option to safeguard your margins is to become as efficient as possible by looking at your cost base and business model. When you look at these options then you will find that this trend of mergers and acquisitions are inevitable,” said Habil Olaka, the KBA chief executive, adding, “This trend is not unique for banking, we are going to see a lot of them coming up in various sectors as firms struggle to ensure that they remain viable.”

Some market analysts have, however, cast doubts on the viability of the mergers and acquisitions unfolding in the banking industry.

“For an acquisition to make sense, which is very rare, there must be clear demonstrable benefits on how the merged business will generate in excess value compared with operating a single business,” said Francis Mwangi, chief executive of Kestrel Capital (EA) Ltd.

“I think balance sheet growth is a more compelling reason for mergers and acquisition in the banking industry currently than profit because some banks have to be cleaned up. I see the profit impact taking longer given integration lags,” said Edwin Chui, head of Research & Strategy at Dyer & Blair Investment Bank.

The Jamii Bora acquisition is set to increase Co-op Bank’s assets to Ksh462.5 billion ($4.62 billion). Analysts at AIB Capital Ltd however predict that the transaction may not have significant impact on Co-op Bank’s books.

“We don’t think the acquisition will add much to Co-op’s balance sheet. Jamii Bora’s market share stands at 0.21 per cent and this is unlikely to have a material impact on Co-op,” said AIB Capital in a research note.


Co-op Bank, which listed on the NSE in 2008, has a market share of 9.63 per cent, with 159 branches in Kenya and South Sudan.  

A survey by consultancy firm PricewaterhouseCoopers carried out last year shows that powerful forces such as customer expectations, technological capabilities and regulatory requirements are transforming the retail banking industry. While growth has remained elusive, costs have proven difficult to contain and return on equity (ROE) remains stubbornly low.

According to a report called Retail Banking 2020: Evolution or Revolution? bankers view attracting new customers as one of their top challenges over the next two years, largely due to ever-changing customer behaviour and expectations.

Kenyan lenders’ profit margins and capital resources are coming under pressure following the implementation of the new international financial reporting standards (IFRS) 9 that demand higher provisioning for all loans before they actually stop performing.

The Central Bank of Kenya had exempted the lenders from charging increased loan-loss provisions in their income statements in the first year of the IFRS 9 regime (January 1 to December 31, 2018), a move that saw banks record lower expenses while booking higher profits. The banking regulator allowed banks to charge increased loan-loss provisions against the retained earnings in the balance sheet and not in the profit-and-loss account, sparing them a drastic dip in profits.

Beginning January 2019, however, banks started making full provisions in compliance with the new accounting standards, in a move that is now having a negative impact on their earnings.

According to consultancy firm Deloitte, the implementation of these standards are widely expected to increase the stock of credit impairment provisions and affect bank profits and regulatory capital.


KCB, last year, acquired the State-owned National bank of Kenya (NBK) through a share swap of 10 ordinary shares of NBK for every one ordinary share of KCB. The National Treasury controls 22.5 per cent shareholding in NBK while NSSF holds 48.05 per cent of the shares. In KCB, the National Treasury is the single-biggest shareholder with 17.53 per cent shareholding followed by NSSF at 6.12 per cent.

The merger between CBA and NIC is expected to see both lenders control a combined market share of 9.9 per cent, a customer base of over 40 million people and over Ksh475 billion ($4.75 billion) worth of assets in the four East African countries — Kenya, Uganda, Tanzania and Rwanda.

Equity Bank’s planned acquisition of 6.27 per cent shareholding in Atlas Mara Ltd is expected to cost an estimated Ksh10.7 billion ($107 million).

But the transaction has stalled after the bank failed to reach a buyout deal within the set deadline.