Africa: Chase woes revive key consolidation talk
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BANKING

Africa: Chase woes revive key consolidation talk

Central bank puts mid-tier lender into receivership; Kenya Commercial Bank wins takeover race.

By Olivier Holmey

Calls by Kenyans on Twitter (#KOT) to withdraw deposits from Kenyan mid-tier lender Chase Bank appeared to amplify a run on the bank in April.

One user wrote on the social media platform: “Don’t mess with Twitter. #KOT has shaken Chase Bank to the toes in just a few hours.” The next day, the Central Bank of Kenya placed Chase in receivership, partly blaming “inaccurate social media reports” for the crisis.

This was only the latest instance of the central bank under governor Patrick Njoroge stepping in to clean up the country’s banks. Since Njoroge assumed office in June last year, the central bank has put three banks in receivership: small-sized lender Dubai Bank Kenya, mid-sized Imperial Bank and Chase.

Beyond the fate of these individual institutions, their difficulties once again raise the question of whether or not Kenya’s banking sector, sometimes unusually innovative, is overcrowded and ripe for consolidation.

Buyers



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Within a fortnight of Chase going into receivership, 10 prospective buyers had come forward, according to comments by Njoroge to local media, suggesting strong appetite for banking M&A. Kenya Commercial Bank, with four times Chase’s assets and liabilities, won the fight to manage Chase and the option to acquire a majority stake in the lender. 

Research from Renaissance Capital shows Kenyan banks’ full-year 2015 results have an average 91% increase in non-performing loans and 167% rise in impairment charges because of tightened auditing procedures. As a result, many wonder which bank will be next to run into difficulties and face takeover by the central bank or a peer.

Conditions seem right for consolidation. RenCap analysts Adesoji Solanke and Olamipo Ogunsanya wrote on April 20: “There is a flight to quality happening and the large banks are benefiting.” The interbank market has been unbalanced, with some second and third-tier banks dependent on central bank liquidity following Chase’s problems, they added.

Their note pushed for a rise in the minimum capital base from KSh1 billion ($10 million) to at least KSh5 billion in the first instance, which should lead to a smaller bank count that can be better supervised by the regulator.

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About a third of all Kenyan banks have just KSh1 billion or KSh2 billion of capital, according to RenCap, and the idea of fewer banks is gaining traction, even at the highest levels of Kenyan regulation and government. Njoroge favours consolidation, as he told Euromoney in the April issue.

There are more than 40 banks in an economy of around $64 billion. Not everyone agrees that consolidation is desirable. Ronak Gadhia, African banks analyst at Exotix, says the closure of smaller banks, some of which focus on niche parts of the economy, could have an adverse effect.

“There are quite a few banks, compared to Nigeria or South Africa,” he says. “But consolidation can create its own problems. Many small banks serve a specific purpose.” There will not be forced regulatory consolidation, he says, but there may be tighter regulation. Because of that, some banks may no longer be profitable enough to remain independent.

Njoroge himself advocated the continued existence of niche banks during his parliamentary screening, as RenCap’s research note pointed out. Last year he warned against rushing through consolidation.

Consolidation

Andre DeSimone, chief executive of Kestrel Capital in Nairobi, says having niche banks “sounds theoretically nice” but there is little need for many tiny institutions serving only specific communities.

He says Kenya’s banks could have proactively consolidated of their own accord, but failed to do so. For that reason, he says, the central bank is having to step in. Asked whether it receiverships form part of a broader regulatory push for consolidation, he says: “It’s very clear that’s what’s happening.”

The central bank placed a moratorium on licensing new commercial banks in November. DeSimone says that prevents the arrival of new players, forcing anyone who wants to get into the market to buy existing banks.

With three banks going into receivership in less than a year, the pace of change is accelerating under Njoroge’s watch. That they may have happened for different reasons – Dubai Bank Kenya, in part because of what the CBK called “weak corporate governance structures”; Imperial for what it thought was misrepresentation in its financial statements, and Chase because of “liquidity difficulties – takes little away from the sense of fragility it gives the banking sector, particularly among small and mid-tier banks. 

“We hadn’t seen that many receiverships in 16, 17 years,” says Gadhia.

DeSimone adds: “It has been a real wake-up call for other banks.”

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