Why desire to go continental could break banks’ safes

What you need to know:

  • Equity Bank has perhaps gone furthest away from home to play the continental game.
  • Ethiopia and DRC seem to be the focus of Equity and KCB in their pan-African strategy.
  • In April this year, Equity announced it would acquire Atlas Mara stakes in banks in Rwanda, Zambia, Mozambique and Tanzania and its share price rose from Sh39.71 to Sh41.95.

In 2015, shareholders of United Bank of Africa (UBA), one of the leading continental lenders, discovered that the financier had spent Sh3.5 billion (12.5 billion naira) on “other transportation equipment”, a euphemism for an aircraft.

The bank had not bought the plane as an investment or stake but the private jet would help managers run a complex continental business that most players have failed to crack.

GTB Bank, another West African lender that set out to conquer Africa, spent Sh2.3 billion (8.34 billion naira) to purchase an “aircraft” as reported in its 2015 annual report.

Struggling retailer Choppies is also said to have bought an eight-seater jet as part of its plans to make access to their branches easier and convenient.

Banking the continent has not been a rosy story. It was the graveyard for Atlas Mara or a black hole sucking money from the parent bank but giving very little in return even for successful brands such as UBA, Ecobank, GTB, Barclays and Standard Bank.

“Over the years, UBA has made considerable financial investments to become Africa’s global bank with operations in 20 African countries, the United Kingdom, the USA and France,” said Emeke E Iweriebor, the CEO for UBA East and Southern Africa.

Kenyan banks have largely remained local and extended regionally but as the lenders run out of room to grow, with an eye on a Sh1 trillion balance sheet, the lure of the African story is beckoning.

Equity Bank has perhaps gone furthest away from home to play the continental game.

But reading from investors buying the company’s shares, the news has not been received with the anticipated ululations of the 35-year-old former building society.
In April this year, Equity announced it would acquire Atlas Mara stakes in banks in Rwanda, Zambia, Mozambique and Tanzania and its share price rose from Sh39.71 to Sh41.95.
Later on September 9, Equity announced it was in talks with some of Banqué Commerciale du Congo’s shareholders to buy a controlling stake for cash, but its stock barely ticked from Sh37.9 to Sh38.


KCB announced it was out to buy NBK through a share swap and at a discount in April 2019 and its share dipped from Sh45 to Sh44.9. This is despite NBK boasting a total Sh114.5 billion in assets that would push KCB into invisibility of a combined Sh860 billion and closer to the coveted psychological Sh1 trillion portfolio.

Why didn’t such news excite the market, which has a cash deluge with few options for investments?

“In my opinion, investors’ reaction is expected considering that the NSE is in a bear market with many banking stocks trading at well below their fair valuations,” said Renaldo D’Souza, a research analyst at Sterling Capital.

He said another reason is that it takes time before the regional subsidiaries can contribute significantly to the bottom line of the group.

“Some subsidiaries for Kenyan banks continue to perform poorly, where I single out the general poor performance of Tanzania subsidiaries,” D’Souza said.

Ronak Gadhia, EFG Hermes Frontier director for sub-Saharan African Banks, said research shows that despite the impact of rate caps in Kenya, Equity Bank-Kenya still remains the most profitable subsidiary for Equity Bank Group.


Patrick Mumu, research analyst with Genghis Capital, says while there could be some strategic benefits in the long term, which remain uncertain, the short-term prospects are bleak.

“The efficiency levels in a majority of these regional subsidiaries are wanting and the ability of the Kenyan banks to leverage on digital platforms in these regions has not really picked up as expected. While the regional expansion strategy may pay off in the long-term, investors are looking to cash in, in the short-term,” Mumu said.

He says banks that have been acquired have also not inspired confidence.

The Atlas Mara Banks that Equity Bank bought had been billed to be the biggest African financial institutions, at one time pitted to buy Barclays Bank in 2016.

It was cofounded by former Barclays Bank chief executive Bob Diamond and Ugandan investor Ashish Thakkar, and went on a buying spree of lenders in Nigeria, Zimbabwe, Botswana, Zambia, Mozambique, Rwanda and Tanzania and was valued at Sh81 billion.

In Nigeria it was hit by currency devaluation, and Zimbabwe was not financially sound and mountains of bad loans bogged down the investments.

The Zambian market has suffered a commodity slump, as Mozambique struggles with the stain of the Tuna bond scandal where Eurobond cash was looted by bankers and politicians.


Some of the acquisitions needed cash injections and operational costs could not be contained. By the time Equity was buying it, four of its banks were valued at a paltry Sh10 billion.

KCB bought the books of Imperial Bank, which was put under receivership in 2015, and National Bank, whose bad loans grew from Sh2.2 billion in 2012 to Sh32.4 billion by the June this year.

“There have been concerns around some of the acquisitions that the large Kenyan banks are undertaking, both locally and in the regional market,” Mumu said.

Analysts also point out that regional subsidiaries are largely a drag on overall group profitability and require huge investments that take away money but bring in very little.

Gadhia, of EFG Hermes Frontier, says investors have a negative view of Kenyan banks’ regional expansion strategy largely because of the difficulties faced by UBA and Ecobank due to their respective Pan-African banking strategies.

“Both banks aggressively expanded out of their host countries, which created a drag on group profitability because the new subsidiaries were not as profitable,” he said.

When you have a building society like Equity you are in full control. When you open a branch you can call or quickly drive there.


Expanding into neighbouring countries with similar characteristics is challenging but doable, though the further you go, you encounter different languages, different cultures, and the distance defies costs and that’s when you need a private jet.

A study published by the Journal of Finance and Economics in 2014 shows that foreign banks are on average less profitable than parent banks, with the exception of those in developing markets, with low loss provisions.

To win this game you have to put away significant capital to fight for market share, because frontier-markets profits are controlled by big banks because of economies of scale. Thus sub-scale subsidiaries become a drag on overall group profitability.

“UBA is on a stronger footing to gain market share in the 20 African countries where we operate, in line with the vision to become the undisputed leading and dominant financial services institution in Africa. We continue to build and execute a sustainable business model,” Iweriebor said.

However, in practice banks are not too eager to throw around money in far-off places and tend to test the waters with small operations, which research analysts say bring in small returns.

“In our opinion, neither UBA nor Ecobank committed sufficient capital in the new countries that they were investing in. As a result, the subsidiaries in those countries would end up being sub-scale, resulting in sub-optimal market share,” said Gadhia.

EFG Hermes head of frontier research Kato Mukuru estimates that Kenyan banks currently have a capital shortfall of $955 million (Sh95.5 billion).
Thus they have less than the required capital base for their current operations, let alone for new expansions.

So there is a risk for investors that they will be asked to put in more capital in banks, which will earn relatively lower returns (at least in the short-term).
Mumu, however, says Kenyan lenders, especially in the listed space and among the largest banks, are sufficiently capitalised and maintain healthy buffers on the regulatory minimum requirements.

He said the significant discounts in the transactions will serve to cushion existing shareholders.

Standard Bank also faced the same issue when it first started expanding outside South Africa; most of those subsidiaries (such as Kenya and Uganda) were underperforming until the lender significantly increased its investments in those outlets, which enabled them to ramp up their scale.

“The profitability of Equity Bank’s regional subsidiaries used to be quite low historically but it is gradually improving because it is ramping up its investments in those countries (it has substantially increased its branch network in all those countries). You can see the same trend at KCB (and other banks that have expanded regionally),” Gadhia said.

KCB, which operates in Uganda, Tanzania, Rwanda, Burundi and South Sudan, has looked inwards for growth, swallowing up Imperial Bank and National Bank at bargains since the two lenders were in distress.

Now KCB Group Managing Director Joshua Oigara says the lender is eyeing the Democratic Republic of Congo (DRC) and is awaiting the granting of a licence to operate in Ethiopia, where it already has a representative office. “Note that there is an initial investment to this expansion. We have seen it with Equity Bank and KCB,” D’Souza said.


Ethiopia and DRC seem to be the focus of Equity and KCB in their pan-African strategy.

Equity entered Congo through ProCredit, which was rebranded to Equity Bank Congo, a rather successful venture that has inspired its push to buy a controlling stake in Banque Commerciale du Congo. Equity Bank Congo became the most profitable subsidiary in three years but the Kenyan lender knows it has to buy market share to play in Congo.

“With regards to DRC, huge business growth potential exists but there are major political factors to consider and this is a risk for any foreign bank venturing into the country,” D’Souza said.

Ethiopia is said to have a huge potential with a population of over 112 million and it is estimated that 35 per cent of Ethiopians hold a financial institution account (82 per cent in Kenya).

Further, less than one per cent of adults in Ethiopia have mobile money accounts (73 per cent in Kenya), depicting the vast potential the country is yet to tap into, considering it has over 42 million mobile subscribers.


“However, a key obstacle lies in regulatory constraints as the country currently prohibits foreign ownership in a bank, and certain key sectors enjoy State protection, with foreign banks only allowed to open representative offices,” Mumu said.

He said this has hampered regional expansion efforts but reforms by the current prime minister, who has been pushing for multi-sector reforms, could mean that the regulatory framework enhances competition and Kenyan banks are able to venture into that market.

D’Souza said Ethiopia looks exciting on paper considering the size of the population and the near consistent 10 per cent GDP growth.

However, its economy is highly controlled and entry and operations might not be as straightforward as they appears.

“Ethiopians’ acceptance of foreign banks is unknown at this point and this is a major consideration,” D’Souza said.

Thus the problem for investors regarding banks’ regional expansionary strategies is two-fold. They believe that the strategies will continue to remain a drag on group profitability (at least in the short term) and thus resulting in low returns. They also believe that lenders may need to raise more capital to finance these strategies.


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