NBK acquisition will weaken KCB Group’s financials in the short term – Moody’s

Moody’s Investors Service says that the acquisition of the National Bank of Kenya (NBK) would be an immediate credit negative for KCB Group but profitability and funding will strengthen over the next 2-3 years, outweighing these short term effects.

Short term weakened financial

In the short term, the acquisition weakens KCB because NBK has a high stock of problem loans making NBK less solvent than KCB Group. KCB Group will handle the bad loans through write-offs and increase provisioning to reduce risks.

In addition, NBK’s low capitalization will lead to a slight deterioration of KCB Group’s capital adequacy albeit above regulatory requirements and that of global peers. In this case, KCB Group shareholders’ pro forma equity to total asset ratio will decline to 15.0% from 15.9% as of 31 December 2018.

Long-term profitability and funding

However, KCB Group will experience gradually stronger profitability and funding over the next two to three years. First, KCB will integrate Sh58 billion government deposits on NBK’s balance sheet thus the combined entity will hold around 62% of Kenya’s government deposits.

Government deposits are cheaper thus will reduce KCB Group’s overall funding costs. Moreover, the deposits have high net interest margins thus will improve profitability.

Furthermore, KCB Group will diversify its revenue base by generating additional transactional revenue by leveraging on NBK’s large government-related business flows.

There is an expectation of greater operational efficiency once the merged entity integrates and rationalizes the various operating channels.

A gain for Kenyan banking sector

Finally, the banking sector is set to gain from the acquisition by removing a distressed bank through consolidation leading to stability in an overbanked system. KCB Group assets will grow to around KSh830 billion from the Ksh622 billion at year-end 2018. This will consolidate KCB’s leading position in the banking sector with an asset-based combined market share of more than 16%, from 14% as of December 2018.

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You expect, for example, a road project by KENHA in Loitoktok to be administered via a CBK account and not a commercial bank? Contractors certificate based payment to be done by CBK minus KENHA mandated signatories on the ground? What would such a scenario imply on the liquidity ratio of most Kenyan banks?

You make it sound simple but you know the system is not as effective as you want it to be