M&A deals in Kenyan banking sector set to increase
According to Cytonn Investments, mergers and acquisitions in Kenyan banking sector are likely to increase in the coming days driven by low valuations and the plan by the central bank to lift the moratorium on licensing of new banks.
Mon, 10 Apr 2017 10:10:34 GMT
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AI Generated Summary
- Evaluation of financial metrics crucial for assessing bank growth potential
- Intense competition driving banks to diversify offerings and enhance efficiency
- Low valuations in listed banking space attracting local and international investors for acquisitions
The banking sector in Kenya has been undergoing a phase of consolidation with a series of acquisitions taking place. The latest development involves Diamond Trust Bank's intention to acquire a major bank. According to Cytonn Investments, this trend of mergers and acquisitions is expected to continue increasing due to low valuations and the planned lifting of the moratorium on licensing new banks by the central bank. Caleb Mugendi, an investment analyst at Cytonn Investments, sheds light on the evolving landscape of the banking sector in Kenya and the factors driving this wave of consolidation.
Mugendi emphasizes the importance of taking into account various financial metrics such as earnings growth, balance sheet strength, and deposit mobilization, to evaluate the growth potential of banks. With regulatory changes such as caps on loan pricing and deposit rates, banks are facing challenges in sustaining profitability and are exploring strategic options like acquisitions to enhance their market position.
The competition within the banking industry in Kenya is intense, with banks targeting similar clientele bases. This has led to a shift in business models, with banks diversifying their offerings to cater to new customer segments. The innovation and drive towards efficiency in the sector are evident through the introduction of new products like PESA link for mobile fund transfers.
In terms of investment opportunities, Mugendi points out that the low valuations of banks in the listed space have attracted both local and international investors seeking strategic acquisitions. Banks trading below their book value present attractive entry points for investors looking for long-term growth prospects.
On a regional level, the performance of Kenyan banks' subsidiaries in neighboring countries has varied, with challenges observed in regions like South Sudan due to economic instability. However, there remains potential for growth and market expansion in regional markets, as banks leverage their presence to capture new opportunities.
The recent announcement of Diamond Trust Bank's intention to acquire Habib Bank highlights the trend of consolidation in the sector. The acquisition, valued at 0.8 times book value, signifies a strategic move by the two banks to align their interests and expand their international presence.
In conclusion, the consolidation trend in the Kenyan banking sector is expected to gather momentum in the coming days, driven by market dynamics and regulatory changes. Banks are exploring mergers and acquisitions as a strategic response to evolving industry challenges and opportunities. The landscape of the banking sector in Kenya is poised for further transformations as institutions navigate towards sustainable growth and competitive positioning in the market.