KCB raises stakes with Sh12.4bn war chest

Cash flush Kenya Commercial Bank has announced plans to double its loans book following the Sh12.4 billion capital injection, setting the stage for a bruising battle for control of the Kenyan banking business.

The bank’s CEO Martin Oduor-Otieno on Thursday shared his thoughts with Business Daily about his Sh35 billion capital machine, the direction of the local banking industry, and future prospects of the bank.

Excerpts:

The rights issue fell short of the Sh15 billion expectation. Are you disappointed?

Absolutely not. If one gets a success rate of 83 per cent in exams, it is reason enough to be happy. Raising Sh12 billion is not a simple matter.

More importantly, KCB had stated expressly that it was targeting Sh7.5 billion and we got Sh5 billion on top.

What next with the Sh12.4 billion capital injection?

The bank is now more confident of taking on its rivals head on and consolidating our business is our number one step. The market should expect a very aggressive KCB as we target to grow to double our loan book and deposits.

How do you expect to double your business in such a competitive market environment?

The high capital levels will give us a number of advantages over most of our rivals.

I can now lend up to Sh7 billion to a single customer, from Sh4 billion. Five years ago I could only lend slightly below Sh1.5 billion.

This tells you that I am targeting huge property and infrastructure projects that are becoming common in the region, which other banks would struggle to fund.

We will increasingly look at the telecoms, energy, and road construction sectors. These industries are cash hungry. Volumes and the scale of loans will influence future profitability in Kenya’s banking sector, and KCB wants part of this change.

So, does this mean that the bank intends to shed its retail banking tag and go big on corporate banking?

Not really. I want to cover the full breadth of the market cross the Eastern Africa region. The bank will give the subsidiaries (Uganda, Tanzania and Rwanda) Sh3 billion from the right issue proceeds to boost their capacity since they have been operating at minimum capital levels.

This, together with opportunities that will come with the common market, will help the subsidiaries grow their market shares. Presently, all the subsidiaries apart from South Sudan control less than five per cent market share.

The banking industry has announced better profits in the first half of 2010. Are these results sustainable?

There will be a lot of pressure to maintain this momentum because the falling lending rates will begin to squeeze bank earnings.

Kenyan banks rely heavily on interest income and with the net interest margin (the difference between deposit and lending rates) coming down, it will be crucial for the industry to re-invent itself.

How does KCB intend to navigate the falling interest margin given that 79 per cent of its income comes from lending?

Driving transaction income and loans volumes. As mentioned earlier, we are going for bigger infrastructure projects to push volumes. But cost containment will also form a key plank in our strategy, especially staff costs. Our cost to income ration is above 60 per cent, way above Barclays Bank’s 58 per cent. Our intention is to bring it down 50 per cent.

Does it mean that KCB is planning to shed jobs?

We put a freeze in employment last year and are not replacing staff who have left through natural causes. We also have a voluntary retirement plan in place.

There is growing optimism that the economy is turning the corner after two years of sluggish growth. What is your bet?

Above five per cent growth looks possible. Given the vibrancy we’ve seen in quarter two and the positive sentiments on the outcome of the August 4 referendum, this target can be surpassed.

Lending rates came down by between 1.5 and four per cent in quarter two. Are we likely to see further interest rate cuts?

The rates could come down further if CBK (Central Bank of Kenya) continues to keep interest rates on government paper low. If this trend persists for the next six months, their will be scope for KCB to cut lending rates by one to two per cent from the current base rate of 13.5 per cent.

The CBK governor says that banks are not lending enough to support Kenya’s fragile economy. What is your take?

Lending must be done in a very cautious manner since the risk element is unpredictable. What happens when something negative happens in the economy and lending rates move up to 19-20 per cent and borrowers who took loans at 15 per cent find themselves unable to pay? It’s simple — banks will be left on their own, to suffer.

So, growth in lending has to be very calculated.

Why has the bank preferred to start operations in new markets from scratch rather than acquisitions, which remove the headache of hiring staff, the struggle to lure deposits, and fighting for market share?

The bank has always been open to both options. The high buyout prices pushed us to set up shop from scratch.

Our entry into the regional market came when international banks were also looking for buyouts and this pushed prices up. But acquisitions remain a prominent strategy on our radar.

You have talked of plans to expand to more African countries. Have you zeroed in on any acquisition target?

We have not drilled down to any since we suspended expansion last year. But the size of our balance sheet now gives us confidence to seriously consider this option in our vision to be an African bank.

Banks are fast adopting the financial supermarket model, which spans from trading shares, selling insurance products and offering loans. Does KCB plan to take this path?

We are looking at it. But it depends on the value model that would add to our business. We are not going to rush to it just because every banker wants to be there. We have to get some synergies.

This is KCB’s third rights issue in six years. How soon should we expect you back to the debt markets?

Not any time soon. We are comfortable that the current capital will carry us through the next three to five years.