Foreign banks open fresh turf war with local rivals

Kenya’s highly competitive banking market is headed for a major shift as local units of multinational lenders stage a major comeback to claw back the huge market share they have ceded to homegrown rivals in the past three years.

The latest half-year financial results show that Barclays and StanChart have sharpened their tools of trade – ready for renewed battle for customers that promises to rearrange the top-tier of Kenya’s financial services market.

Barclays and StanChart dominated Kenya’s banking sector for decades, topping the rankings in key metrics such as profitability and loan book size, but the ground shifted in 2011 when KCB replaced Barclays as the country’s most profitable bank.

Equity and Co-operative banks have subsequently overtaken the two lenders with foreign roots further relegating them down the pecking order.

But the half-year results show that after nearly four years of low-profile activity, Barclays and StanChart are now pursuing a rapid growth strategy that is hinged on increased lending and introduction of new services for an edge over their homegrown rivals.

CfC Stanbic, a local subsidiary of South Africa’s Standard Bank, has also stepped up its growth momentum as it races to break into the top five group after staying in the sixth position for years.

StanChart on Thursday announced a 34.4 per cent jump in net profit to Sh6 billion for the half year ended June, racing past Co-op Bank’s (Sh4.7 billion) to rank as Kenya’s third-most profitable lender after Equity (Sh7.6 billion) and KCB (Sh8.1 billion).

Barclays posted a Sh4.2 billion net profit in the same period, placing it fifth ahead of CfC Stanbic whose net earnings rose 47.6 per cent to Sh3.2 billion.

Co-op Bank overtook Barclays and StanChart’s profitability in the first quarter of last year, a position that StanChart has now grabbed with a Sh1.3 billion lead over the homegrown lender.

StanChart’s performance was driven by increased lending and a Sh1.8 billion gain from the sale of an undisclosed property.

READ: Property sale lifts StanChart profit to Sh6bn

While Barclays continues to rank at the bottom of the top five’s list, the lender is clearly on a comeback track – going by the half-year results.

Barclays disbursed Sh11.6 billion new loans in the second quarter of the year, expanding its loan book to a record Sh128.4 billion.

This marked a significant jump for the bank whose loans portfolio steadily shrunk from 2008’s peak of Sh109 billion before rising gradually to Sh118.3 billion last year.

“We want to be one among the top three players in the industry in the next three years,” said Jeremy Awori, Barclays’ chief executive, who took office early last year.

He said the full impact of the enlarged loan book will be felt from the second half of the year that ends in December.

Mr Awori’s strategic standpoint means Barclays will in the near term focus on beating Co-op and Stanchart in terms of overall profitability and asset base growth.

The three-year target must also be seen as an implicit acknowledgement that it will take much longer to match up to KCB and Equity that have amassed much more assets from operations covering the East African region.

READ: Barclays grows lending with eyes on mortgage market

Barclays’ new battle plans are expected to renew rivalry among the top five lenders that accounted for 57 per cent of the industry’s total pre-tax profits of Sh125 billion last year.

Mr Awori said the bank’s bigger risk appetite is drawn from Johannesburg-based Barclays Africa to which it now reports following a reorganisation of Barclays African subsidiaries last year.

The Kenya subsidiary previously reported to London-based Barclays Plc, which had to sanction big-ticket loans, making its credit approval processes more stringent compared to its homegrown rivals.

The lender also shunned fast-growing sectors such as real estate and SMEs in pursuit of a conservative lending strategy that led to the contraction of its loan book that has largely focused on large corporate borrowers.

Its consolidation under Barclays Africa has, however, culminated into a revision of the risk appetite, removing a major bottleneck that has limited its growth.

Mr Awori says Barclays is now ready to lend more to SMEs and the booming property market that has taken loans running into tens of billions of shillings from local financiers.

To this end, Barclays recently poached Standard Chartered’s general manager for SMEs, Humphrey Muturi, to help drive its lending among mid-sized firms.

Loans to SMEs have higher margins compared to the large corporate customers that currently account for the bulk of Barclays’ lending.

The bank is also setting up a mortgage desk to grow its presence in the real estate sector where KCB and Housing Finance are the biggest players.

Among other targeted sectors is the nascent oil and gas where the bank says it can deploy large sums as a consortium with its affiliates in the continent, including South Africa’s Absa that has Sh6.3 trillion in assets.

Barclays’ ambitions are likely to see it raise more funds. The lender has announced plans to take a Sh4 billion loan from its parent to boost its capital levels that have come under pressure from aggressive lending in the second quarter.

Besides growing its loan book, Barclays is also betting on expanding its services to grow non-interest income that is becoming a key driver of every bank’s total earnings in the Kenyan market.

These include investment banking that will see the lender earn fees from advisory services, derivatives to help customers hedge against currencies and interest rate volatility.

It remains to be seen whether Barclays and StanChart will edge out KCB and Equity that now rank among Kenya’s leading multinational companies.

Unlike their homegrown rivals, the local units of the foreign banks cannot exploit expansion opportunities in East Africa because their parents have existing operations in most of the markets.

This structure means that the two banks can only grow by expanding their lending and other financial services in the local market, a task that has become harder with the cash-flush KCB and Equity entering the foreign banks’ corporate lending turf.

KCB has the largest asset base – including loans — at Sh439.7 billion followed by Equity (Sh302.9 billion). Co-op is third with Sh266.6 billion, ahead of StanChart (Sh228.8 billion) and Barclays (Sh213.1 billion).

While Barclays and StanChart have been overtaken in absolute profitability, an analysis of their results shows they are still competitive in terms of returns to shareholders.

Stanchart had the highest return on equity (ROE) in the half year at 16.3 per cent, followed by Equity (14.3 per cent), CfC Stanbic (13.2 per cent), KCB (12.6 per cent), Barclays (12.4 per cent) and Co-op (11.6 per cent).