Local banks beat foreign rivals in profits contest

Kenya’s homegrown lenders have used high risk appetite and ability to connect with the bottom segment of the loans market to topple their foreign rivals from the top of the profitability table, an analysis of the bank results shows. 

The top three local banks have been nibbling at their foreign rivals’ market share and now control 40 per cent of total industry earnings going by the latest six-month financial results.

The shift in control of the banking market is best demonstrated by the fact that the top three foreign banks – Barclays, StanChart and Citi – controlled 91 per cent of the industry’s profit in 2000 but have steadily lost dominance to remain with 24 per cent of the earnings by the end of June.

Industry statistics show that the three most profitable local banks – Kenya Commercial Bank (KCB), Equity and Co-operative Bank – earned Sh25 billion in the first six months of the year compared to Sh15 billion that the top three foreign banks earned out of the industry’s total profit of Sh62 billion.

The foreign banks first took the path of descent in 2003 when top three local banks increased their share of industry profits to 14 per cent, pulling down the former’s share to 71 per cent.

In 2000, the profitability league produced different winners with NIC Bank, Commercial Bank of Africa (CBA) and CFC Stanbic topping the list of local banks.

KCB, CBA and National Bank of Kenya (NBK) took charge in 2003 before Equity – then a small building society – and Cooperative Bank entered the fray.

The top three local banks earned Sh1.9 billion profits in 2003 way behind the top three foreign lenders who walked away with Sh9.6 billion.

Nine years later (at the end of 2012) the protagonists changed places leaving the leading local lenders with Sh41.4 billion of industry profits or 38 per cent of the total while the foreign banks walked away with Sh31.8 billion or 29 per cent of the total.

This shift has mainly been driven by the ability of local lenders to connect with the lower-income segments of the population as well as small and medium-sized enterprises considered the riskiest fraction of the lending market.

“The turning point came at the beginning of the millennium when the foreign banks pulled out of rural and low-income urban areas, closing branches they felt were unprofitable. But the likes of Equity went in, buying out some of their branches,” said Bob Karina, the managing director of Faida Investment Bank.

“It amounted to foreign banks selling their profits to the local banks.”

The rush to the bottom also opened new avenues for lenders like KCB that had for years sat on a big asset base it had failed to efficiently deploy in the lending market.

“In 2003, this was virtually a virgin segment of the lending sector that was ready for the taking for any lender with a high appetite for risk,” said Robert Bunyi an analyst with Mavuno capital.

Control of the bottom million has helped KCB to stay in the list of top three local banks in the past 13 years.

(READ: KCB grows fastest among top banks)

Equity’s aggressive pursuit of Kenya’s unbanked enabled it to enter the top league for the first time in 2007 when it became the second-largest local bank by profit after KCB.

The two lenders have since consistently stayed at the top, deepening their lead with the spread of footprints to neighbouring Uganda, Tanzania, Rwanda and South Sudan. 

The change in fortunes of the local versus foreign banks appears to have begun in earnest in 2006 with the listing of Equity Bank at the Nairobi Securities Exchange (NSE).

This is the year that saw foreign banks’ share of industry profits fall below the 50 per cent after staying above it for decades.

Local lenders crossed the 20 per cent market share line for the first time in the same year.

The top three foreign banks took home 45.3 per cent of industry profits while their local counterparts earned 21.2 per cent. Foreign banks’ share of industry profits fell further in 2007 to 38.6 per cent even as it rose in absolute terms of Sh13.8 billion.

Local lenders continued their profitability climb, earning Sh8.5 billion or 24 per cent of the total in the same year.

“Controlling this market requires an understanding that the small trader or the light manufacturer is the driving force for growth,” said Michael Musau, who heads investment advisory firm Emerging Africa Capital.

“The big deals are not many but there is a massive amount of the small deals that have been the main drivers of KCB and Equity Bank’s growth.”

Mr Musau said focus on the large customers was bound to have its limits even as the low-income and unbanked segment continued to grow.

“Perhaps as much as 75 per cent of the business in commercial banking is attributable to the small customer, leaving only about 25 per cent for the big corporations,” said Mr Musau.

The slowdown in the growth of  big foreign banks has also been linked to the low risk appetite that has locked them out of numerous lending opportunities at the bottom of the pyramid.

“One could say that the local banks understand the low-income market better and have the space to quickly respond to market dynamics – a luxury that foreign banks do not have,” said Mr Musau.

Some analysts, however, reckon that it was the central bank’s drive for financial inclusion that enabled the local lenders to control a bigger share of the market.

“This is the model that has helped the local institutions overtake the foreign ones,” said Augustine Misoka, a research analyst at Sterling Capital.

Barclays Bank of Kenya, which stayed at the top of profitability league table until about three years ago, has been the biggest loser in the shift of fortunes. Its ability to mint money has been declining relative to the massive asset and capital base it controls.

StanChart, known in Kenya for ruthless efficiency, has avoided much of the risk associated with the bottom end of the market while the third-largest foreign-owned bank, Citi, has unapologetically stayed focused in the corporate segment of the market.

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