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Small banks ripe for wave of mergers on stiff regulation

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Elizabeth Nkukuu, Cytonn chief investment officer. PHOTO | DIANA NGILA

The financial services sector is poised for a wave of consolidations, mergers and acquisitions given recent changes in the regulatory environment.
Cytonn Investments new report projects a realignment that will see mergers driven by stiffer regulation and a need by players to remain competitive.

“Consolidation is happening and will continue to happen – the last two years alone we have had five bank transactions. Equatorial Bank, Giro Bank, Oriental Bank, Fidelity Bank and Habib Bank have all been acquired and the common theme is that they are all Tier III banks. As the operating environment becomes tougher and more disciplined, we expect to see more Tier III banks get acquired,” said Elizabeth Nkukuu, chief investment officer during the launch of the banking sector report.

The capping of interest rates has cut margins for banks, with small lenders taking the biggest hit. Small banks, which rely heavily on wholesale deposits, had been paying interest of more than 10 per cent to cash-rich firms and high net worth individuals.

The cash was then lent to borrowers at rates of up to 18 per cent or higher, leaving them with a significant spread to cover their cost of funds and book a profit.

The Banking (Amendment) Act 2016, which came into force on September 14, sets the maximum lending rate at four percentage points above the Central Bank Rate (CBR), meaning 14 per cent on Monday.

Cytonn investment manager Maurice Oduor said foreign banks keen to get a piece of the local banking pie are projected to snap up firms keen to stay afloat.

“We expect the entry of more foreign players with the stiffer regulation and a highly competitive landscape pushing more banks into becoming candidates for consolidation,” said Mr Oduor.

DTB #ticker:DTK announced plans to acquire Habib Bank for Sh1.8 billion, using its own shares to compensate the owners.