Threat of Nigerian ‘take-over’ stalks Kenyan banks

Guaranty Bank, Nigeria’s largest lender by market capitalisation, announced in July that it had acquired a 70 per cent stake in Kenya’s Fina Bank at a price of Sh8.6 billion ($100 million). Barely four months later, another Nigerian bank made an acquisition, this time in West Africa.

In early November, FirstBank, Nigeria’s biggest lender by assets, announced that it had acquired 100 per cent equity interest in the West African operations of International Commercial Bank (ICB) Group through a conditional sale and purchase agreement.

ICB Group is a financial services conglomerate headquartered in Switzerland with operations in 10 African countries.

FirstBank acquired existing banking operations in four new markets-Ghana, Sierre Leone, Guinea and Gambia with a total of 28 branches of which 17 are in Ghana, five in Guinea, four in Gambia and two in Sierra Leone.

The 2008-2009 consolidation of the Nigerian banking sector yielded very strong banks by way of imposing higher capital requirements. Right now, to get a new banking licence in Nigeria an investor is required to have Sh13.4 billion ($156 million) in core capital, compared to Ghana’s Sh2.6 billion ($30 million) and Kenya’s Sh1 billion ($12 million).

These ongoing acquisitions continue to demonstrate how big Nigerian banks are, especially from a balance sheet perspective. And having exhausted the Nigerian market, they are now increasingly looking for opportunities elsewhere in Middle Africa.

The expansion is also driven by Nigerian banks’ ever-growing appetite for big ticket transactions, especially in the Mining, oil and gas, telecoms and manufacturing sectors.

Additionally, Nigeria has banks that can compete both from a balance sheet and pricing perspective. At the close of June 2013, the top five banks had a single obligor limit (the capacity of a bank to lend to a single customer) of $2.6 billion.

Single obligor limit remains the key measure of a bank’s balance sheet strength. The same top five banks in Kenya had a capacity of just $400 million (and $200 million for the same in Ghana).

This scenario calls for consolidation in Kenya’s banking sector by way of higher capital requirements.

Otherwise the current core capital requirement in Kenya of $12 million is seemingly insufficient for the kind of development projects being launched in the country and needs to converge with the rest of Middle Africa regime.

Most central banks in the region are now revising upwards their core capital requirement to a minimum of $20 million (including Zimbabwe and Zambia now asking foreign-owned banks to provide $100 million in core capital).

With Kenya launching more ambitious big ticket development projects, coupled with the discovery of oil in the Northern part of the country, the appetite for the Kenyan market by Nigerian banks is set to grow and could see more local acquisitions, especially by FirstBank and Zenith Bank.

However, in their pursuit of other markets, Nigerian banks are more likely to stumble on two key challenges. First, Nigerian banks hold foreign currency liabilities, especially US dollars, at very expensive levels.

Their cost of dollars is as high as eight per cent compared to an average of five per cent levels in Kenya and the larger EAC. This makes lending to high quality corporate borrowers a bit prohibitive.

Secondly, Nigeria’s Central Bank (CBN), has now passed a regulation prohibiting banks from placing dollars with their foreign affiliates, which takes effect in January 2014.

Typically banks with cross-border operations like to place deposits with their other affiliates either to help them out or to take advantage of emerging opportunities.

This rule will now make it hard for Nigerian banks to support their foreign affiliates struggling with raising dollar deposits. But the threat of a Nigerian “take-over” in the banking sector still looms large.