Last year, Kenyan banks had a hard time with their cross-border operations within the East African Community (EAC), and they could be headed for another rough patch.
There are 10 Kenyan banks with cross-border operations in the EAC region: KCB, Equity Bank, Diamond Trust Bank (DTB), NIC Bank, Guaranty Trust Bank (GT Bank– formerly Fina Bank), Bank of Africa, Imperial Bank, African Banking Corporation (ABC), I&M Bank and Commercial Bank of Africa (CBA).
In total these banks had 257 branches at the close of 2013, which represented 12 per cent, of the total branch network in the four markets of Uganda, Tanzania, Rwanda, and Burundi (South Sudan is yet to be formally admitted into EAC).
Additionally, they accounted for 14, 15, 14 and six per cent of total assets, loans, customer deposits, and PBT respectively in the four markets. This shows that they are still minority players in these markets.
In 2013, the total profit before tax for the 10 banks declined by a marginal two per cent year-on-year to $35 million from $36 million in 2012. This decline was driven by the pre-tax losses posted by Equity Bank, GT Bank, NIC Bank and Imperial Bank, which totalled $7 million.
However, Equity Bank significantly narrowed its full-year pre-tax losses from $2.7 million in 2012 to just $0.2 million in 2013 and could be set to finally break-even its EAC operations (excluding South Sudan) this year.
DTB had the most profitable operations in EAC, in nominal terms, among the 10 banks after posting $20 million in pre-tax profits, which represented a 30 per cent year-on-year growth.
In revenue terms, the 10 banks generated $250 million in total revenues in 2013, which was a 13 per cent year-on-year growth and represented a paltry 11 per cent of total revenues generated by all banks in the four markets.
KCB and DTB generated the most revenues with both generating $49 million each. Equity Bank was a distant fifth with total revenues of $33 million.
But here is why these banks are still set to have a rough patch in these four markets.
First they face notable challenges in funding their balance sheets. In 2013 alone, their balance sheet funding costs accounted for a whopping 20 per cent of total funding costs of all banks in the four markets (and there are a total of 122 banks), while only accounting for 11 per cent of total revenues.
Additionally, in 2013, funding costs of the 10 Kenyan banks accounted for 67 per cent of their total operating costs. This serves to show the severity of the funding challenges these banks are facing in their cross-border operations, especially in generating low-cost deposits.
The problem is that they still have weak deposit franchises and are finding it increasingly hard to compete for cheap deposits with the more established brands.
In the four markets, CRDB Group (Tanzania), National Microfinance Bank (NMB, Tanzania), Stanbic (Uganda), Standard Chartered (both in Uganda and Tanzania) are the most dominant players and controlled a combined market share of 31 per cent in the deposit market.
Secondly, they have relatively weak balance sheets; at the close of 2013, the 10 banks had a total of $368 million in shareholder funds that were just 10 per cent of what the overall market had.
This translates to a single lending limit of just $92 million, which may not be sufficient to finance big-ticket transactions. This means that these EAC operations may need to adequately recapitalise.
Mr Bodo is an investment analyst.