Moody's says NIC, CBA merger good for banking sector

NIC Bank
NIC Bank on Kenyatta Avenue in Nairobi. FILE PHOTO | NMG 

The proposed merger between NIC #ticker:NIC and Commercial Bank of Africa (CBA) is likely to lead to higher profitability for the new entity due to staff and branch rationalisation while reducing funding costs, global rating agency Moody’s says, and in the process will strengthen Kenya’s financial sector.

An update from the firm’s investment service said the merged entity would also be able to inject capital into strategic growth and digital expansion more efficiently thanks to a strong capital base.

“Despite integration costs in the first two years of the merger, cost synergies resulting from staff and branch rationalisation and reduced funding costs from the stronger banking franchise have the potential to support profitability,” said Moody’s on Monday.

“This will depend, however, on the banks effectively managing the high integration risks stemming from eliminating numerous positions, retaining customers during the transition process, and merging their financial and operational systems and infrastructure.”

CBA's reported total capital to risk-weighted assets ratio was 17.4 per cent at the end of 2017, while NIC's was 19.9 per cent. The increased scale would also allow the entity to offer higher credit limits to corporate clients.

According to the agency, the merger — which it termed as credit positive for the two lenders — will also add to the small number of large, strong banks in Kenya’s over-banked sector.

The deal is currently valued at Sh65 billion, being the book value of the two institutions based on numbers published in the September quarter.

The merged entity, in which NIC will hold a 47 per cent stake while the CBA will have the controlling 53 per cent equity, will become the third-largest bank in the country with assets of Sh444.3 billion based on September disclosures.

The merger is expected to be completed by end of September.

Areas of overlap including branch networks, technology, management and support functions are expected to be reviewed with a view to cutting costs and improving efficiencies.