Kenyan banks are not deriving value in their regional operations with subsidiaries in volatile South Sudan unlikely to stay viable due to conflict and currency woes, investment bank Renaissance Capital says.
KCB, #ticker:KCB Equity Bank, #ticker:EQTY Stanbic and Co-operative Bank #ticker:COOP have seen their subsidiaries in the troubled country fall on hard times due to hyper-inflation and currency devaluation, coupled with an ongoing conflict that has nearly crippled the nascent country’s economy.
Renaissance says in its latest note on African banks that Equity and KCB subsidiaries in other countries such as Uganda, Burundi, Rwanda, Tanzania and Congo DRC are also punching below their weight in return on assets.
Rencap suggests that the lenders should concentrate on strengthening the subsidiaries before undertaking further expansion into markets outside East Africa.
“Despite restricting expansion to East Africa, Kenyan banks have struggled to make waves in these markets,” says Rencap in the report.
“Although KCB and Equity have expressed interest in expanding beyond the East African region, we believe this is unlikely in the short term as both banks are yet to fully reap the benefits of their investments in the region.
"In our view, ramping up profitability in the various subsidiaries should be the key focus of management.”
Rencap estimates that in 2016, KCB’s East African subsidiaries including South Sudan contributed just two per cent to the group profit before tax.
South Sudan has undergone political and economic upheaval since 2013, forcing the lenders to scale down their operations there.
For Equity, the investment bank says that a quicker reaction to the woes in South Sudan relative to its peers helped minimise the hit from the conflict and currency problems.
However, Rencap says, while the bank’s other operations in Uganda, Tanzania and Rwanda are gaining traction, they only contributed six per cent to profit in spite of accounting for 12 per cent of total assets in 2016.
For Co-operative Bank, whose only regional subsidiary is in South Sudan, Rencap says the contribution to profit is negligible and likely to remain so in the near future.
“We believe that South Sudan will continue to struggle in the short-to-medium term, in light of the economic challenges,” Rencap says.