South African based Global Credit Ratings GCR has changed NIC Bank Kenya PLC’s long-term and short-term national scale ratings of A(KE) and A1-(KE) from stable to an Evolving Outlook citing its merger deal with Commercial Bank of Africa Limited.
In its latest review, GCR states that successful merging of the two banks would be a positive move as it would result in lower funding costs for the combined bank through improved ability to mobilise deposits and it could also increase the lending capacity of the bank to the private sector and government’s focus areas,
“The successful conclusion of the proposed merger could see the combined bank emerge as the third biggest bank in Kenya by total assets, and the second biggest bank in Kenya by customer deposits, the banks are expecting a combined capital adequacy of around 18%, which is considered adequate for the operating environment,” GCR states in its report.
Nonetheless, GCR notes that the merger could also pose operational and technical risks of combining two banking systems, funding structures and cultures adding that the long-term integration costs could drag the earnings of the new entity for approximately 2-3 years.
“We also anticipate the long-term integration costs to be material, causing a drag on earnings for a two to three-year period, limiting the positive effect of the merger. Potential increases in asset and liability exposure concentrations (overlaps from both banks having large exposures to the same asset or liability counterparties) may also be an issue, especially considering the limited number of high-quality borrowers and depositors in the region.
“Conversely, if the merger proves to be difficult, raising operational risks and damaging the operating performance, capital and funding stability of the rated entity, we may lower the ratings,” GCR stated.