KCB’s plan to acquire the debt-laden National Bank of Kenya recently gained approval from its shareholders and the Central Bank of Kenya. The transaction is expected to be finalized by the end of the third quarter of 2019.
An analysis by Moody’s Investor Service predicts that the takeover will lead to a weaker financial position for KCB Group in the short term.
Firstly, National Bank’s non-performing loans make up more than 50 per cent of the loan book, a factor likely to adversely affect the financial status of KCB Group. The regional lender intends to manage the non-performing loans by writing them off and increasing provisions for bad debt.
Secondly, NBK’s significantly low level of capital is expected to slightly reduce the capital adequacy ratio at KCB Group. Although the union of the two banks will result in a weaker financial position for KCB group, analysts at Moody’s expect the top lender to maintain strong performance and manage risks.
The report notes that the lender’s position will improve in the next two to three years. “KCB Group’s profitability and funding profiles would strengthen over the following two to three years, outweighing the short term effects,” states Moody’s Investor Services.
KCB group will benefit from the large size of government deposits held by National Bank. Moody’s estimate that the joint entity will hold roughly 62 per cent of government deposits. The huge size of government funds will reduce the cost of finance for KCB and therefore lead to higher profits.
The merger of the two institutions is a positive move for the banking industry in Kenya as it will reduce the number of struggling lenders in the sector. KCB and NBK are expected to have a combined market share of 16 per cent, the largest share by a single entity in the banking sector. KCB currently holds a 14 per cent market share.
After the acquisition is finalized, National Bank will operate as a subsidiary of KCB group over the next two years as the two institutions integrate the operations of NBK into KCB Bank Kenya.
Related; Central Bank approves National Bank takeover offer by KCB Group
