KCB’s Congo entry positive – Business Daily
KCB Group chief executive officer Paul Russo during the lender’s announcement of half year 2022 financial results in Nairobi on August 24, 2022. PHOTO | DIANA NGILA | NMG
KCB’s entry into the Democratic republic of Congo (DRC) is positive for the bank. A month ago, the lender said it had entered into a share-purchase agreement with existing owners of Trust Merchant Bank SA (TMB), a financier domiciled in the central African republic.
It will initially acquire 85 percent of the ordinary shares of TMB while the existing shareholders will continue to hold the balance for a period of not less than two years, after which KCB may acquire their shares.
Additionally, KCB says it will pay a cash consideration for the TMB shares determined based on the net asset value of TMB at completion of the proposed transaction and using a price to book multiple of 1.49x.
As a bank, TMB is the third largest lender in the DRC by total assets (behind RawBank and EquityBCDC). Provisional figures show that it’s total asset base grew by 25 percent y/y to $1.46 billion at the close of 2021.
Additionally, its customer deposit base increased by half to $1.3 billion while customer loans and advances grew by a third to $433 million. It had an efficiency level of 79 percent and recorded a single-digit return on its shareholder equity.
Nonetheless, TMB is a fantastic asset that gives KCB Group immediate visibility in the DRC. Additionally, with fairly strong distribution, the re-franchising turn-around time will be shorter.
Beyond onboarding costs, KCB may not need to export capital to the bank given the low intermediation levels in the market. Instead, TMB can organically strengthen its balance sheet. KCB has not provided any timelines but given the nature of such a transaction, a conclusion could happen in Q1 2023.
Aside from the asset being fantastic, the structure of the market also generally favors Kenyan banks. The DRC is largely a transactional market and deposit intermediation levels remain comparatively low.
At the close of 2021, the loans-to-deposit ratio stood at 36 percent while loans and advances to customers only accounted for a third of total banking sector assets.
By comparison, the loans-to-deposit ratio in Kenya stands at 70 percent while loans account for over half of banking sector assets. At these levels, the DRC’s banking sector is yet to realise full intermediation with the ideal level for any growing sub-Saharan Africa economy expected to be around 60 percent.
Effectively, the pie is still big enough. It is also a growing market. In US Dollar terms, total banking sector assets grew by 36 percent year-on-year to $14.4 billion in 2021.
Further, the DRC economy is largely dollarised and bank funding remains exclusively in foreign currencies (dominated by the US dollar). In 2021, total customer deposits increased by 41.5 year-on-year to $11.3 billion. It is estimated that commercial banks’ foreign currency deposit liabilities constitute over 80 percent of their total deposit liabilities.
A number of leading foreign-domiciled banks do not have appetite for local currency (Congolese Franc) funding and are exclusively USD funded. This is positive for KCB as it stands to harvest USD liabilities for its already underfunded USD asset book.
Finally, current loan default levels don’t trigger any alarm bells. In 2021, provisional figures show that only 10 percent of loans were non-performing.
Broadly, lending is largely receivable-based; and given the low intermediation levels, the expectation of flare-ups should be minimal. Essentially, loan non-performance would be a big issue if risk appetite levels were high in the market, which has not been the case.
However, efficiency is still a problem in the DRC market. In 2021, industry cost-to-income ratio (CIR) stood at 70 percent. The top three banks, namely Rawbank, EquityBCDC and TMB, had an average CIR of 72 percent.
This explains the thin returns in the DRC’s banking sector. In 2021, industry return-on-equity averaged at 8 percent. This is where technology and third-party platforms will play a key role in distribution and in enhancing efficiency.