This archive report was first published on 5 September 2019.
On September 5, 2019, Moody's Investors Service issued a statement regarding the acquisition of the National Bank of Kenya (NBK) by KCB Group. According to Moody's, the acquisition would be an immediate credit negative for KCB Group, but profitability and funding would strengthen over the next 2-3 years, outweighing these short-term effects.
Moody's noted that in the short term, the acquisition would weaken KCB because NBK has a high stock of problem loans, making NBK less solvent than KCB Group. KCB Group would handle the bad loans through write-offs and increase provisioning to reduce risks.
Additionally, NBK's low capitalization would lead to a slight deterioration of KCB Group's capital adequacy, albeit above regulatory requirements and that of global peers. As a result, KCB Group shareholders' pro forma equity to total asset ratio would decline to 15.0% from 15.9% as of December 31, 2018.
However, Moody's predicted that KCB Group would experience gradually stronger profitability and funding over the next two to three years. The combined entity would hold around 62% of Kenya's government deposits, which are cheaper and would reduce KCB Group's overall funding costs. Moreover, the deposits have high net interest margins, which would improve profitability.
Furthermore, KCB Group would diversify its revenue base by generating additional transactional revenue by leveraging on NBK's large government-related business flows. There is an expectation of greater operational efficiency once the merged entity integrates and rationalizes the various operating channels.
Finally, the banking sector is set to gain from the acquisition by removing a distressed bank through consolidation, leading to stability in an overbanked system. KCB Group's assets would grow to around KSh830 billion from KSh622 billion at year-end 2018, consolidating KCB's leading position in the banking sector with an asset-based combined market share of more than 16%, from 14% as of December 2018.
