Business Daily (Nairobi)
Michael Omondi
5 August 2007
Nairobi — Over the last one year, KCB has been desperately angling for a piece of either Crane Bank or Development Finance Company of Uganda (DFCU) as a linchpin to the Ugandan market.
After months of negotiations with the two banks, the talks finally came to the acquisition price and KCB's management hoped to close the deal by December to make way for a market entry next year.
But an unexpected shot from a rival started scuttling the plan when Barclays Bank completed its takeover of Nile Bank for an estimated price of between Sh1.6 billion and Sh1.7 billion, in a deal that most analysts noted should not have been priced beyond the Sh1.2 billion mark.
That is where all the bad things started emerging on the deal.
Suddenly, these banks that looked amiable in past negotiations hardened their tactics and started insisting on a higher price. After all, the Barclays deal had set a precedent. Other than Barclays paying a premium for Nile, some people familiar with the negotiations say the KCB management may have taken longer than was necessary to close the deal and missed an opportunity.
KCB chief executive Martin Oduor Otieno who is keen on an ambitious regional expansion however remains cautious on paying a premium for a Uganda acquisition and last Thursday sought and was granted permission to set up a subsidiary in Uganda from scratch.
An acquisition would have provided an easy solution compared with the cost of start up, which would involve buying land, putting up buildings, hiring staff, seeking regulatory approval, struggling to lure deposits and fighting for market share against established rivals such as StanBic, Barclays Bank and Standard Chartered Bank.
Mr Oduor-Otieno says that the acquisition plan now looks remote but he has not ruled it out.
"We are still open to both options, but we are now more keen on setting shop since the asking price for a buyout is on the higher side," he told Business Daily.
Though he was not willing to reveal the identity of the bank, people close to the details both in Kenya and Uganda narrowed KCB's targets to Crane and leaned more towards DFCU.
Analysts said that given the fact that DFCU has one big private equity shareholder, CDC Group Plc, which is willing to sell its 60 per cent stake to a trade buyer in a similar fashion as it happened in the deal between Housing Finance, Equity Bank and British American Insurance, it was the most likely target.
KCB with its current value of Sh56 billion on the Nairobi Stock Exchange (NSE) has enough currency to buy DFCU, which is valued at Sh4.4 billion on the Uganda Securities Exchange (USE) in an all equity deal.
Leading Kenyan firms keen to expand to Uganda and Tanzania such as East African Breweries Limited, Kenya Airways and Jubilee Insurance have been cross listing across the three countries.
DFCU has seven branches and has plans of pushing its network to 14, while Crane bank has three branches, with both banks having a heavy presence in Kampala. And both have been posting double digit growth in the past three years, a combination that made the deal attractive to KCB.
African Alliance, which last month downgraded DFCU to a "neutral" rating recommendation, terms it as a "recovery play." In its current state, DFCU would be an ideological soulmate to KCB of 2001, but which has recently emerged from a legacy of low quality loan assets and poor systems after a nearly eight-year turnaround period.
KCB had hoped to reach a deal by December to allow it enter the market from next year, but with acquisition talks having stalled, it now expects KCB Uganda to open doors from 2009.
Last Thursday, the bank's board gave the management the nod to set up shop In Uganda and the bank is on course to seek regulatory approvals from Ugandan authorities, as it sets its sight in breaking the stranglehold of the Ugandan banking market by Stanbic Bank, Barclays Bank and Standard Chartered Bank.
KCB's troubles in snapping one of the banks in Uganda can be traced to the sudden increase in acquisition interest by international banks and the premium buyout price most banks are willing to pay to stake a claim at the lucrative Ugandan market.
Analysts have attributed the sudden surge in acquisition interest by the international banks to the growth opportunities in the Ugandan market and the low levels of competition in the market compared to that of Kenya and Tanzania.
"The price for buyouts will remain high in the coming years as foreign banks increasingly look for lame ducks to acquire," said a source at Old Mutual Assets Managers (Omam)
However, some banks, like Stanbic, saw this opportunity early when it bought the debt-ridden state owned Uganda Commercial Bank, which it has since fixed, in 2002, making it the leading and the most profitable bank in Uganda.
The Ugandan banking sector, which consists of 15 commercial banks, has been growing at a fast pace over the last five years and the net profit has more than double over the period to Sh6.3 billion (Ush140 billion) in 2006.
The industry's assets grew by 21 per cent last year compared to a year ago, while its bad debt book as a proportion of the total assets has sunk to three per cent from 10 per cent in 2000.
The sharp growth is linked to a jump in credit demand on the strong growth of the construction, transport and communication sectors.
"The health of the banking sector is quite good," Mr Lamin Kemba, the chief executive officer of Standard Chartered Uganda told, the Monitor our sister newspaper.
Ugandan banking shares have also been hot among investors, notably foreign institutional.
A July research report by African Alliance has given the entire Ugandan baking sector an enthusiastic "overweight" recommendation for the three listed banks, citing plenty of room for profit growth.
This is the growth opportunity that KCB and a string of banks are scrambling to capture, pushing buyout deals to record levels.
The planned entry into Uganda fits in well with the bank's regional expansion strategy, which has seen it open operations in Tanzania and Southern Sudan.
The Tanzanian outfit, which has been struggling since it opened doors, has since turned around, while the Southern Sudan branch has also began to draw in results for KCB and the bank is now planning to open five more branches to consolidate its gains in that market. KCB's foreign subsidiaries accounted for Sh5.2 billion of its Sh83 billion customer deposit by June 2007.
For Uganda, the market is more important given that Kampala is Kenya's largest trading partner and the bank expects to benefit from the increased business activity in the region, which will grow further as the East African Community takes shape.
As a result, KCB is increasingly looking at the growing clients with business interests across the East Africa countries including Tanzania, Uganda and Kenya.
"We want to position ourselves as a regional bank, and we cannot be regional if we are not in Uganda," Oduor-Otieno said.
He noted that the bank's presence in Uganda would also support its outfit in Southern Sudan given the increased trading between Uganda and Southern Sudan following the signing of a peace deal between the Government and the break-away Southern Sudan rebels.
The bank's regional expansion plan will involve the opening of more outlets in Tanzania and Southern Sudan and possible entry into Rwanda and Burundi as it races to consolidate the East African market, a clear signal that the bank is on a sound financial footing.
In Kenya, the bank is set to open 35 branches in the next 18 months pushing its branch network to 156, the largest in the industry. The growth comes at a time when most local banks are on an expansion binge as they race to grow and maintain their market share.
The intended KCB branch expansion will be supported by a wider ATM coverage, since the bank is poised to push its network to 172 ATMs from 155 over the same period.
"We intend to increase our footprint across the country to maintain our growth gradient," said Mr Oduor-Otieno, while unveiling the bank's half year results.
The bank posted a 40 per cent increase in profit before tax for the six months to June 30 and raised its outlook for the second half of the year, turning the bank among the fastest growing in the region. The bank's net interest income for the six months grew by 27 per cent to Sh4 billion, while pre-tax profit jumped to Sh2 billion from Sh1.4 billion.
The bank attributed the improvement in performance to a sharp rise in income from its lending book that grew by Sh18 billion in the last six months to Sh55 billion at a time when competition for control of the loans market has hit fever pitch.
KCB has come through a successful turnaround strategy that has seen it stop making losses to posting double digit growth in net profit in the last two years after posting a net loss of Sh4.1 billion in 2002.
The bank's balance sheet, which was saddled by a huge stock of non performing loans, is now cleaner and has more than doubled since 2003 to Sh101 billion, making it the second largest bank by asset value behind Barclays Bank.
"The troubles that threatened this bank with collapse is now a thing of the past and we are now looking at spreading," Mr Oduor-Otieno said.
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