
Regional subsidiaries boost profits for Kenyan banks
Nearly all Kenya's banks wit- nessed a surge in external profits in 2024, with Equity Group generating the highest at Ksh24.4bn ($188.9m), accounting for half of the total Ksh48.8bn ($377.7m) net profit.
Its closest competitor and the largest bank in Kenya, KCB Group, reported that 30.3% or $144.7m of its total net profit of $478.3m came from foreign subsidiaries, while NCBA Group achieved $24.8m, representing a 13% share of the total.
The profit share from I&M Group's subsidiaries also rose to 29% or 46.4m in 2024, despite its Mauritius sub- sidiary, Bank One Limited (acquired in 2008), plunging into losses. I&M had a total net profit of $128.5m during the period.
The increase in profit contribution, cou- pled with the potential for more dividends from foreign subsidiaries in the near fu- ture, highlights the gradual maturity of these external investments after years of capital injection by parent banks.
Lawrence Kimathi, KCB Group CFO, says robust external subsidiaries are important 'to diversify and de-risk Kenyan con- centration' while Equity Group's CEO, James Mwangi, views the Kenyan unit as 'a sleeping giant that can push back.
'The strategy of regional expansion is truly effective. This diversification aids us in managing economic shocks. It will be intriguing to see Kenya regain its posi- tion as contributing more than 50% of the profit,' Mwangi notes.
The decline in the contributions of Ken- yan domestic units coincides with slower GDP growth, projected at 4.7% in 2024, down from 5.6% in 2023. This growth lags behind peers like Rwanda, Tanzania and Ethiopia.
Tight monetary conditions, which per- sisted until mid-2024, when the Central Bank of Kenya (CBK) initiated minimal cuts in benchmark interest rates, con strained private sector lending, with banks prioritising government debt over riskier retail and individual loans.
Commercial bank lending to the private sector contracted by 1.4% in December 2024 compared to a year previously, due to several factors including reduced demand for loans amid defaults.
Banks lagged passing on the benefits of the benchmark rate cuts to Kenyan bor-rowers, citing costly funds tied to locked deposits. The reduction in interest rates is anticipated to encourage more borrowing for consumption and investment, thus stimulating economic activities in 2025.
Kenya's economy is forecast to rebound this year at 5.3%, attributed to improve- ments in the agriculture and service sec- tors. However, this growth will still lag behind countries such as Rwanda, DRC and Tanzania, where growth rates are expected to exceed 6%.
'Interest rates are inching down, and inflation remains under control. We are remaining at the table with other Kenyan bankers to see how we can quickly transmit changes in in- terest rates,' says Paul Russo, KCB Group's CEO.
The strengthening of the shilling against the dollar, which led to cur- rency translation losses, also partly reduced the value of assets and earn- ings, especially in Kenya, South Sudan and DRC, where lenders have signifi- cant holdings in dollars. The Kenya shilling appreciated from a high of 160 per dollar in February 2024 to 129 last December.
DRC is the key
Big lenders KCB Group, Equity Group, DTB Group, NCBA, and I&M Group have op- erations across Tanzania, Uganda, South Sudan, the Democratic Republic of Congo (DRC), Rwanda, Mauritius and Burundi.
Outside Kenya, DRC tops the profit chart for Kenyan banks, buoyed by a large un- banked population and the arrival of global firms seeking investments in the mineral sector. The central African nation is esti- mated to have $24trn-worth of untapped minerals such as cobalt, gold and copper, needed in the fast-growing e-mobility sector.
Both Equity Banque Commerciale du Congo (EBCDC) and KCB's Trust Merchant Bank (TMB) achieved double-digit profit growth in DRC last year, reaching $120.7m and $80.5m respectively.
Equity enjoys a bigger market share than KCB in DRC, having entered the popu- lous country earlier through a series of acquisitions that began in 2015, to spur market penetration. Today, EBCDC, with 79 branches, is the second-largest in DRC af- ter Rawbank, boasting an asset base worth $5.1bn, more than double KCB's $2.1bn.
As in DRC, Equity has outperformed KCB, I&M Bank, and NCBA in Rwanda. The lender commands an asset base of $962.1m and generated a net profit of $41.8m in 2024 in Rwanda, while KCB reported $23.2m profit from its $712.1m assets.
NCBA, which holds 3.5% of Rwanda's banking sector, reported a gross loss of $1m last year, with the management not- ing in its outlook that 'Rwanda is clouded by external vulnerabilities due to escalat- ing conflict with the DRC'.
2024 marks the second consecutive year that NCBA's external subsidiaries collec- tively realised a profit growth, turning from a combined gross loss of $12.8m in 2021 to $24.8m profit last year. NCBA Group, which heavily relies on its do- mestic Kenyan unit, has three exter-nal banking subsidiaries in Rwanda, Tanzania and Uganda, along with digital operations in Côte d'Ivoire.
In Uganda and Tanzania, the Ken- yan lenders are struggling to grow and challenge other institutions like South Africa's Standard Group (Stan- bic), which maintains a relatively firm grip of those two markets.
NMB Bank and Cooperative Rural Development Bank (CRDB) are also dominant in Tanzania, collectively commanding about 43% of the mar- ket.
While the performance of Kenyan banks improved in those two markets in 2024, the profit contribution from the Uganda and Tanzania units was low last year, ranging between 0.6% and 5% for Equity, NCBA, and I&M Group.
'We are exploring ways to achieve a breakthrough in Tanzania because it is a strategic market. Starting in 2025, the group will invest heavily and put a lot of focus on Tanzania,' says Equity CEO James Mwangi. (See page 87.)
However, there are still stark risks in the DRC and South Sudan, as military clashes intensify amid faltering peace talks. Kenyan banks operate branch- es across various locations in the DRC, primarily in Kinshasa, Lubumbashi and Goma.
KCB has over 110 branches in different parts of the DRC. Its operations in eastern
DRC, where Rwanda-backed M23 rebels have gained control, have already reported a 10% impact on their revenue within the first two months of 2025.
This impact translates to approximately $23.2m in revenue loss that could worsen if the conflict spreads to other parts, espe- cially Lubumbashi, DRC's commercial and industrial hub located in the southeast.
'Luckily, eastern DRC is not that big and not very economically advanced or densely populated. If the situation continues and escalates, it could worsen. For now, we can absorb the 10% impact we've experienced,' says Russo of KCB.
Foreign interest in DRC mines has partly exacerbated ongoing geopolitical tensions, with the US reportedly a frontrunner in sealing a mineral pact with Kinshasa in exchange for military support to neutralise the M23 rebels.
Similarly, the war in South Sudan, the world's youngest nation, has led to deaths, disrupted businesses, and threatened oil exports, the country's primary source of revenue. Equity, KCB, and Co-operative Bank, which together control nearly 40% of South Sudan's banking sector, had mixed performances in that market in 2024. In South Sudan, KCB grew faster than any other Kenyan bank, reporting a 53% year-on-year rise in revenue to $31.8m. Equity and Co-operative Bank experienced profit drops of 40% and 98%, respectively, in Juba due to decreased cus- tomer deposits and rising loans. The South Sudan unit is the sole external subsidiary for Co-operative Bank, which it co-owns with the national government.
Mixed dividend pay-outs
The overall profit increase by Kenyan banking heavyweights resulted in record dividend pay-outs. The top nine banks declared a combined dividend of Ksh85.3bn ($660.2m). However, the dividend pay- ments from players like KCB, Equity, NCBA, and Co-operative Bank, compared to for- eign banks in Kenya, fell short of market expectations, given their impressive fi- nancial performance.
Some analysts believe this is a conserv- ative approach as a result of the lenders aiming to build more capital for growth in external markets, particularly in Ethiopia, which some are targeting once banking regulations are finalised.
KCB, for instance, paid $74.3m in dividends, reflecting just 15.5% of the total $478.3m net profit. It froze dividends in 2023 after a profit drop. Equity paid a $123.8m dividend, a modest 6% annual increase, while NCBA offered $70m.
'The low dividends are part of a long-term strategic plan targeting a stronger capital base now that regula- tors in various countries are increas- ing minimum capital requirements for banks,' argues Chokaa at Capital A Investment Bank. 'We also antici- pate that Kenyan lenders, primarily KCB and Equity, will pursue future acquisitions in Ethiopia or markets where they have weak penetration,' he adds.
Amid impressive performances, many external subsidiaries may soon begin con- tributing dividends to their parent banks in Kenya. Aside from the Kenyan unit, Equity currently receives dividends from Rwanda and South Sudan, with Mwangi noting that the other subsidiaries are 'ac- cumulating capital and retaining every- thing to sustain growth.'
KCB also expects its Rwanda, Tanza- nia and DRC units to start contributing dividends in 2025. However, the CEO says DRC might be exempt, given the ongoing military wars.
Dividend payment by external sub- sidiaries is 'something that gong forward will be a push and that will improve our pay-out ratio ultimately,' says Lawrence Kimathi, KCB's CFO. n
Nearly all Kenya's banks witnessed a surge in external profits in 2024, with Equity Group generating the highest at Ksh24.4 bn ($188.9m).
There are still stark risks for banks in DRC and South Sudan, as military clashes intensify amid faltering peace talks.
© Copyright IC Publications 2022 Provided by SyndiGate Media Inc. (Syndigate.info).
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