Renaissance Capital (Rencap), a global investment bank, has released a report whose findings indicate that regional markets have become difficult to penetrate for Kenyan banks with ambitious expansion plans. For instance, Kenyan banks that have expanded to South Sudan have had to shut down tens of branches despite the market appearing lucrative because of low development.
An analysis of Kenyan banks’ operations in regional markets shows that the returns from these subsidiaries have dropped to less than half of their Kenyan operations. Therefore, Rencap is of the opinion that KCB, Co-operative, and Equity banks, which have invested considerably into the regional markets, should re-evaluate the strategies for expanding.
“We conclude that despite restricting expansion to East Africa, the Kenyan banks have struggled to make waves in these markets […] in our view, ramping up profitability in the various subsidiaries should be the key focus of management,” Rencap stated in their Africa banks sector update for February.
The return on assets in other markets besides South Sudan has remained less than the asset base growth.
The Rencap analysis indicates that KCB, which has operations in Uganda, South Sudan, Burundi, Tanzania, and Rwanda, only obtained a double-digit return on equity in Kenya and Rwanda in 2016 at 17 and 14 percent in that order. Tanzania recorded 9 percent, Uganda 5 percent, Burundi 3 percent, and South Sudan -26.
“We believe that South Sudan will continue to struggle in the short-to-medium term, in light of the economic challenges. South Sudan is experiencing hyperinflation, and as long as KCB continues to operate in such an environment, costs will continue to be a considerable challenge,” Rencap said.
Equity bank recorded an 18 percent return on equity for its operations in Tanzania, DRC, Rwanda, South Sudan, and Uganda from January to September 2017 while Kenya recorded a unit return of 38 percent. Rencap said that Equity’s strategy in reducing its branches in South Sudan at the start of civil unrest has saved it the cost implications that KCB is dealing with.
On the other hand, Co-operative bank only has a subsidiary in South Sudan where returns declined from 97 percent in 2015 to -50 percent in 2016. Kenya recorded returns at 34 percent in 2016.