Another notable development in Q3’2019 was that KCB Group finalized the take-over of 100% of all the ordinary shares of the National Bank of Kenya (NBK) after the Capital Markets Authority approved the acquisition. The transaction will enable the two banks to increase its customer base and product offerings, which should result in a steady growth in profitability, after addressing the current challenges facing NBK of inadequate capitalization and high levels of Non-Performing Loans. However, the two banks will not merge, and NBK will instead exist as a subsidiary of KCB Group’s.

National Bank is currently severely undercapitalized with the total capital to risk-weighted assets ratio coming in at 2.9%, 11.6% below the 14.5% required by regulation. The bank has been granted an exemption to operate below the regulatory requirement but the current acquisition by KCB Group should see the bank become recapitalized as they operate as a separate subsidiary for two years.

The bank experienced a deterioration in asset quality, with gross non-performing loans (NPLs) increasing by 6.7% to Kshs. 33.0 bn, from Kshs. 30.9 bn in Q3’2018. The NPL ratio of 47.9% is still above the banking sector average of 10.0% and thus the bank needs to adopt a raft of measures to improve on the overall asset quality.

The bank could improve its poor performance, and needs to focus on improving the asset quality. National bank has a poor asset quality, with an NPL ratio of 47.9% which is above the baking sector average. KCB Group has highlighted its intention to focus on the recovery of NBK’s outstanding loans which mainly comprises of private sector debt in the real-estate sector, manufacturing, infrastructure and agriculture.

For more information, see our National Bank Q3’2019 Earnings Note.