Kenya's KCB eyes Zambia and Ethiopia

NAIROBI Tue Mar 8, 2011 6:48pm GMT

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NAIROBI (Reuters) - Kenya Commercial Bank (KCB) (KCB.NR), the country's biggest lender by assets, plans to move into Zambia and Ethiopia and could consider acquisitions in its continental expansion plans, its chief executive said.

Ranked first in east Africa's biggest economy with assets of $3 billion, KCB has operations in Tanzania, Uganda, Rwanda and South Sudan and has already said Burundi and the Democratic Republic of Congo are in its sights in the short-term.

"Burundi and DRC are countries that are very much in our short-term horizon ... looking at 2011 and 2012 we will begin to see where next in terms of our expansion program," Martin Oduor-Otieno said in Nairobi on Tuesday at the Reuters Africa investment summit.

Normally KCB uses nations where it already operates as a springboard into neighboring countries and therefore Zambia and Ethiopia, when that country opens its banking sector to international competition, will be next on the list, Oduor-Otieno said.

"It is a matter of time, it is a matter of what models we will use to get there. Traditionally we have gone through the green fields model where we have set up from scratch," he said.

But since valuations have fallen a bit after the global financial crisis, KCB could consider buying existing operations, to circumvent the need to build up scale over a long time.

"Last year through a rights issue we raised $150 million and so potentially we got a pot of funds that we could use if we came across attractive opportunities," he said.

"Today there is a lot of finance that is looking for a home and there is nothing to say we couldn't partner with equity funds or other partners that want to go into these markets."

"VICIOUS" COMPETITION

KCB has hired Mckinsey to help it raise revenues and cut costs to improve its earnings and cost to income ratio, which stood at 63 last year from 77 five years ago.

"We are actually aiming to bring that down to about 50 by the end of next year and probably going below that over the next three to five years," Oduor-Otieno said.

Kenya's own banking market has attracted many foreign investors in recent years -- Islamic banks from the Middle East, pan-African banks from Nigeria and foreign funds. Telecoms operators have also launched money transfer services, adding to the rivalry with local banks.

"Competition is vicious, actually. There's almost a false notion that banks are having it very easy and making lots of money," said Oduor-Otieno, adding the bank posted an 18 percent return on investment last year and 2.9 percent return on assets.

He said the requirements for success include deploying armies of marketers to attract deposits, investing in technology and setting up branches.

"People sort of think that there's easy money here but it isn't, it's a real struggle. So whoever is coming into this territory must really be prepared for that level of investment if he's to make any money," he said.

Nevertheless KCB's pretax profit rose 56 percent in 2010, and while the costs of shoring up its subsidiaries in the region lowered the impact of a strong performance at home last year Oduor-Otieno sees a turnaround in Uganda and Rwanda this year.

"The outlook for 2011 is great, and we will begin to make money in those countries," he said.

However, falling margins and political instability before Kenya's elections next year are key risks to earnings, he said. Deadly post-election violence in 2008 weakened growth to 1.6 percent whereas Kenya expects growth to hit 6 percent in 2011.

"They (margins) are narrowing. There are a number of banks, all of them literally offering the same products so the key issues are service and price. Consumers are driving down margins very aggressively, particularly where they have the muscle (big corporates)," Oduor-Otieno said.

"We did see in 2007/2008 the amount of disruption and chaos the election resulted in. It blew everybody away from the previous notion that the economy could continue despite the politics .... you need a stable political environment to be able to reap the benefits of a growing economy."

(Editing by James Macharia, Greg Mahlich)