Executive Summary
- The Kenyan financial services sector remains fertile ground for digital-led providers, supported by high mobile money penetration, a robust regulatory framework, and strong customer digital affinity.
- NCBA Bank is a digital leader across Kenyan banks, utilising a combination of international partnerships, innovative products, and sustained investment to outperform industry peers in fintech performance.
- NCBA maintained strong asset quality despite robust loan growth driven by a higher-risk digital sector, demonstrating the bank’s ability to manage its risks efficiently.
- The bank’s planned digital expansion into Ghana (2025), another market with high mobile money penetration, offers more upside.
- NCBA’s competitive advantage in digital financial services and risk management makes it a standout player in a burgeoning industry.
- Ranked third for return on equity and dividend yield, NCBA’s low price-to-book ratio reflects an undervalued asset with significant upside.
- The bank’s familiarity with M&A and its existing digital and operational strength place NCBA in a prime position to absorb smaller retail-focused banks.
Introduction
Kenya is a global leader in mobile money usage, with over 4 out of 5 adults using mobile money platforms for transactions in 2022. This widespread adoption has accelerated digital finance, compelling Kenyan banks to enhance their technological capabilities and improve digital offerings to remain competitive. With growing demand for fintech services, Kenyan banks have rolled out a suite of solutions, including mobile banking apps, agency banking services, and digital payment solutions.
NCBA Bank (“NCBA”) is a leader in this digital transformation. Known for its pioneering role in digital credit, NCBA has strategically partnered with Safaricom—Kenya’s largest telecom and mobile money provider— on “M-Shwari”, a widely adopted mobile money service that connects NCBA to a large share of Kenya’s mobile money users. The banks’ collaborations with global fintechs, such as Visa and NALA, and a sustained improvement in its digital offerings like Loop, reflect a commitment to using digital solutions
Kenyan Banking Industry Performance Review
In FY2023, Kenyan banks recorded a robust 20.8% year-on-year (y/y) increase in gross earnings, reaching Kes 893.3 billion ($5.7 billion), up from Kes 739.8 billion ($5.99 billion) in FY2022. This growth was driven by higher interest and non-interest income, supported by the Central Bank of Kenya’s (CBK) cumulative 5.5 percentage point rate hike between April 2022 and December 2023, which boosted yields on loans and government securities.
From 2019 to 2023, Kenyan banks benefitted from an average 9.2 percentage point spread between lending and deposit rates, contributing to a 7% compound annual growth rate (CAGR) in profit before tax (PBT) from Kes 159.1 billion ($1.6 million) in FY2019 to Kes 219.13 billion ($1.4 billion) in FY2023. Profits dipped between 2022 and 2023 due to increased operating expenses but have since rebounded, with H12024 PBT printing at Kes 139.6 billion ($1.1 billion), a 16.1% y/y increase.
Total banking sector assets grew at a CAGR of 12.6% in the period, reaching Kes 7.6 trillion ($48.6 billion). We expect this positive trajectory to continue as policymakers prioritise economic growth amid slowing inflation.
However, the sector has risks. One concern is the increasing exposure to government debt, as Kenyan Banks are invested heavily in government securities, with an average exposure of government securities to total assets of 29.5% between December 2019 and December 2023. While government debt offers stable returns, a downturn in fiscal health could lead to potential solvency issues for banks due to the concentrated risk.
Another risk is the high level of non-performing loans (NPLs), which reached a record high of 16.3% of total loans in June 2024. NPLs have risen due to high lending rates, exacerbated by a challenging economic environment of high inflation and currency devaluation. While we anticipate a gradual improvement in loan quality towards the end of 2024 and into 2025 as economic conditions stabilise, a persistently high NPL ratio poses a latent threat to the sector's overall health and stability.
Despite these concerns, Kenyan banks have maintained strong capital adequacy. The industry’s capital adequacy ratio stood at 19.1% as of June 2024, well above the regulatory requirement of 14.5%. We expect the robust capital position to persist, supported by planned recapitalisation efforts, which should bolster the sector's resilience. Additionally, the recapitalisation exercise will likely spur more mergers and acquisitions (M&As) as smaller banks consolidate with larger, more financially stable entities or seek equity from shareholders. As illustrated below, Kenyan banks have shown a historical appetite for M&A activities.
Company Overview: NCBA Bank
NCBA Bank (“NCBA”) emerged in October 2019 from the merger of Commercial Bank of Africa (CBA) and NIC Group, creating a robust entity under the NCBA Group. The NCBA Group is listed on the Nairobi Stock Exchange under the trading symbol NCBA. The bank currently has 109 branches across four East African countries—Kenya (92), Tanzania (8), Uganda (4), and Rwanda (5), and runs digital operations in Ivory Coast, with a view to initiate the same in Ghana by 2025.
NCBA offers a comprehensive suite of services that cater to various customer segments:
- Corporate Banking: Provides trade finance, loans, and various essential financial services for corporate clients.
- Retail Banking: Serves individual clients and SMEs, offering loans, savings accounts, and other personalised banking services.
- Asset Finance & Business Solutions: Assists customers in financing new and used movable assets and equipment.
- Digital Banking: Delivers digital financial services through platforms such as M-Shwari (a mobile banking service that combines savings and loan products, launched through a partnership with Safaricom) and Loop Digital Business, meeting the needs of a growing digital consumer base.
Following its merger in 2019, NCBA has pursued growth through five strategic pillars:
- Establishing a brand recognised for superior customer experience
- Expanding retail banking reach
- Reinforcing leadership in corporate banking and asset finance
- Driving digital transformation
- Building a high-performance employee culture
Our analysis indicates that NCBA Bank is highly focused on digital innovation by integrating customer-focused digital solutions within each business division. For example, the corporate banking division offers “Bedee,” a digital platform for accessing trade finance loans, retail clients benefit from the “Now App,” and the asset finance division features an online application portal. These offerings align with NCBA’s commitment to providing a cohesive digital experience across all customer touchpoints.
In early 2023, NCBA relaunched its Loop digital banking app with enhancements designed to attract younger, digitally adept users. New features include:
- A marketplace offering location-based deals and coupons
- An investment and savings platform
- A quick-loans feature, enabling access to a 30-day overdraft of up to Kes 100,000 ($774) or personal loans of up to Kes 3 million ($23,220) without extensive documentation
The app’s enhanced functionality has led to tangible outcomes. Digital loan disbursements through Loop doubled from Kes 600 million ($4.9 million) in FY2022 to Kes 1.2 billion ($7.7 million) in FY2023. By H12024, digital loans disbursed through Loop were Kes 1.2 billion ($9.3 million), reflecting a 140% y/y increase, highlighting Loop’s efficacy in driving customer engagement and supporting revenue growth.
NCBA’s partnerships with fintech firms have expanded its digital service offerings. In October 2023, NCBA collaborated with Visa to introduce a business spend management tool that offers commercial clients better expense visibility and overhead reporting. A year later, in October 2024, NCBA partnered with NALA, becoming its settlement bank to streamline cross-border payments across Africa. These partnerships highlight NCBA’s commitment to client-centric solutions that advance digital financial inclusion and create an interconnected financial ecosystem, which is crucial for attracting and retaining customers in today’s competitive environment.
Investment Thesis
NCBA Bank’s digital transformation and strategic market expansion place it at the forefront of East Africa’s evolving financial market. By implementing advanced digital lending and mobile banking solutions, NCBA has enhanced its market penetration, expanded its customer base, and driven growth across key financial metrics. Over the past three years, NCBA has achieved an impressive CAGR of 10.4% in total assets, reaching Kes 661.74 billion ($4.2 billion), with loan growth outpacing deposits by almost five percentage points. This robust loan growth, bolstered by a 27% year-on-year increase in digital loan disbursements to Kes 930 billion ($5.9 billion), reflects NCBA’s success in expanding digital financial services in a region amid high demand for mobile banking.
The strategy's impact is apparent across NCBA’s financial platforms. The revamped Loop app alone saw an 87% increase in loans disbursed to Kes 1.2 billion ($7.7 million). Similarly, digital loan disbursements in other digital channels like M-Pawa (a partnership with Vodacom in Tanzania) and Mo-Kash (Uganda) surged by 101% and 114%, respectively.
Even with this robust loan growth, NCBA improved asset quality, reducing its NPL ratio from 14.9% in 2021 to 12% in 2023 and outperforming the industry average of 15.5%. This improvement reflects the Bank’s customer-centric approach to risk management, which has proven effective in managing the inherent risks of mobile lending, an area that typically faces higher default rates. NCBA’s strategy combines advanced qualitative and expert-driven models with a preference for customer-centred resolutions over litigation in default cases. This prudent risk management solidifies NCBA’s position as a stable and reliable digital lender, distinguishing it from other East African Banks, where the concern is that the NPL ratio will increase as the loan portfolio increases.
We expect the digital transformation strategy to continue to drive asset growth, given that it aligns with broader market trends in Kenya and East Africa, where digital financial solutions are rapidly adopted. Notably, with mobile money deeply ingrained in Kenya’s financial ecosystem, NCBA’s partnership with Safaricom through the M-Shwari platform is a standout advantage, giving it substantial reach among mobile money users.
NCBA’s investments in digital infrastructure further underpin this advantage. In 2023, the Bank invested $31 million to enhance IT infrastructure, cybersecurity, and cloud migration, reinforcing its capacity to sustain digital growth while mitigating the risks of cyber threats—a critical concern in Kenya’s banking sector.
NCBA’s digital transformation also translates into tangible benefits for its shareholders. With a return on equity of 23.1%, the Bank ranks third among Kenyan banks in the large peer group. Similarly, NCBA Group boasts the third-highest dividend yield among listed banks at 11.9% in H1 2024, signalling a commitment to shareholder value.
The digital transformation strategy has also been reflected in its gross earnings. Between FY2022 and FY2023, gross earnings grew by 10.8% from FY2022 to FY2023, reaching Kes 80.8 billion ($514.8 million), though at a decelerated pace compared to the 18.9% increase between FY2021 and FY2022. While net interest income rose by 9.1% to Kes 29.9 billion ($190.7 million), driven by higher interest rates, non-interest income declined by 12% due to weaker foreign exchange trading results, reducing total operating income to Kes 52.8 billion ($336.8 million) in FY 2023 from Kes 53.4 billion ($432.9 million) the previous year. Notably, NCBA’s net interest margin aligned with the industry average at 6.1%.
Operational expenses increased slightly by 0.79% to Kes 31.14 billion ($198.5 million), primarily due to an 18.4% rise in staff costs attributed to salary adjustments and hiring initiatives amid a high inflation environment. Consequently, the cost-to-income ratio increased by 1.14 percentage points to 58.93%, and profit before tax declined marginally by 1.5% to Kes 21.70 billion ($138.3 million). We anticipate that rising staff costs will stabilise, supporting profit growth in FY2024.
Additionally, NCBA’s expansion beyond Kenya is beginning to yield returns. In FY2023, Tanzania, Uganda, and Rwanda contributed 2.1%, 2.7%, and 1.6% to earnings, marking an improvement from the previous year. With regulatory groundwork underway in Ghana, Ethiopia, and the Democratic Republic of Congo, NCBA’s digital services are well-positioned for cross-border growth.
Our assessment of the Bank is that its approach, i.e., digital transformation and market expansion, is proactive and well-resourced, with initiatives that respond to regional digital adoption and pioneer new market opportunities. With recent recapitalisation regulations in Kenya encouraging consolidation, NCBA is well-positioned to engage in a merger & acquisition within the Kenyan Banking sector. Given that NCBA itself is the product of a merger, the Bank has the operational expertise and the institutional experience to integrate new acquisitions smoothly. This familiarity with the M&A process and its existing digital and operational strength place NCBA in a prime position to absorb smaller retail-focused banks, expanding its retail base while driving additional synergies. Private equity firms can add value here by supporting NCBA’s acquisition strategy, optimising operational efficiencies, and positioning NCBA as a consolidator in the Kenyan market.
NCBA Group’s listing on the Nairobi Securities Exchange provides private equity firms with a clear and viable exit pathway. As the sixth-largest stock by trading volume on the NSE, NCBA enjoys healthy market demand, underscoring investor confidence and presenting an attractive public market exit strategy. Further, given NCBA’s growth potential and attractiveness to global investors focused on emerging markets, an exit through a private sale to a strategic partner—either a larger African bank or an international financial institution—could yield high returns.
Risk
We have identified the following risks to the Bank:
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- Earnings concentration: The bank’s earnings are predominantly Kenya-based, with 85.5% of income generated domestically, making it especially vulnerable to domestic economic fluctuations.
- Exposure to government debt: 30.7% of the Bank’s total assets are invested in Kenya's government securities, reflecting a significant reliance on government debt, which could erode the Bank’s asset base should a sovereign default or debt restructuring occur.
- Cyber risk: As the Bank continues to adopt new technologies, the threat of cyber risk increases with agents becoming more sophisticated and the technology infrastructure broader.
