100 years on, ghosts of past policies haunt Barclays

Most organisations mark 100 years of existence with pomp, toasts and grand declarations.

Not Barclays. It is marking its century in Africa with plans to exit. The UK lender last week announced it would be selling its majority stake in its African operations, which include a unit in Kenya.

Barclays Bank of Kenya (BBK) has had the benefit of time to craft a rich history for itself. And it certainly has.

There is the saying that in the multitude of words, there is sin. In business, the spirit of this saying applies. In Barclays’ case, in 100 years, there have been missteps that appear to have come to haunt it and led to the decision to sell off Africa.

In Kenya, from comfortably straddling the top ranks in the banking sector, BBK has lost significant ground to local lenders, particularly Equity Bank and Kenya Commercial Bank. These latter two banks are today more valuable then BBK at the stock market.

Turbulent 90s

Several decades ago, few would have predicted this turn of events. Consider the early 90s, for instance. At the time, BBK was the biggest lender in terms of reach and profitability.

It could, therefore, get away with capping minimum operating balances at around Sh10,000 (equivalent to about Sh20,000 today), and closing dozens of branches. This had the effect of repelling millions of potential customers in the low-income segment.

This strategic decision, however, was attributed to the high risks in the banking industry at the time. This is the period when several banks collapsed, forcing the Government to amalgamate nine lenders to form Consolidated Bank of Kenya.

The banks that were merged were Union Bank, Jimba Credit Corporation, Estate Finance, Estate Building Society, Business Finance, Nationwide Finance, Kenya Savings and Mortgages, Home Savings and Mortgages and Citizens Building Society.

There was a second wave of collapses between 1993 and 1995, affecting a dozen more banks, most of them linked to the infamous Goldenberg scandal.

Barclays held steady, and as a result, resonated with a niche group of customers.

Richard, 68, has banked with BBK for more than 40 years.

“Barclays has always been very conservative and is not a big risk taker, just like I am. This held it in good stead in the turbulent 90s, but has of course seen it lose growth momentum to the local banks that dominate profit rankings these days,” he said.

Richard, who did not want his second name used, is a corporate manager and founder of a decades-old SME, and said he has grown his company just like Barclays has, and been exposed to the same growth trajectory — slow, but steady.

At the turn of the century, the lender again proved its aversion to risk, shutting down 22 of its branches, most of them in rural areas — a market Barclays considered unprofitable.

On July 20, 2000, when the then Barclays Africa Chief Executive Officer Dominic Bruynseels announced the closure of the branches, he said: “It is a decision we had to make as we cannot maintain and invest in areas that are not commercially viable.”

Then Acting BBK Managing Director Albert Ruturi would add that the restructuring had been facilitated by the need “to keep the costs of banking for customers to an absolute minimum, while continuing to provide first-class service.”

“At the time, most multi-national banking models found it too expensive to operate branches in rural Kenya. Of course that withdrawal created an opening that the likes of Equity Bank’s James Mwangi spectacularly took with both hands. I believe Barclays Kenya was a real solid franchise, notwithstanding the step back from the farm economy in the 1990s,” said Aly Khan Satchu, an independent investment analyst.

Rural areas

In late 2002, Adan Mohamed was appointed BBK’s managing director. Two years later, he implemented a further round of branch shutdowns. This time round, the branches affected were in Murang’a, Kiambu, Molo, Limuru and Kerugoya. Others were in Homa Bay, Kilifi, Webuye, Bamburi and Sotik, and a branch in Lavington, Nairobi.

But as the bank scaled down, smaller lenders saw an opportunity to grow. The rural areas Barclays shunned would later give banks such as Equity, Co-operative Bank and KCB billions of shillings in returns.

As a result, the lender has had to make unfamiliar, but slow, moves in a sector dominated by double-digit growth mined from previously shunned consumer segments.

“The trouble with Barclays is that its strategic direction has sat at the top with the group CEO,” said Fred Ogola, a strategy and competitiveness lecturer at Strathmore University.

“If you find one who believes more revenues will flow from closing branches, then branches are closed. But then you end up interfering with customers, some of whom will never forgive you for closing doors in their faces.”

For Richard, this is the upside to Barclays Plc’s decision to sell its stake, which he expects to give BBK more freedom to respond to local needs.

“It will be good for us to break away from South Africa’s umbilical cord. It doesn’t make sense that BBK, which is big and profitable in its own right, reports to South Africa. We can stand on our own,” he said.

Dr Ogola added that as a result of a strategy not localised to the Kenyan situation, Barclays ended up disenfranchising customers when they were vulnerable. When such people ended up becoming decision makers later in life, many held on to their grudge with the bank.

One such customer who asked not to be named over the sensitivity of the issue recalled his first job at a UK-based firm required him to open a Barclays account.

“When I went, I was asked to give them payslips for three months, yet I was starting out on my first job. I tried to explain my position, but they would hear none of it. When I later became a chief finance officer at a different organisation, I closed all the accounts we had with Barclays,” he said.

Still, Barclays has had its moments of adaptation to local market needs.

For instance, in 2007, BBK increased the number of employees it had three times over from the previous year.

It was the first time in the bank’s history that it was going on such a hiring blitz, a strategy that had the backing of the head office. The lender appeared determined to shed its conservative and elitist image.

BBK had 2,197 employees in 2006. They had increased to 6,900 by the end of 2007. At the time, six in 10 employees were on contract, and majority of the new staff were fresh graduates from local universities.

Most of these new employees were tasked with the job of literally peddling loans on the street, in offices and people’s homes.

By this time, Equity Bank was registering significant success going after the masses.

Enticing passers-by

These new graduates sat in tents set up along major streets in Kenyan towns, enticing passers-by to open accounts at Barclays. It seemed to herald an era of a bold new BBK, ready to aggressively fight to grow its local market share.

Equity Bank, on the other hand, began to build its war chest, perhaps in readiness to steal the thunder from BBK in coming years.

The bank received Sh11.5 billion from private investment firm Helios for a 24.45 per cent stake. This was a well-timed investment, as it gave the bank the financial muscle to expand over the next five years.

In 2008, when the global economy slowed down and the local economy got jitters because of the post-election violence, BBK started cutting back on the number of employees on its payroll. It also froze its branch expansion, maintaining them at 119 between 2009 and 2014, according to figures in its annual report.

But it is in 2011, a year when the Kenyan economy suffered from a weakened currency, that Equity Bank achieved a major milestone over BBK.

In 2011, Equity Bank’s Kenyan operations reported a higher profit after tax compared to BBK for the first time. Equity’s profits after tax in 2011 were reported as Sh9.77 billion compared to BBK’s Sh8.11 billion.

That year, Equity Bank also, for the very first time, surpassed BBK in terms of net loans given to customers. In 2011, Equity loaned out Sh106 billion, compared to BBK’s Sh99 billion.

The irony is not lost that when BBK seemed to hold back, local banks, exemplified by Equity, invested more aggressively to capture market share.

As a result, while Barclays reported net profits of Sh4.5 billion in 2006, Equity made Sh753 million. But by 2014, the tables had turned. Barclays’ net profits were Sh8.38 billion, while Equity’s were Sh17. 2 billion. This included gains made in Equity’s regional subsidiaries, including in Uganda and Rwanda.

Over this period, Equity grew its net profits 23 times over, while Barclays just about doubled its profits.

Target market

Agency banking is another example of BBK’s near-opposite thinking to local lenders. For local banks, the model provided a way to get services even closer to their customers.

In 2012, Mr Mohamed had rejected the model.

“The agency banking model still has several operational risks and costs which have made such an investment unattractive for us, and therefore we will not delve into it immediately,” he said.

“We prefer to use a different route in order to capture the same target market and this is through services such as our free revamped mobile banking services.”

But last week, BBK’s current managing director, Jeremy Awori, capitulated and launched an agency partnership with the Postal Corporation of Kenya (PCK). It will allow the bank’s 800,000 customers to access services through PCK’s 400 outlets by the end of the year.

“The change in global technological trends and lifestyles is such that people greatly value convenience and ease-of-service,” said Mr Awori.

“The focus towards mobility both in professional and personal life patterns, necessitates the introduction of service channels that support this lifestyle.”

There is also the concern that BBK’s deposit growth was a marginal 0.2 per cent last year.

Further, when KCB released its results last week, it announced it had moved Sh31 billion through agency transactions last year, up from Sh14 billion in 2014. The bank, which also has regional subsidiaries, registered Sh19.6 billion in net profits in 2015, against BBK’s Sh8.4 billion.

Now, with Barclays Plc’s sale looming, analysts at Cytonn Investments say Equity Bank and KCB could be the biggest beneficiaries.

“It will increase the strength of other tier I banks, namely Equity and KCB, which over time have displaced foreign banks, such as Standard Chartered, Barclays and Citi, from their perch as the key providers of banking solutions,” a Cytonn report sent out last week said.

In terms of performance at the Nairobi Securities Exchange (NSE), Cytonn notes that five years ago, Barclays’ market capitalisation was Sh93.7 billion. It has since dropped 24.9 per cent to Sh70.3 billion.

Equity Bank’s market capitalisation then was Sh105.5 billion, but has since increased 36.8 per cent to Sh144.3 billion.

“It is becoming harder for foreign banks to grow and compete locally given the rapidly evolving landscape, with the likes of M-Pesa, agency and informal sector banking, innovations that were adopted faster by local banks compared to foreign banks,” Cytonn analysts said.

Exposure to risk

But according to Mohamed Wehliye, the senior vice president for financial risk management at Saudi Arabia-based Riyad Bank, the reasons for the sale are not entirely tied to performance, but also to the UK lender’s level of exposure.

“Profits from the African business are not as bad as they are made to look .... The real reason [for the sale] could be Barclays Plc sees risks in the current business model where they don’t have a seat in the board of BAGL [Barclays Africa Group Ltd] and hence control, yet they take on all the risks,” he said.

“Their business model is also very much tied to the South African economy, and especially its currency, the rand.”

The rand fell 25 per cent to the dollar last year, and the South African economy is in a downturn. This has imported an outsize degree of volatility into Barclays Plc’s shareholding, added Mr Satchu.

BAGL’s operations span 12 African countries and 12 million accounts, which South Africa leads with nine million. Kenya is second with 800,000.

Middle Eastern and Chinese banks are largely favoured by analysts to buy up Barclays’ stake, which the UK lender plans to sell in the next two to three years, subject to regulatory and shareholder approvals.

“Barclays has had some serious challenges and is looking to consolidate in the UK, European Union and the US. Increased regulation also meant that owning a majority African business was plain punitive from a capital point of view,” said Satchu.

But whichever way the sale plays out, it will open a new chapter in Kenya’s banking history.