Kenyan top retail banks with operations in South Sudan are optimistic about an economic turnaround after years of mixed performance weighed down by political unrest, hyperinflation, currency devaluation and shortage of foreign currency.

Analysts at EFG Hermes say that South Sudan operations for KCB, Equity, Co-operative and Stanbic Bank have started to stabilise after several years of making losses.

The civil war, which started in 2013 and ended this year, led to massive write down of assets, loss of revenue and hyperinflation, which resulted in banks reporting monetary losses due reassessment of assets and liabilities.

The four banks, which are listed on the Nairobi Securities Exchange, have operated in South Sudan for an average of 10 years, with their performance characterised by losses, declining profitability, scaling down of operations and closure of branches.

The lenders went into South Sudan following a peace deal in 2005, attracted by a large unbanked population and oil wealth. KCB started operations in the country in 2006 and Co-operative Bank was the latest entrant in 2013.

"While the banks still report monetary losses, the magnitude has declined because the hyperinflation rate has declined. However, the profit contribution from South Sudan is much lower than it was at its peak as transaction volumes haven't recovered," Ronak Gadhia, EFG Hermes director in-charge of sub-Saharan Banks told The EastAfrican.

Last year, KCB's subsidiary in South Sudan recorded a net profit of $5.6 million, Equity made $4.7 million, Stanbic $1.65 million, and Cooperative made a loss of $4.19 million, according to the banks' audited financial statements.

Long game

"The Kenyan banks are playing the long game, and are not after quick gains. What is happening in South Sudan is the normal speed bumps for a maturing democracy, and it is only those who are focused on the long term and hence patient enough who will eventually stabilise and reap the benefits," Habil Olaka, the chief executive of the Kenyan Bankers Association told The EastAfrican.

"It is for this reason that none of the Kenyan banks have pulled out in the face of a tumultuous spell, because the long term still looks promising."

According to Paul Mwai, chief executive at AIB-AXYS Africa Ltd, the political instability in South Sudan has adversely affected businesses and slowed down the momentum of growth of Kenyan banks.

"Regional expansion has not been very successful for Kenyan banks. When South Sudan was opening up, there seemed to be a big opportunity. But now with the war going on, that has changed the situation and the opportunities are less. The growth for Kenyan banks in new markets has been slow," he said.

"Equity Bank has changed their strategy in going to new markets from what I call Greenfield to acquisitions. So the expansion strategy has changed from one where you go and set up shop and you start growing organically to acquisition of existing banks. Equity seems to have changed to that model, which I think they believe would be better. When you open a bank organically it takes some time to create momentum and to penetrate the market."

South Sudan's economy rebounded in 2019, with growth estimated at 5.8 per cent from 0.5 per cent in 2018, largely buoyed by increased oil supply following the reopening of oil fields and resumption of production and the revitalised peace agreement signed in September 2018 between President Salva Kiir and then opposition leader Riek Machar, committing to end a five-year civil war that has killed an estimated 400,000 people and displaced millions.

Political risk

"Reasons why Kenyan banks are facing challenges in South Sudan are the political risks and the over-reliance on oil to support the economy. The dip in oil prices in the past year and a half, coupled with political instability, have led to banks closing branches," said Daniel Kuyoh, a Nairobi-based financial analyst.

"I don't think any of the Kenyan banks were going there to make profits. What they were looking for is to get a footprint into South Sudan and also begin to amass deposits for onward lending. This is because the government of South Sudan actually drives a lot of its deposits through commercial banks that can offer them good forex rates."

South Sudan's Inflation increased to 69 per cent in 2019 from 40.1 per cent in 2018.

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