This article first appeared in InvestingInAfrica
Brick and mortar bank branches will soon be going the way of the dinosaur.
That’s the message that Kenya Commercial Bank CEO Joshua Oigara delivered while presenting the regional bank group’s 2015 earnings results.
Over the past decade, Kenya has pioneered the convergence of financial services and mobile telephony. And Nairobi-based Kenya Commercial Bank (KCB) is now beginning to reap the benefits.
Historically, KCB disbursed roughly 200,000 new loans per year. Then along came mobile banking, and loan applications skyrocketed. The bank made nearly 4 million new loans in 2015.
This works out to one new loan every eight seconds.
The majority of these borrowers — 94 percent — never even walked through a KCB branch door. They simply applied for a loan with a few keystrokes on their mobile phone, instead.
This remarkable growth was made possible by the bank’s heavy investment in technology over the past few years.
In 2012, the bank launched an in-house mobile banking platform (Mobi) and, in 2015, bolstered it through a partnership with Safaricom M-Pesa, Kenya’s overwhelmingly popular mobile payment system.
KCB M-Pesa and KCB Mobi combined delivered some $91 million worth of loans last year.
And these were small loans. Very small. Their average size was roughly $25 to $30.
How is KCB able to manage to administer such small loans profitably? By pouring reams of M-Pesa customer data into a proprietary algorithm capable of processing the risk of each loan applicant in a matter of milliseconds.
It’s difficult to overstate the importance of the bank’s Safaricom partnership.
In Kenya, nearly everyone with a mobile phone has an M-Pesa account, and thanks to its convenience and security, it’s become fully integrated into its users’ financial lives.
Thus, KCB now has access to the earning profiles and spending habits of millions of potential customers that it otherwise wouldn’t have had access to.
This allows the bank to extend loans to people who previously wouldn’t have had a prayer of getting them.
A fruit seller, for example, who receives M-Pesa deposits at the end of each market day can now demonstrate proof of income in a way that would have been impossible before, which boosts her creditworthiness.
The result is a 98.5 percent repayment rate at interest rates that range between 4 percent and 6 percent per month depending on the tenor of the loan. One month loans come with a nominal APR of 101 percent.
So, such loans are already making a significant contribution to revenue, but, more importantly, they allow the bank to reduce its costs.
Over the past five years KCB has reduced its cost-to-income ratio from 64 percent to 50 percent. By slashing the time required to process a loan from three days to just 60 seconds, mobile lending will help to further this trend.
In aggregate, mobile loans currently represent a very small portion of KCB’s total lending book — roughly 1 percent.
But KCB CEO Oigara believes that the bank has barely scratched the surface of mobile lending’s potential.
Over the next few years, he wants to increase the size of the average KCB M-Pesa loan from $25 to $100, and he believes Kenya’s digital loan industry could grow as large as $5 billion over the next few years.
The convenience of mobile lending has helped the bank attract hundreds of thousands of new customers. Each of these customers presents opportunities to cross-sell other products ranging from savings vehicles to insurance to mortgages.
Oigara is confident that the mobile lending model can be extended to new markets in the bank’s rapidly expanding geographic footprint. A well-developed mobile banking platform allows KCB to move into big markets like Ethiopia, the DRC, and Mozambique without the need to build and staff new bank branches.
“Welcome to the age of algorithmic banking,” he says.
It’s an attractive investment proposition, and one made all the more compelling by the bank’s depressed share price.
Over the past six years, KCB’s pre-tax profits and net asset value per share have grown at annualized rates of 26.5 percent and 23.3 percent respectively. Yet the stock now sports a price-to-earnings ratio of 6.3, a 2.5 percent dividend yield, and a price-to-book ratio of 1.5. It’s been over five years since the stock has traded at such low multiples.
With a valuation like this, I believe KCB’s fast-growing, increasingly digitized operation is poised to deliver market-beating returns to investors over the next five years.
Ryan Hoover is director of research at California-based financial services firm, Africa Capital Group, and is the founder of InvestingInAfrica.net, a field guide to sub-Saharan Africa stock markets.
Disclosure: Hoover has a beneficial interest in shares of KCB Bank Group through his work for Africa Capital Group.
