Bid farewell to long lines at the teller window. Brick and mortar bank branches will soon be going the way of the dinosaur.
That's the message that KCB 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 KCB is now beginning to reap the benefits.
A New Lending Platform
Historically, KCB disbursed roughly 200,000 new loans per year. Then along came mobile banking, and loan applications skyrocketed. The bank made nearly 4,000,000 new loans in 2015.
This works out to one new loan every eight seconds.
And the vast majority of these borrowers (94% to be exact) 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, last year, bolstered it through a partnership with Safaricom Mpesa, Kenya's overwhelmingly popular mobile payment system.
KCB Mpesa 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 $25-30.
How is KCB able to manage to administer such small loans profitably? By pouring reams of Mpesa customer data into a proprietary algorithm capable of processing the risk of each loan applicant in a matter of milliseconds.
A Key Partnership
It's difficult to overstate the importance of the bank's Safaricom partnership.
In Kenya, nearly everyone with a mobile phone has an Mpesa 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 Mpesa 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% repayment rate at interest rates that range between 4% and 6% per month, depending on the tenor of the loan. One-month loans come with a nominal APR of 101%.
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% to 50%. By slashing the time required to process a loan from three days to just 60 seconds, mobile lending will help to further this trend.
Scratching the Surface
In aggregate, mobile loans currently represent a very small portion of KCB's total lending book (roughly 1%).
But 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 Mpesa 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.
Moreover, the convenience of mobile lending has helped the bank attract hundreds of thousands of new customers. Each of these customers present opportunities to cross-sell other products, ranging from savings vehicles, to insurance, to mortgages.
And 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.
The Price Looks Right
It's an attractive investment proposition, and one that's 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% and 23.3%, respectively. Yet, the stock now sports a price-to-earnings ratio of 6.3, a 2.5% 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.
Disclosure: The author has a beneficial interest in shares of KCB Bank Group through his work for Africa Capital Group.