Access Bank PLC's purchase of scandal-plagued Transnational Bank PLC raises questions about its expansion strategy as it is likely to struggle to crack the Kenyan market, according to analysts.

Nigeria's largest bank by assets aims to increase its share of corporate business in 10 key African markets including Kenya. With operations in seven African countries prior to buying Transnational, Access could already claim to have a sizable international presence. But aside from Nigeria and Ghana, its foreign operations comprise just 29 branches spread across five countries.

"It's become clear over the last decade that you need scale in order to have a successful banking operation in sub-Saharan Africa," said Ronak Gadhia, director of research on sub-Saharan African banks at EFG Hermes. "Apart from their core markets in West Africa, banks from that region haven't been able to build successful subsidiaries in other parts of the continent."

Smaller banks often fail to generate high enough return on equity, said Gadhia.

"They get priced out of the deposit market and don't have a large enough presence to generate noninterest revenue," he said. "Typically, they're underwriting low-quality loans, so their cost of risk is high. Their margins are low and therefore so too is profitability."

Transnational's assets totaled just 9.57 billion Kenyan shillings as of Sept. 30, 2019. It posted a nine-month net loss of 23.3 million shillings versus a profit of 10.6 million shillings in the prior-year period.

The bank's history is also tarnished by a scandal with links to former Kenyan President Daniel Arap Moi, whose associates allegedly used it to launder money.

Kenya's central bank classifies the country's banks into three tiers based on their market share. Tier one features heavyweight domestic banks such as KCB Group PLC and the local subsidiaries of multinationals such as Barclays PLC and Standard Chartered PLC, while tier three lenders include Transnational.

"It'll be tough for Access to crack the market," said Martin Kirimi, a senior associate research at Kenya's Standard Investment Bank, citing the struggles of Ecobank Transnational Inc. in Kenya.

"Tier one lenders have a tight grip on the market," he said. Access Bank "will need to recruit people who really understand the Kenyan market and have the right strategy."

So why buy into Kenya?

In November, Kenya's central bank scrapped interest rate caps that were introduced in 2016 following public outcry over high borrowing costs.

"Since the rate cap was imposed, tier three lenders have been on life support," said Kirimi.

"Their business model used to work by relying heavily on purchased funds and then lending at exorbitant rates in order to make their margins."

The immediate impact of removing the rate cap is unclear, though there are signs of more lending.

"There has been an increase in loan issuance and banks are starting to advertise more, so there seems to be more activity in terms of credit issuance," said Faith Mwangi, a senior investment analyst at Tellimer in Nairobi, Kenya's capital.

Buying a seat at the table

Yet the rate cap removal is unlikely to spur a credit boom.

"There's a misconception that abolishing the rate cap means banks can now set their own rates," said Kirimi. "From speaking to management of tier one lenders, the regulator is very stringent on loan pricing — it's not like banks will go back go back to the Wild West of pre-rate cap regime.

"So, tier three lenders aren't out of danger yet. This year and into 2021, we should see bigger players either taking a slice of the tier three lenders' market share or further vertical consolidation."

That could be Access' thinking, said Gadhia.

"Kenya's regulator wants foreign banks to show their commitment by first buying a small bank with liquidity and solvency issues," he said, citing the example of SBM Bank (Mauritius) Ltd., which initially acquired a minor Kenyan bank before purchasing the larger Chase Bank (Kenya) Ltd. in 2018. "It's buying a seat at the table."

Access, instead of trying plant flags in as many countries as it can, would be better advised to concentrate its resources in just a few key markets, said Gadhia.

"Access's expansion strategy seems half-hearted because it hasn't talked about the capital it will commit, and I doubt it has enough capital to really make an impact."

Access Bank did not respond to a request for comment.