Inside National Bank: The Sh5 billion in toxic loans that threaten to sink listed lender

NBK's suspended CEO Munir Ahmed. PHOTO: FILE

NAIROBI: A sacco received Sh893 million just a few hours after it opened an account at National Bank of Kenya (NBK).

An oil company was advanced Sh236 million after holding an account at the bank for just one month.

An individual received Sh38 million barely two months after opening his account at NBK.

Aside from these funds being advanced in haste in clear violation of banking regulations, these customers (who we cannot name for legal reasons) had no time to build a track record, raising the risk of their defaulting on repayments.

These and more shocking details have been revealed in a dossier put together by a group of the bank’s employees, mostly from the risk and credit departments.

The insider document adds that 95 per cent of mortgage loans were approved without site visits being conducted by bank officials, contrary to the lender’s credit policy on business and mortgage products.

The employees found that the bank has several accounts that were opened purely for the purposes of borrowing, and were thereafter abandoned, making recovery of the cash nearly impossible.

The document shows NBK has in excess of Sh5 billion of such toxic loans in its books, money that was advanced to newly registered companies and a few well-connected, high net worth individuals.

The dossier is understood to have been prepared to be shared with a team of investigators who are combing through the bank’s books.

Last week, the bank announced its biggest loss in eight years of Sh1.2 billion. It blamed this on a 62 per cent jump in non-performing loans — cash advanced that it does not expect to get back.

The results raised eyebrows for two reasons. First, the listed lender had issued a profit warning just a day before it reported its financials.

Second, the bank reversed in just three months what it had earlier termed its best performance in 48 years — a Sh2.25 billion profit in the nine months to September 2015.

So what happened between October and December?

The insider document gives insight into why the bank made a hasty retreat in the last three months of its financial year to make heavy provisions for bad debt. It had become clear it was staring at a serious default risk.

Employees analysed loans of Sh10 million and above, and warned that if the entire loan book were scrutinised, the amounts involved would be much higher than Sh5 billion.

RISKY BILLIONS

Insiders at the bank say these loans, which are now the subject of an investigation, and a poor verification process are behind the current troubles threatening to sink the lender.

In this first instalment on the intrigues at NBK, Business Beat can reveal that some accounts opened specifically for purposes of borrowing have since been abandoned, exposing workers and taxpayers to heavy losses from defaults. The Treasury and National Social Security Fund (NSSF) own 70.6 per cent of the bank.

The dossier show most of these risky billions were lent out between August 2013 and February 2014.

NBK is now being subjected to multi-pronged audits from internal auditors who report to the board of directors, the Central Bank of Kenya (CBK) and external auditors.

The audits are expected to look at these suspicious accounts, some which are related and receive common account-to-account transfers.

“Funds are transferred from the borrowing account to a related account almost instantly, from where the monies are sent to another bank. In most cases, cross-transfers are done before money is remitted via Real Time Gross Settlement (RTGS),” the dossier reads in part.

“In most instances, fund transfers of amounts of between Sh950,000 and Sh990,000, punctuated by RTGS/SWIFT messages, are transferred to other banks. It is apparent that this is to avoid tracking of the movement of funds.”

According to the dossier, Swift messages of large amounts (outside the country) are credited to suspense accounts, from where they are transferred in hard cash to the bank’s correspondent banks. It is still not clear if approval for such transactions was sought from CBK.

“Some loans were disbursed against properties offered as security that had outstanding rates without requesting clearance certificates prior to loan disbursements,” the document adds.

In addition, some mortgage facilities were appraised and approved without valuation of the properties offered as security.

This also raised the risk of loss in cases where the said properties turn out to be of a lower value than the loan approved.

“In case of default in servicing the facilities whose disbursements were made, on early drawdown, without supporting customer requests, the bank will be in a precarious position to support its case against the customer on litigation arising thereof,” the document reads.

Also, some accounts that were making repayments applied for additional loans.

“This is violation of the bank’s credit policy. This impacts negatively on the bank’s liquidity since the opportunity cost of funds given out was high,” an insider said.

Another source at the bank, who corroborated these claims, added that in some instances, some of the companies that were given loans have directors in common.

PUBLIC OUTBURST

It first emerged that the bank was dishing out toxic loans in June last year. But the bank’s managing director, Munir Sheikh Ahmed, would hear none of it. For months, he fought against claims there was anything wrong at his bank.

The NBK boss, who was suspended last week alongside five other managers, took on anyone who suggested there was trouble.

One of the biggest public outbursts for the man who was picked from Standard Chartered Bank to chart a new path for the lender happened that June.

Some employees claimed the bank was issuing millions of shillings in toxic loans, but Munir dismissed the reports as coming from disgruntled staff. He further accused some powerful forces of funding malicious stories to discredit his team’s hard work.

Indeed, apart from a delay in getting NBK’s 2015 banking licence renewed by the Central Bank due to poor liquidity ratios, everything else looked good.

In his three-year stint at the bank, Munir’s administration had overseen a successful re-branding, automation and modernisation, product differentiation and launch of 25 branches.

His controversial transformation programme, however, saw management fall out with some key staff.

Later in the year, as if to prove critics wrong, the bank reported Sh2.25 billion in net profits.

The result helped calm the nerves of shareholders at the bank and convince some depositors who had wanted to leave that the lender was not in any trouble.

Until Thursday last week, the bank’s balance sheet looked healthy, with Munir seemingly taking it to greater heights of profitability than his predecessor, the late Reuben Mbaine Marambii, did.

But employees of NBK describe Munir as aggressive and the opposite of Mr Marambii. Before his suspension last week, there had been at least three other attempts to kick him out.

The narrative that Munir’s team advanced is that there were powerful people hell-bent on painting the bank in negative light to justify a change in management.

But the events of last week have proved that NBK may be in deeper trouble than it has been in in the last decade, and has bigger problems than its managers and CBK may be willing to admit.

The first crack at the bank was seen in March 2015 after two directors at the bank were voted out of the boardroom at an Annual General Meeting (AGM).

The boardroom coup was calculated to send a strong message to anyone who had a dissenting opinion on the manner in which the bank was being run. The two directors voted out were Wangui Mwaniki and Sylvia Gitonga.

The pair is understood to have been warned not to bother seeking re-election.

It is not clear what their main sins were, but sources told Business Beat they were some of the strongest and most vocal critics of the bank’s management.

BOARDROOM WAR

Insiders say the two were also the main antagonists in the bank’s simmering boardroom war. They were further suspected of having leaked the happenings in the bank’s boardroom to the press through their agents.

They are said to have opposed several decisions, among them keeping the bank’s then chief finance officer on the payroll, even though he had been adversely mentioned in a Mumias Sugar Company audit report and was being investigated by the Ethics and Anti-Corruption Commission (EACC).

At the AGM held in March, Joseph Kimutai Kering and Linet Mirehane replaced the two directors, who were described in board meetings as “traitors”. The Treasury and NSSF also voted against the two directors.

After that decision, the board largely enjoyed a harmonious working relationship. A board meeting held on May 18 last year passed in a record one hour all the items on the agenda that the previous board had struggled with.

These included the review of the bank’s organisational structure, the termination of services of about over 100 employees and the opening of more Amanah branches, its Islamic banking window.

But things are unravelling now.

Before he was suspended from the bank last week, Munir admitted his bank was being audited by several parties, but said these were normal and were conducted every quarter in line with the regulator’s guidelines.

“As a company listed in the Nairobi Securities Exchange, we are further subject to additional oversight by the Capital Markets Authority,” he said.

The bank then went on to announce a loss, which it attributed to loan impairment charges that increased by Sh3.2 billion last year.

“The bank’s non-performing loan portfolio increased sharply towards the end of 2015, undoing a gain of Sh3.3 billion in profit before tax reported by the bank for Quarter 3 2015,” the bank said in a statement.

“Increasing provisions is a prudent practice in accounting. We have further put elaborate steps in place to manage the recovery of this position,” the bank’s acting managing director, Wilfred Musau, said, adding that the reduction in profits was also a result of higher interest expenses.

He was left with the task of announcing results after Munir was suspended.

The performance is set to eat into the gains the bank has made in the last decade, and is a slap on the faces of its shareholders who had to go for years without dividends as part of the turnaround plan.

Several parastatals have allegedly started moving their funds out of the bank. It is understood that the Teachers Service Commission (TSC) and Defence ministry have moved their funds to other banks, further worsening National Bank’s position.

This is NBK’s first loss in over eight years. Its best year was 2010, when it reported Sh2 billion in net profits.

The lender took a beating after its gross non-performing loans rose to a massive Sh11.7 billion last year. This was a 62 per cent increase from Sh7.2 billion in 2014.

Our source at the bank has also raised concerns on how the bank has been filling vacant positions.

The source accused the bank of running an employment process that is not entirely based on merit; a process that has seen friends and relatives of some interested parties handed jobs. It is said this is one of the main reasons of the fallout within the board.

ICY RELATIONSHIP

NBK has also had an icy relationship with the Treasury after its right issue was put on hold and funds for it withdrawn. Munir and several board members had on numerous occasions claimed the Treasury has been frustrating its efforts.

“Treasury and a cartel is frustrating a professional team that has delivered under very difficult circumstances and that could have done better if Treasury had in the least approved the rights issue in 2013, 2014, 2015 or even now,” a board member at the bank told Business Beat.

But in a change of tune, Munir said in a recent statement: “We are not at war with Treasury or anyone. The bank is listed, and to own the bank, simply buy shares on the securities exchange.”

The management of the bank has also said its troubles are linked to a plot to take over the bank.

On August 20 last year, for instance, former Finance Assistant Minister Oburu Odinga told Parliament’s Public Investment Committee (PIC) that he was aware of a plot involving “Treasury mandarins” to sell the bank to a well-known politician.

“Mr Chairman, I do not know why this issue has not been investigated. It is criminal for Treasury to assist in a plot to grab such an important Kenyan bank,” Mr Oburu said.

PIC Chairman Adan Keynan said Parliament would not sit back and watch the grabbing of a bank owned by Kenyans.

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