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Why Chase Bank buyout deal worries existing depositors

By Otiato Guguyu | July 17th 2018
Central Bank Governor Dr. Patrick Njoroge(right) & Mohamud A. Mohamud(left) Chief Executive Officer Kenya Deposit Insurance Corporation(KDIC)

NAIROBI, KENYA: When Chase Bank depositors wake up on Monday August 20, they will be able to walk into a State Bank of Mauritius (SBM) counter and draw part of their money that has been locked away since April 2016.

While this move is a welcome relief, they will only be able to get a fraction of the money. This is because the deal offers them access to only 37.5 per cent of the money they had at ChaseBank.

“The Chase Bank story is being told saying that only 75 per cent is coming back to depositors, the rest is in essence gone. Of that (75 per cent) only half or 37.7 of original amount is what is available on August 20,” a source told Financial Standard.

Under the deal with SBM, the Central Bank of Kenya (CBK) agreed that about 180,000 new customers who deposited money into Chase Bank after it was placed under receivership will have full access to their Sh5.9 billion.

The rest of the 3,100 customers whose money was stuck with the ailing lender will have access up to a quarter of the cash or Sh14.25 billion which will be deposited in a current account.

Another Sh14.25 billion will be put in a savings account earning an interest of seven per cent, which can either be withdrawn or saved up with the Mauritius lender after three years.

The rest of the Sh28.5 billion will be set aside as a term deposit attracting seven per cent interest, and will be paid to the customers for a period of three years in tranches of Sh9.5 billion each.

The other 25 per cent stuck in Chase Bank may all be lost for all intents and purposes.

CBK Governor Patrick Njoroge told Chase Bank depositors last year that the regulator will pursue the assets of the owners in several small cases to recover value and get the remainder of their cash.

He said they had taken the time to collect watertight forensic evidence but would not file an omnibus case but rather small cases which would deliver maximum results without risking the whole fraud case over technicalities.

He, however, admitted that during the receivership, Kenya Deposit Insurance Corporation (KDIC) had not essentially been able to ensure clients pay their loans due which would have enabled the depositors to access more cash. “During the receivership, some people stopped servicing their loans. Large borrowers who had large deposits in the bank decided to stop making payments, which led to Sh20 billion of the Sh35 billion going into negative equity,” said Dr Njoroge.

This means that the un-serviced loans left with the troubled lender would be way higher than the Sh19 billion previously estimated, leaving CBK and KDIC with a daunting task of following up on the defaulters.

Half of Chase Bank customers stopped paying their home loans when the bank was put under receivership in 2016, according to CBK data, where out of the Sh7.5 billion worth of mortgage assets held by the lender, Sh4.5 billion was non-performing.

Lender’s woes

This makes up a quarter of the total loans that were abandoned when the bank was momentarily closed and later partially opened as borrowers took advantage of the lender’s woes.

It has been a holiday for individuals and businesses who took loans from Chase Bank after they spent two years without repaying. The holiday may be about to continue after August 20, when the lender is carved out of assets to a shell that will only be on paper under the continued receivership by the KDIC.

Njoroge, however, said the lender will pursue the defaulters past the August asset takeover bid. “Are we letting them go? Certainly not. What we want is to quickly release depositors from this trap and then deal with the problem,” he said. This move may prove challenging in terms of capacity since staff will have been adopted by SBM.

Kenya Commercial Bank, which provided receivership, has also pulled out leaving it with KDIC staff who have shown limited ability to handle the lender.

According to sources within the lender, during the receivership, employees who had been promised rewards including cashing in on terminal benefits had been frustrated by the delays, leading to massive bleeding through internal fraud.

SBM strategically avoided taking any problematic loans in the sweet deal in which it did not pay a penny owing to the risk of adopting non-performing loans, which would have required substantial capital injection.

According to sources, part of the Sh57 billion assets taken by SBM is over Sh20 billion in cash and cash equivalents held at one commercial bank alone.

The other assets are the ICT systems which consists of the core banking system - the platform where the bank runs - as well as several IT related systems to manage the human resource and card transaction whose value may run into billions of shillings.

SBM is also expected to inherit the 62-branch network held by the troubled lender. “What we are taking are some of the branches, the employees, the IT system and some loans which at this time I’m not at liberty to disclose,” SBM Group CEO Andrew Bainbridge said on Thursday last week.

This means SBM may have gotten a deal to die for, inheriting lucrative assets without contracting bad loans for free, and locking in liabilities in terms of deposits for three years. Mr Bainbridge, however, said the lender had pumped in capital last month and would pump in more next month to hit minimum required levels.

CBK has set a liquidity ratio at 20 per cent, but the acquisition of a troubled lender’s books brings in the risk of dipping the buyer into the negative cash position.

When SBM acquired Fidelity Commercial Bank last year, it had to inject in Sh1.45 billion of fresh capital once the deal got all the required regulatory approvals.

The Chase Bank transaction will move SBM Kenya from a Tier Three bank to a strong Tier Two lender within a year of its creation with Bloomberg reporting that their operations may break even within the year.

Other losers in the Chase SBM deal will be the shareholders who will not get any cash after the asset takeover. United Bank Ltd of Dubai and its London-registered subsidiary United National Bank Ltd are owed Sh1.1 billion.

Fund managers lost Sh4.2 billionlast year alone.


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