How the Asian model has marred bank acquisitions

Imperial Bank head office at westlands.

Nairobi is for the wittiest. You buy a phone on the street or some item from a hawker and when you get home it may just turn out to be a trick and you have clay in the shell of a phone or of rags Louis Vuitton replica you thought you had grabbed at a bargain.

You would think that corporate boardrooms are any different. They are not. Both new and experienced players have been sold a gaping hole after owners of very reputable banks exited.

This is the drill, a lender is grown from the ground up, it is spruced up and sold out. Then cracks immediately fire up and the masking veneer is revealed.

What the market has learned from the toss and pass that has transpired as the Central Bank of Kenya tried to sell Imperial Bank and Chase Bank was that these banks, glittering three years ago, were just a ruse waiting to happen.

“When we put Chase Bank up for sale, we had a lot of interest and then all of them pulled out. Is this public information or have I just said something I shouldn’t,” Central bank Governor Patrick Njoroge told Imperial Bank depositors on Thursday.

“We went and asked them, what was wrong, how could we handle this,” he said.

Deep-pocketed suitor like Société Générale, France’s third-largest bank by total assets and the sixth-largest in Europe, along with South Africa’s First Rand and Stanbic Bank who could write off its losses, all walked away.

Chase Bank was managed by the KCB Group, which did not take it up even under these circumstances and it took a foreign lender, State Bank of Mauritius to be lured into the deal.

Imperial Bank has been managed by KCB, Diamond Trust Bank and NIC Bank yet it could only get a sour deal and a single suitor being given a second chance.

“We sent expressions of interest to every bank in Kenya and some outside the country but only some few responded,” Dr Njoroge said of Imperial Bank.

A market analyst said the problem with the model of Asian banks is that they are run as franchises where the head office allows branch managers to make money in whatever way so long as the buck gets passed upwards.

This creates a massive web of ‘chopdi’ accounts, a parallel banking facility that offers you more interest than you get in the open market. The accounts are on paper while the money has been moved into personal business and can only work where they are not demanded immediately.

“Credit is not approved centrally so every branch does whatever they are doing on their own creating a lot of risks,” an analyst who did not want to be named said.

Centred on the customer

In slightly over two decades, Chase Bank rose from the ashes and slumped back into oblivion with its owners having to write off their investment in the firm.

Chase Bank traces its origin to 1995 when a group of local investors got together to buy out the troubled Kisumu-based outfit, United Bank.

The bank then tapped the then humbly Zafrullah Khan who spruced up its image developed a business model that centred on the customer and moved the Bank to the city in 2000.

Soon the bank grabbed a brand as a Small and Medium Enterprise lender, recruited the youth and rode the millennial image who wanted banks that could do things differently from straight jacket dinosaurs.

Then in poured eager funds from the likes of French PE firm Amethis Finance, German Investment Corporation (DEG), and Zurich-based asset management firm responsAbility.

Then with a confidence oozing shareholding, the Sh11 billion sack was orchestrated using depositors cash to invest in properties, wiping out the lender’s core capital of Sh9.6 billion as at December 2015.

Now the shareholders including firms associated with Mr Khan will see their investment move over to the Mauritius government for nothing.

Rinascimento Global Limited is the single-largest investor with a 15.9 per cent stake, Shegas Limited (13.9 per cent), Balst Investment Holdings Limited (11.2 per cent), Festuca Investments Limited (9.3 per cent) and Namaja Investments Limited (three per cent).

Chase Bank’s employees have a 4.3 per cent stake in the lender. Major investment funds Amethis Finance, ResponsAbility and DEG — which all invested in the bank in 2013 — also rank among the top owners. Amethis’s equity stands at 10.9 per cent, followed by DEG (6.6 per cent) and responsAbility (3.4 per cent).

At Imperial Bank, which is likely to be acquired by Kenya Commercial Bank, the books had been ripped open for almost a decade before it was almost sold off to a prospective buyer.

W. Tilley featured prominently in the collapse of Charterhouse Bank on suspicion of engaging in money laundering and had according to court papers borrowed in excess of Sh30 billion in Imperial Bank.

Immediately Imperial bank was put under receivership, it was reported that its shareholders tried to sell it to a tier-1 Kenyan bank, but the deal fell through at the last minute when the prospective buyer suddenly cooled off following its own investigation of the bank’s viability.

Unlike Chase Bank, as the bank prepares to pave the way for new owners, its shareholders have not been keen on being edged out.

The seven shareholders including Imaran Ltd, Reynolds & Company Ltd, East Africa Motors Industries Ltd, Momentum Holdings Ltd, Rex Motors Ltd, Kenblest Ltd, and Abdumal Investments have been putting up a spirited fight in the court corridors to stop CBK from giving their banks assets to other lenders that would have liquidated the bank.

But given these were distressed lenders, it will be interesting to see how other lenders fair in a new wave of acquisitions that is targeting the Kenyan market.

According to global rating agency Moody’s, the country is looking at consolidation to reduce the number of banks from the current 42 since only six banks run the show while the other 36 battle for crumbs.

“Six banks (out of 42) controlled around 54 per cent of system assets as of end-2017,” Moodys said in a recent banking report.

“We expect consolidation given the large number of banks, with many smaller banks facing challenges to survive.”

Small lenders such as Jamii Bora are barely lending, with the bank reducing the size of loans from Sh9.3 billion last year March to Sh7.9 billion in the first three months of this year.

The lender has a negative liquidity ratio of 11 per cent, which means it is 31 per cent lower than the Central Bank of Kenya’s (CBK) set mark.

Consolidated Bank needed a Sh500 million boost from the Government this year to stay at 20.2 per cent liquidity, just marginally above the 20 per cent required by CBK.

It also cut lending, reducing facilities from Sh8.7 billion last year to Sh7.8 billion in the first quarter of 2018. The Government has appointed a transaction adviser on the privatisation or consolidation of Consolidated Bank - which may be the first to live up to Moody’s prediction.

National Bank had a liquidity ratio of 29 per cent but that came at a cost since loans reduced by a massive Sh7 billion to cushion its cash position.

According to sources, Prime Bank is being wooed by private equity funds to inject cash in the lender. However, the Bank's media contact denied the claim. Dr Rasik Kantaria, the chairman and founder of the bank holds a significant shareholding in the lender.

Industry sources say at least three small lenders are also in discussions with investors to sell a stake to enable them to survive in the competitive banking industry.

The need to go through deals in Kenya with a fine toothcomb means some of the deals will, however, be delayed over the years even as the operating environment continues to be tougher.