The National Bank of Kenya (NBK) faces imminent collapse if it is not taken over by KCB Group in the proposed merger of the two lenders, Central Bank of Kenya (CBK) Governor Patrick Njoroge has warned.
Dr Njoroge, while appearing before Parliament Tuesday, said failure to rescue the struggling bank would be disastrous to its 650,000 customers as well as the shareholders of the Nairobi Securities Exchange (NSE)-listed firm.
KCB Group, Kenya’s biggest bank, has offered to take over the ailing institution through a share swap deal.
“NBK isn’t a small institution and letting it collapse will be disastrous to its over 650,000 customers and the financial sector at large,” Dr Njoroge told the Finance and National Planning Committee of the National Assembly.
NBK’s core-capital position has deteriorated from Ksh10 billion ($100 million) in 2016 to Ksh2 billion ($20 million) as at March this year, reflecting an 80 percent drop.
Dr Njoroge linked the poor performance to mismanagement, political interference and a poor business model.
NBK, which operates 82 branches countrywide, requires an injection of at least Ksh13 billion ($130 million) to stay afloat and to be in compliance with statutory requirements.
“The resuscitation of NBK is urgent and if there is a misstep it will have a significant implication in the financial sector,” Dr Njoroge told the House committee chaired by Kipkelion East MP Joseph Limo.
The National Social Security Fund (NSSF) and the government, through the National Treasury, are the principal shareholders of NBK with 48 percent and 23 percent stakes respectively.
Dr Njoroge said he is in support of the takeover bid by the KCB Group since it is the most viable option to move the troubled bank to safety.
“This option is best for shareholders because it strengthens the capital position right away. The next step will be strengthening the business model so it becomes a solid bank,” he said.
NBK’s full-year earnings in 2018 stood at Ksh7 million ($70,000) from the Ksh410.78 million ($4 million) posted in 2017.
Net earnings in the first quarter of 2019 jumped to Ksh106.33 million ($1 million) from a loss of Ksh278.54 million ($2.8 million) over the same period last year.
Loans and advances to customers dropped by Ksh5.22 billion ($50 million) or 10 percent to Ksh45 billion ($450 million) in the first quarter compared to last year’s Ksh51.14 billion ($500 million) .
NBK has non-performing loans to the tune of Ksh30 billion ($300 million) .
In 2007, the government pumped in about Ksh20 billion ($200 million) into the bank, but the capital injection did not realise much. This was followed by a bungled rights issue in 2013 in which it had intended to raise Ksh13.2 billion ($130 million), worsening the lender’s financial standing.
Defending KCB’s acquisition of the bank, Dr Njoroge said no investor was willing to work with NBK and that its problems are the reason why its shareholders have refused to pump in more money.
“Nobody wants to work with a weak bank and having seen the management at NBK, strengthening is unlikely. Leadership is key and the bank needs a team that can turn around this institution. For this to happen, you do not need an economist to run the bank, but a banker and less of political appointments,” he said.
The CBK boss noted that the reforms at NBK started in 2016 after the problems were discovered, forcing an audit of its financials, which revealed that its IT system had been messed up and that the numbers it claimed to have were not accurate.
The lender’s core capital is significantly in breach of regulatory capital ratios and therefore constrained in its ability to lend.
Although its liquidity ratio is above the minimum requirement of 20 percent, its total capital to total risk-weighted assets stood at a deficiency of or negative 10.7 percent as at the end of the first three months of the year.
NBK’s core capital to total deposit liabilities stood at a negative or deficiency of 5.8 percent while core capital to total risk weighted assets stands at negative 8.1 percent.
This could be having a bearing on the bank’s huge decline in its financial performance and lack of interest from its customers to invest more money in it.
National Treasury support
“It should not be forgotten that the Capital Markets Authority (CMA) – the capital markets regulator – penalised some of the bank’s senior managers involved in illicit financial dealings,” Dr Njoroge said.
The NSSF and the National Treasury are supporting KCB Group’s takeover bid.
Last week, KCB shareholders also backed the bank’s plan to buy NBK. And on Monday, the NBK board recommended that shareholders agree to the deal. The bank will hold its AGM on June 14.
In a circular to shareholders, NBK said the proposed transaction currently values each of its shares at either Ksh3.78 ($0.04), Ksh ($0.04) and Ksh4.49 ($0.04) based on various scenarios.
It is expected that NBK will end up with shares equivalent to a 4.59 percent stake in KCB.
Meanwhile, two people yesterday moved to court seeking to stop the proposed acquisition.
Evans Aseto and John Kiptoo argue that the acquisition is being conducted in an opaque manner to avoid public scrutiny in a direct contravention of the Constitution.
They have named CBK and the Competition Authority as interested parties in the case.
They argue that the intended acquisition might lead to massive loss of jobs.
—Additional reporting by Sam Kiplagat.