Cause for concern about KCB merger in state-owned banking

This is how I view Kenya Commercial Bank’s bid to take over ownership and control of the National Bank of Kenya.

If you look at it critically, it is really a case where two common shareholders in both banks are proposing to consolidate and rationalise their stakes in the two institutions.

As we all know, the National Treasury and then National Social Security Fund are the largest shareholders of both the NBK and KCB.

If you own two banks, it may just makes sense to put them in one basket.

With the shareholding of the NBK currently trading at its lowest multiples and at a steep discount on the book value, this transaction could put the government and the NSSF in a position where  they can start realising a return on their investments in the bank.

ANCHOR SHAREHOLDERS

Indeed, the two anchor shareholders of NBK have not been able to earn a return either by way of capital appreciation or dividends from  the billions they invested in the company in nearly two decades.

If I were the one making the decisions, I would have sacked all the trustees of the NSSF and pressed charges against them in the High Court for negligence of fiduciary responsibility and for investing workers’ hard-earned pension savings in what has not yielded returns for nearly 20 years. 

I can assure you that had the NSSF been a private pension scheme holding regular annual general meetings where members and sponsors can elect trustees, the board of trustees would have long been sent home.

The NBK has more or less been a black hole where capital goes in and no returns come out; an institution that is forever demanding bailout funds and shareholder loans.

KEPT ALIVE

But more significantly, a takeover of NBK will serve as strong signal that those distressed state-owned banks will no longer be artificially kept alive even after they have long out-lived their usefulness.

Many of the state-owned banks have been in poor financial health, only managing to limp along because of support and regulatory forbearance from the Central Bank.

Some of these banks have found themselves suffering crippling liquidity problems, forcing them to resort to complete dependence on the CBK discount window for liquidity.

In the interbank market, they are unable to access liquidity easily because the large banks are not willing to lend to them, choosing to deal only with their large peers.

STRUCTURED CHANGES

Which is why we must hope that the proposed merger of NBK and KCB will just be but the beginning of structured changes that will eventually give us a long-lasting solution to deal with widespread distress within the state-owned segment of the banking sector.

We must not forget that the idea of consolidation and mergers of state-owned banks originated from recommendations of the presidential task force on parastatal reforms of 2014.

At the time, the thinking was that KCB would be left alone to operate as one national champion with the remaining banks – namely NBK, Consolidated Bank of Kenya, Development Bank of Kenya and Post Bank – merged into a second national champion.

Those proposals did not see the light of day. Me thinks that KCB is not acting on its own motion by tabling the proposal.

NON-PERFORMING LOANS

The bank has been prodded by the government. Which begs the questions: Is merger of a sick bank with a large profitable one the only recipe for dealing with troubled state-owned banks?

Is there a risk of NBK contaminating KCB’s balance sheet with its mountains of non-performing loans? 

These questions remain pertinent. Looking at balance sheet size, the fact that KCB is nearly six times the size of NBK, and considering the volume of government banking business and public deposits which the merger of two is bringing under one roof, the risk of any major contamination is probably exaggerated.

Still, I have fears. First, with the combined stake of both the government and the NSSF set to increase to 30 per cent after the proposed merger, KCB might be exposed to more political meddling by elites.

MAJOR CRISIS

Secondly, I don’t agree with this whole idea of channelling between 80 and 90 per cent of government banking business and deposits into a Treasury Single Account domiciled at KCB.

Mark you, the government currently keeps over hundreds of thousands of deposits with commercial banks.

If you move all that money to the proposed Treasury Single Account as KCB suggests, you might precipitate a major crisis, especially among banks where government deposits account for a big proportion of the total deposits.

 [email protected]