Treasury CS backs KCB's bid to take over National Bank

A file photo of Labour Cabinet Secretary Ukur Yatani, who is currently serving as the acting Treasury minister. PHOTO | NATION MEDIA GROUP

What you need to know:

  • Acting Treasury CS Ukur Yatani said the government supports the acquisition to grow a strong banking sector that can meet its obligations.
  • This means the deal is as good as done since the government, through the Treasury and NSSF, is NBK’s majority shareholder.
  • The litany of problems NBK is facing, which worsened in 2016, mean that without a rescue plan, the half a century-old financial institution would cave in.
  • Despite the fundamental limitations, the board has managed to steer the bank to improved profitability over the last three years while continuing to engage the shareholders on the injection of additional capital.

The National Treasury on Thursday backed KCB Group’s acquisition of the ailing National Bank of Kenya in a share-swap deal that closes on August 30, a day after a House team opposed the move.

This means the deal is as good as done since the government, through the Treasury and NSSF, is NBK’s majority shareholder.

Acting Treasury CS Ukur Yatani said the government supports the acquisition to grow a strong banking sector that can meet its obligations.

Mr Yatani’s statement came a day after the Parliamentary Committee on Finance recommended that the acquisition be halted and that Treasury finds alternative means of injecting liquidity into the struggling bank.

The full House is yet to debate the report House Majority Leader Aden Duale tabled.

“Since the merger process started, consultations have been ongoing with various stakeholders including Parliament,” Mr Yatani said in a series of tweets.

“The government is confident that these consultations will yield positive results for both KCB and NBK to support the bigger government agenda of strengthening the financial sector in Kenya,” he added.

DEAL CLOSING

The CS spoke as KCB issued a statement on its intention to close the deal, adding, it looked forward to discuss it with MPs.

“We are conscious that Parliament has a role to play in national governance and we shall endeavour to uphold the relevant legal and regulatory requirements at every stage of the transaction,” KCB said.

NBK shareholders had already received offer documents and KCB said they remained optimistic they would receive positive responses.

Central Bank Governor Patrick Njoroge had earlier warned Parliament that NBK was heavily in the red and that KCB’s acquisition of NBK was its only way out of the woods.

Dr Njoroge told the Finance committee that NBK was facing several challenges including non-compliance with regulatory capital requirements and its business growth had been curtailed.

“In CBK’s opinion, the proposal by KCB is the most appropriate and the only option at this time for NBK,” he said.

Treasury was of similar view when they appeared before the committee, chaired by Kipkelion East MP Francis Limo. It warned that if the issue facing NBK was not addressed, it would cause negative ripple effects across the banking sector.

The committee, however, rejected the counsel from Treasury and CBK and recommended that NBK shareholders should not accept the offer by KCB.

ALTERNATIVES

The committee’s recommendations will, however, require the approval of the House.

Should the House approve the recommendations, they will remain advisory because the acquisition is taking place under The Capital Markets (Take-overs and Mergers) Regulations, 2002.

KCB proposed to make the acquisition through a share swap of 10 ordinary shares of NBK for every one ordinary share of KCB

The Finance committee had recommended that the Treasury seeks alternative ways of funding NBK despite fears of the bank’s collapse if the planned takeover fell through.

NBK has not received any alternative offer aside from the ongoing deal by KCB.

The need for an alternative financier, the report says, is to ensure the bank is compliant with the Banking Act capital ratios to continue lending and taking in more deposits.

NBK'S PROBLEMS

The litany of problems NBK is facing, which worsened in 2016, mean that without a rescue plan, the half a century-old financial institution would cave in.

The report notes that NBK’s core capital dwindled from Sh10 billion in December 2016 to Sh2 billion as at March 31, this year while the total asset base also fell from Sh115 billion to Sh105 billion in the same period.

This contrasts with KCB Group’s solid position where the core capital stood at Sh100 billion as at March 31, 2019, way above the statutory requirement of Sh1 billion. KCB’s liquidity ratio is also weighted at 35.6 per cent which is above the legal requirement for 20 per cent.

The current scenario has curtailed NBK from lending and also taking in more deposits.

KCB gave an offer bid share price of Sh3.80 and the total value of NBK at Sh6 billion against an independent valuation of per-share price of Sh6.10 and a total value of Sh9 billion.

CAPITAL

The Finance Committee was however of the view that the offer given by KCB does not reflect the fair value of NBK but no alternative offer has come up since.

The NBK told the committee that the bank's problems were due to lack of capital which has constrained business growth.

Despite the fundamental limitations, the board has managed to steer the bank to improved profitability over the last three years while continuing to engage shareholders on the injection of additional capital.

The board explained that it has continued to engage key stakeholders to inject Tier I and II capital.

The board also strengthened management, established an independent risk and audit function, enhanced governance and revised key policies to embed robust risk management and control environment.

The Finance Committee rejected the Treasury and CBK's advice and took the position that the ailing NBK should instead be rescued by a cash injection from the public purse.