The Big Take-Over
When financial services company, Kenya Commercial Bank (KCB) Plc announced that its profit for the last three quarters of 2019 had risen to Ksh19.2 billion, the financials were to raise public attention. But the focus was not much on the huge profits, but the latest development the Bank had undergone in the second quarter of the year.
Since April 2019, KCB Group had been showing interest to acquire National Bank of Kenya (NBK), a 51-year-old state-owned bank that for months had been on the low.
NBK, whose core shareholders include the National Social Securities Fund and government, has had its fair share of financial crises. For instance, in the last three months of 2015, the bank reported a $11.5 million loss. The banking regulator, Central Bank of Kenya, had at the time accused the bank of not posting provisions for higher loans.
A year later in April, the Nairobi Securities Exchange also stated that NBK had its performance weighed down by a poor income. Then in 2018, the NBK’s core capital base fell below Ksh1 billion. This was among a raft of challenges that had crippled the state-owned bank.
Hence, in April 2019, KCB came up with a bail-out plan, in which it would buy 10 ordinary shares of NBK for one ordinary share of KCB- essentially acquiring the bank.
The Competition Authority of Kenya (CAK) lists KCB as a Tier 1 bank with 14.4 percent market share, ranking it among leading financial institutions that control 49 percent of the retail and banking services market. By September 2019, KCB had 263 million shares, against 338.8 million ordinary shares that had been issued by NBK.
While regulators such as the Central Bank of Kenya and National Treasury welcomed the acquisition, there were other parties such as the Finance Committee of the National Assembly that weren’t fully convinced initially.
“Not only is the acquisition lacking in public participation, but that it is also undervalued and thus is likely to have an adverse effect on the workers,” explained the Committee as part of its hesitation.
Meanwhile another regulator, the Competition Authority of Kenya (CAK), though welcomed the acquisition, stated that the merged entity of KCB-NBK should be able to retain ‘its employees within eighteen months after the acquisition had been completed, though restructuring is inevitable.’
Kenya National Bank of Kenya board of directors would few months later be shown the door following the take-over, leaving only two on the board. Those that exited included chairman of the Coalition of Trade Unions (Cotu) Francis Atwoli, chairman of NBK Mohammed Hassan and Managing Director of the National Social Security Fund (NSSF) Anthony Omerikwa- this despite NSSF being a significant shareholder in NBK.
In a statement written in September 2019, Chairman of NBK Wilfred Musau stated that there is a mutual importance as to how the banks will be created. “The acquisition would not only be important to both banks but also give meaning to their organisational structures as well as increase their mutual capital bases,” he said.
In an interview with The East African Business Times magazine mid-November, Wycliffe Otieno, an Associate at Standard Investment Bank (SIB), revealed that SIB was hired by both NBK and KCB banks as a transaction adviser to prepare a report about the terms, benefits and risks involved in the acquisition.
“The report found out that NBK was basically in the red because of mismanagement. The acquisition is going to solve this challenge because it has a fall back plan. For instance, the acquisition will have an increased lending capacity of about Ksh1 trillion. There will be a cost synergy because of the reduced cost of transactions,” he says.
Furthermore, Otieno says the acquisition by NBK was done because the Board of Directors of NBK had to approve the terms set forth. Another condition that NBK had to adhere to was to be de-listed at the Nairobi Securities Exchange (NSE), which was done by September 2nd, 2019.
According to an analysis by Dr Robert Odunga, ***write his titled/capacity*** on share swap: “When we talk of shares, a company is normally registered with shares because they determine the amount of capital that a company is registered with. One of their clauses is that they have to indicate the number of shares, par value and the amount of capital that they should be registered with,” he says.
At no time, Dr Odunga adds, is a company going to go beyond its authorised capital. But they can issue shares in bits so that at any given time, they can have authorised capital and unauthorised capital. Once that capital has been approved, Odunga says, it can be granted and they can increase their authorised capital to whichever level of capital of either Ksh1 million or an upper ceiling.
The KCB-NBK share swap acquisition has set a precedent for other banks. For instance, Equity Bank is set to acquire four banks owned by Atlas Mara, in a bid to expand its footprint in other East African countries such as Tanzania, Rwanda, Zambia and Mozambique, with an expectation to grow its base beyond Ksh1 trillion, according to Chinese media Xinhua.
Research shows that between 2018 and 2000, there have only been six bank acquisitions in Kenya. Already, there has been the merger between Commercial Bank of Africa and NIC Bank, which was done in October 2019.
Globally, the American banks such as BB&T is set to merge with SunTrust Bank after regulatory approval. The acquirer, BB&T, is set to gain a much bigger leverage in the housing industry from the acquisition, with merged assets likely to be in the region of $442 billion, states a report published by Housing Wire.
The trend of mergers and acquisitions in the banking industry seems to be the solution to the challenging economy that is negatively affecting companies in the financial services sector, McKinsey & Co explains.
An example here in Kenya is how the interest rates in the Finance Bill had sought to stifle credit to the Small and Medium-sized enterprises (SME’s) by commercial banks.
However, in November 2019, President Uhuru Kenyatta signed into law the Finance Bill, giving commercial banks free reign to set their own lending rates, whereas the role had previously been the preserve of the regulator, Central Bank of Kenya, a move that has been praised by commercial banks as progressive.