Category Archives: Basel II

Spire Bank Capital Injection

Spire Bank shareholders will hold an extraordinary general meeting at the end of November 207 to approve an increase in bank capital that has been eroded by recent losses at the bank.

At the November 27 EGM, shareholders will approve the creation of 100 million new shares, worth Kshs 500 million that will be allocated to Equatorial Commercial Holdings. Kenyan banks are to have a minimum core bank capital of Kshs 1 billion, and as at June 2017, Spire’s capital was down to Kshs 1.6 billion and the bank had a half-year loss of Kshs 307 million coming on the back of a 2016 loss of Kshs 967 million. Spire had Kshs 13 billion assets, Kshs 6.4 billion loans, and Kshs 7.6 billion deposits as at June 2017. But interest income and total income at the half-year was sharply down from that in June 2016 which could point to their performance trend for the end of 2017.

In 2015, Mwalimu SACCO one of the country’s largest credit societies bought out and rebranded the former Equatorial Commercial Bank as Spire. Equatorial had itself been formed from a merger between Southern Credit and Equatorial banks in 2010. 

Mwalimu SACCO has Kshs 37 billion in assets and Kshs 3 billion profit in 2016 and has over 70,000 members as owners.  This is the second bank capital injection by Mwalimu at Equatorial after another with the buyout. The shares will be allocated among Equatorial Commercial Holdings which owns 98% of Spire bank has shareholders including Mwalimu National Holdings (75%), Yana Towers (10%), A.H. Butt (8%), Yana Investments (6.75%, and who also own 11% of CBA) and N.N. Merali (0%).

Barclays Kenya Previews IFRS9

Barclays Kenya held a workshop session in Nairobi today to explain about the coming of IFRS9, a set of new accounting standards that will replace IAS 39 on January 1, 2018. which will have a great impact on banks, their capital, customer assessment and ultimately their profits.

Some of the highlights of the day:

Compliance Impact

  • Even as banks are still digesting the impact of interest rate caps, along comes IFRS9.
  • All institutions will adopt the impairment standard in 2018.
  • One challenge will be on how to report for impairment: Banks will have to do three sets of accounts, one for impairment according to Central Bank of Kenya (CBK) rules, one for the Kenya Revenue Authority to calculate taxes on profit after impairment, and another for Impairment according to IFRS9. This makes compliance a costly affair.
  • IFRS9 is data intensive, so auditors will be concerned with the quality of data and reconciling it to bank financial statements. They will have to trust that management is providing the right data to make decisions, and if not, they will engage with the bank board, then the bank regulator (CBK).
  • Banks need systems that are able to capture a lot of this customer data and products and come up with impairment models.
  • Banks will use predictive analytics, and big data to manage risk in customer lending.  

Customers

  • IFRS9 brings cross-product default, and if a customer defaults on one loan item like a credit card, a bank has to provide for impairment across all products advanced to them
  • Expect a change from the current practice of using credit reference more from the negative  perspective (a blacklist of borrowers) to a good one (banks will check to see who has been paying on time and offer them better rates)
  • Collection strategies will become very important, given the financial impact of IFRS9 for defaults over 30 days and 90 days.
  • Kenyan bankers are working to enable customers to get access to their own data and shop for products that will be easy to compare across different banks. This will be an enhancement of the loan calculator that the bankers association rolled out earlier.
  • IFRS9 seems to give an incentive for banks to lend shorter duration loans. 

    IFRS9 gives incentive to shorter loans

Profits

  • With IFRS9 banks estimate the credit risk of an instrument, at the point of origination – so losses are recognized earlier.
  • Previously, under IAS 39. banks only recognized a loss once an event occurred e.g customer does not pay a loan for many months. Now banks will have to expect and estimate some defaults and recognize the loss upfront.
  • Under IFRS9, accounting provisions are expected to be higher than the current regulatory provisions.

Financial Statement Changes

  • From day one of IFRS9, there will be an impact on retained earnings and a reduction in Tier 1 capital at all banks
  • Under IFRS9, letter of credit, financial guarantees, performance guarantees, unused credit cards, non-traded government bonds will also be used to calculate impairment.
  • Studies show that IFRS9 running concurrently with IAS 39 can impact on the capital of a bank by between 25 to 100 basis points.
  • Are government securities still risk-free for local traders and investors? Not so under IFRS9. But since Kenya has never defaulted on debt so IFRS9, provisioning will be minimal compared to bonds of some other nations

Way Forward

  • On 1 Jan 2018, international accounting standard IFRS9 will replace IAS 39.
  • Kenyans banks are at a fairly satisfactory stage in terms of getting ready for IFRS9 with Tier I banks, and those with global parentage at an advanced stage compared to local indigenous banks e.g. Barclays has been working on IFRS9 for two years
  • ICPAK (Institute of Certified Public Accountants of Kenya) is working on. rules for the consistent and uniform application of the IFRS9 standard and these will be ready by the end of October.
  • ICPAK will have other forums to further explain IFRS9 as will the Central Bank. 
  • CBK will come up with new classification of loans to replace the current measures of normal, watch, sub-standard, loss etc..

Barclays Exiting Africa: Part II

Almost a year after Barclays Africa announced a decision by (parent) Barclays PLC to exit Africa, they released their Barclays 2016 results (PDF). While the world is now a different one after BREXIT and President Donald Trump, the exit plans are still on course.

Excerpts of the some statements released on Thursday 

  • Revenue from (the rest of) Africa) has been growing at about 16% a year, compared to 5% in South Africa, but, the rest of Africa (excluding SA) is still just 23% of revenue for Barclays Africa. They expect that rest of Africa growth should exceed South Africa’s
  • They have agreed with Barclays PLC on terms of the “separation payments and transitional services  – Barclays PLC will contribute £765m, comprising of £515m in recognition of the investment required in technology, rebranding and other separation projects, £55 million to cover separation related expenses, £195 million to terminate the existing service level agreement relating to the rest of Africa operations”.
  • Barclays PLC will contribute an amount equivalent to 1.5% of Barclays Africa market capitalization towards a black economic empowerment (BEEP) scheme and Barclays plans to create an equity plan for employees in the next 12 to 18 months.
  • They will continue to use the ‘Barclays’ brand in the rest of Africa for three years from the date on which Barclays PLC reduces its shareholding in BAGL to below 50%.
  • During 2016, Barclays PLC reduced its shareholding from 62.3% to 50.1%. Other shareholders include Public Investment Corporation (SA) 6.86%, Old Mutual Asset Managers 3.31%, Allan Gray Investment Council 2.16%, Prudential Portfolio Managers 2.01%, Schroders Plc 1.93%, BlackRock 1.69%, Vanguard Group 1.66%,  Dimensional Fund Advisors 1.65%, and Sanlam Investment Management (SA) 1.62%.

June 1 2017 update

  • Barclays Africa Group Limited today announced that following the completion of South Africa’s largest bookbuild in South African Rands, Barclays PLC has sold 33.7% of Barclays Africa’s issued share capital at a price of R132 per share.
  • This results in accounting deconsolidation of Barclays Africa from Barclays PLC.
  • Barclays PLC sold 285,691,979 Barclays Africa ordinary shares at a price of R132 per share, which results in Barclays PLC reducing its shareholding to 23.4%, with a further 7% to be taken up by the Public Investment Corporation at a later date, following receipt of the necessary regulatory approvals.
  • The significance of this sell-down is that Barclays PLC is no longer the controlling shareholder of Barclays Africa, which now has a diverse shareholder portfolio made up of very supportive, long-term, institutional and individual investors.
  • Ownership of Barclays and Absa operations in Africa does not change as a result of the reduction in shareholding. The 11 banks that form part of Barclays Africa will continue to be led and operated by people with deep local knowledge and a diversity of skills and experience.
    £1 is $1.25, £1 = KES 128.5, and  £1 = 16.1 ZAR.

Twiga Bancorp Closure

Just a few days after Uganda shut down Crane Bank, in Tanzania, the governor of the Bank of Tanzania announced a takeover of Twiga Bancorp, citing a deteriorated capital position that jeopardized its operations.

twiga-bancorpUnder the takeover, the board and management were suspended and a new statutory manager appointed and the bank was to  stay closed for one week while new arrangements were made.

According to a 2012 Tanzania bank report by Serengeti Advisors, Twiga was a relatively small bank, ranked 28th out of 45 banks in the country. It was wholly owned by the Government of Tanzania and had 4 branches. It had $42 million in assets, $24 million of loans and deposits of $34 million. Its capital base was $3.4 million and it made a profit in 2011 of $189,000.

Bank Capital Raising Season

Away from the Chase Bank saga, banks continue to raise money to support their fast growth in recent years. It’s a bit harder to raise money and it’s clear the Imperial Bank fallout affected other bond and stock offerings that came in its wake.

In the News

  • Family Bank has a rights issue coming up, to be approved by shareholders.
  • Duet Private Equity Limited, part of the Duet Group, will inject Ksh1.9 billion into Fidelity Commercial Bank to strengthen the Bank’s core capital, and support its local and regional growth strategy.
  • EDIT Jamii Bora Bank just raised $12 million through two Private Equity funds – Equator Capital Partners  (through its managed fund, ShoreCap II) and Progression Capital Africa  (through through its managed fund, Progression Eastern African Microfinance Equity Fund). 
  • KCB Group shareholders are to approve a rights issue and (another) name change to KCB Plc. KCB is also paying shareholders a Kshs 2 dividend, with Kshs 1 in cash, and the other Kshs 1 as a scrip dividend. The intent of this is to allow its Shareholders to derive value on account of higher dividend in future due to increased shareholding. This is automatic, but shareholders have the option to receive the Kshs 1 in cash by  filling and returning a scrip election form to the bank by June 17. If all shareholders opt for the scrip, and get new shares at a price of Kshs 38 per share, this will increase the number of KCB shares by 2.5%.
  • National Bank was expected to have a rights issues in 1Q2016, and the government expected to raise Kshs 4.99 billion from a the issue in February 2016. The process has been delayed and it now appears that NBK may still be combined with two other smaller state-controlled banks –  Consolidated Bank and the Development Bank of Kenya.
  • Sidian Bank (formerly K-Rep), is expecting its minority shareholders to  provide Kshs 400 million capital to support its growth plans.The new capital comes after the majority shareholder, Centum Investment, injected its share of Kshs 1.2 billion last year after raising its stake in the lender to 67.5%.. Sidian chief executive officer Titus Karanja said  “They gave us their commitments and we are expecting the money by end of May.”
  • SMEP Microfinance Bank shareholders are expected to have a rights issue to increase their  share capital, issue a bonus (1 for every 6 held), and also create an employee share option program (ESOP). They  will target less than 100 people or institutions for the privately placed capital raising.
  • EDIT Credit Bank expects that Fountain Enterprises Programme (FEP Holdings) will pay Kshs 5.4 billion for an additional 70% stake in the bank..via a private offer priced at Kshs180 apiece and limited to members of the chama (investment club) which has a large following in the UK and US.

Away from right issues, some banks have recently signed funding deals:

  • CfC Stanbic Bank signed a $135 milllion dual tranche term loan facility in which Emirates NBD Capital Limited (ENBD) and Mashreqbank PSC were the Initial Mandated Lead Arrangers and Bookrunners of the financing. The financing, which will be used for general corporate purposes, including, trade-related finance, was oversubscribed from the initial launch amount of US$ 100,000,000.
  • Commercial Bank of Africa (CBA) and Standard Bank of Southern Africa (SBSA) executed a $25 million cross-currency repo transaction.  The deal, facilitated and guaranteed by Frontclear, is a first of its kind transaction and paves the way to a more robust, stable and inclusive interbank market in Kenya. In the transaction, CBA receives $25 million in 1-year funding from SBSA and provides Government of Kenya Bonds as collateral.
  •  The African Development Bank (AfDB) recently extended a $40 million, 10-year line of credit to the East African Development Bank (EADB) towards support of regional infrastructure, manufacturing, agribusiness and education sectors with a bid to increase economic and government revenue growth in the member countries.
Not forgetting Chase Bank:
  • The Chase Bank bond that was oversubscribed last year was suspended. The bank had also undertaken a private placement in which high net worth investors bought shares at Kshs 2,760 each. Chase Bank had said that proceeds of the private offer would be used to shore up the lender’s thinning capital ratios, grow the loan book and invest in technology.

What other bank rights issues are there?

 $1 = Kshs 102.