Category Archives: Basel II

IFRS9 capital provisions extension for Kenyan banks

Kenyan banks have been given more time to implement increased provisions as part of the capital compliance in new accounting rules IFRS9.

According to KPMG IFRS9 is still effective as at 1 January 2018 for all entities reporting under International Financial Reporting Standards (IFRS), which includes companies in Kenya. However, because IFRS 9 is likely to have a significant negative impact on banks’ capital adequacy ratios, CBK has given banks a 5 year period in this regard to meet the resulting capital requirements from implementation of IFRS 9. In practice, this means that CBK will allow Banks to stagger the effect of the increase in provisions on capital adequacy ratios over 5 years.

Last year, KPMG joined Barclays Kenya in unveiling IFRS 9 by giving the perspective from the auditor’s side on how they were assisting banks to prepare for the change over including reconciling the enormous amounts of data called for by IFRS9 rules and working with banks to develop models including for better management decision-making and provisions.

See the KPMG IFRS page with stories on how “All corporates need to assess the impact of IFRS 9” and “How corporates might be affected” as well as the recently issued guidelines from the Institute of Certified Public Accountants of Kenya (ICPAK) on the requirements of IFRS 9.

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.

EDIT May 17, 2018: The Bank of Tanzania announced that it had approved a merger between Twiga and a new TPB Bank Plc which will take over all customers, employees, assets, liabilities, and protect the interests of depositors of Twiga while ensuring the stability of the banking sector. The move ends the statutory management of Twiga by the regulator – the Bank of Tanzania.