Interest Cap Impact and Bank Resilience

The end of August marks the deadline for Kenyan banks to publish their unaudited half-year results (January to June 2017). Those of most banks are done and there are some trends, some concerns and some resilience areas seen in what’s been a challenging year for the sector that has for a long time been seen as one that earns super-profits for its shareholders.
The interest rate capping bill was signed last August, and while its initial impact was not fully seen in the 2016 results, one year later these can now be interpreted. The law has had far-reaching impacts on different banks, their performance, operations and strategic directions. Overall, there has been a decline in bank results due to a mix of interest rate caps and digitization, as phones have taken over from branches as the main point for the bulk of customer transactions.
Some observations: 
  • Less traditional banking: there has been a decline in assets as more banks have turned to digitization to cut costs, and increase efficiency. At Equity, deposits were flat between March and June, which also marked the third straight quarter of overall loan declines
  • Lower interest income: e.g. 45% down at Family Bank, plunging it to a half-year loss
  • A buildup of government debt: Equity now has Kshs 105 billion, KCB 100 billion, and Diamond Trust 83 billion.
  • More closure of branches e.g. Barclays, Standard Chartered, Bank of Africa and Ecobank. But it’s not all gloom as some banks like Cooperative and Diamond Trust have announced plans to open new branches.
  • Job cuts have been announced at KCB, Standard Chartered, Barclays, Family Bank, National Bank of Kenya, NIC Bank, Ecobank, Bank of Africa, First Community Bank and Sidian Bank.
  • With nowhere to go, banks are giving money back to shareholders. Some banks have reduced capital, while KCB with profit flat at the half-year will pay a rare interim dividend confirming analysts’ view that some banks will return more capital to shareholders at a time when they have curtailed lending to riskier customers. 
  • Big banks are okay, small ones, not so much:

  • Losses, not profits. E.g. Family and Sidian, went into the red at the half year, despite layoffs and closures, while Ecobank managed to stay above water. These have mainly been attributed to reduced interest income.
  • Declines in loans and deposits at tier ii banks, and T1 equity
  • Mortgage declines: Buy Rent Kenya said that there has been a major drop in the number of mortgage applications over the past year and that those that the cap was meant for are currently the biggest losers as banks are skeptical to give credit to most individuals as they now have numerous terms and conditions that are not easy to meet.
  • Local banks converting debt to equity at Kenya Airways: This has been a reluctant move, with three banks delaying the Ksh 23 billion conversion that will see a consortium of Kenyan banks become the second largest shareholder at the airline.
  • Equity announced they will no longer lend unsecured loans to salaried Kenyans, cutting off a product feature that has brought them great popularity.
  • New business lines:  Banks have looked to other sources of income this year. Co-operative Bank which has net interest income and pre-tax profit that was down 10% in the half-year, received regulatory approval from the Central Bank of Kenya to enter into a joint venture with Super Group, a leading South African leasing company and together they will target major infrastructure projects, government vehicle leasing, oil & gas exploration, and other leasing opportunities. Elsewhere, National Bank entered a partnership with World Remit to allow remittances to be paid directly into bank accounts at NBK, Barclays is funding solar mini-grids in Turkana while Standard Chartered bucked the trend on Equity and will step up unsecured lending. 
  • Non performing loans (NPA’s) are up: At NBK, they are up to 29 billion, half the 57 billion loan book. NBK is awaiting a Kshs 2.9 billion NSSF (shareholder) loan to shore up capital.
  • NPA’s have also gone along with increased provisions e.g. 1.8 billion at Stanbic at the half-year.

RwandAir applies for US Flights

RwandAir, which is 99% owned by the Government of Rwanda, plans to start US flights, by applying to the US Department of Transportation for the right to fly passengers and cargo between Kigali and JFK airport (New York) from August 2018 using Airbus A330.
The government has designated RwandAir as its international services carrier and the application for US flights also has letters of support from the Rwanda Embassy in Washington, the Rwanda Minister of Finance who writes that the government has supported the airline since its inception in 2002 and support continues to be budgeted for each year.
The application includes three years of audited financial statements. For 2016, the airline’s revenue was $99 million (and this has gone up from $64 million in 2013). Expenses in 2016 included direct expenses of $115 million, staff of $11 million, and finance costs of $15 million –  for a loss before tax of $54 million that was then offset by a government grant of $53 million. Other government grants are cited including $56 million in 2015 and a $28 million in 2014. The application notes that the airline has no financial projections for the first twelve months of operation on the proposed US flights route and requests exemption from providing that (as have been granted to other carriers)

The RwandAir balance sheet at the time (June 2016) was $238 million – but this was before the arrival of new aircraft in an expansion program that included two Airbus A330, and 4 Boeing 737 next generation (NG).  The fleet is now 2 A330, 2 737-800, 2 CRJ-900 and a Bombardier Q400, and RwandAir also leases 3 other Boeing 737 and another Q400. By the end of  2017, RwandAir plans to have 18 aircraft which will include four more  Airbus A330’s.
RwandAir flies to 19 destinations but plans to add China, Germany, and the US flights. Plans to fly to Britain and India are included in the application, and these flights have already started in 2017. RwandAir has codeshare partnerships with Turkish, SN Brussels, Ethiopian, South African, Proflight (Zambia) and Precision (Tanzania) airlines and the application also lists technical and maintenance support partners for their aircraft including Lufthansa for the Airbus A330 and Ethiopian for the B737 NG.
RwandAir has only had one fatal incident; with a wet-leased Jetlink Kenya plane that hit a terminal building while taxiing out of Kigali in 2009 – it resulted in one fatality. After this, they canceled the wet-lease and invested in their own fleet

Safaricom Governance Changes

Appearing in today’s newspaper was a notice for the Safaricom shareholders annual general meeting (AGM) that will take place on September 1. In addition to the usual shareholder resolutions, there are additional matters that will be approved, mainly relating to governance by at Safaricom. This all follows the buyout of UK’s Vodafone stake in Safaricom, by South African Vodacom in an internal Vodafone group corporate realignment earlier this year that has now been completed.  A running theme seems to be entrench Kenyan citizens in the governance and influence at what is now Kenya’s most valuable company.

Some of the changes:

  • The company Chairman shall be a Kenyan (this is now going to be mandatory and is spelled out in the company’s articles of association)
  • Directors shall encourage retention of a “Kenyan character” in the senior management and executive committees of Safaricom.
  • The articles are also changed to spell out that that independent non-executive directors of Safaricom, shall all be Kenyan citizens.
  • The position of Deputy Chairman is eliminated.
  • Directors appointed by Vodafone shall be excluded from voting on agreements relating to M-Pesa.
  • Directors appointed by Vodafone are to vote in the interest of the company (Safaricom) if its growth and investment decision clash with those of Vodafone.
  • Directors shall appoint the Managing Director Previously as indicated in documents from the Safaricom IPO, Vodafone directors had veto power over the appointment over approval of business plans, annual budgets, the appointment of the Managing Director (Chief Executive Officer) and appointment of the Financial Director (Chief Financial Officer). Now, the Safaricom articles will change to read that “75% directors must approve these provisions” including a new one of “any material change to the company brand”. Shareholders at the AGM will also approve a name change of the company to “Safaricom PLC” in compliance with Kenya’s new companies law for listed companies to be “PLC”

Atlas Mara Prospectus Peek

Atlas Mara is selling 44.44 million new shares at $2.25 each to raise $100 million. Atlas Mara is acquiring 13.4% equity in Union Bank Nigeria (UBN), from Clermont Group for $55 million, increasing its stake to 44.5%.

This offer aims to raise $30 million from Fairfax Africa (a Canadian investment holding company that is listed on the Toronto Stock Exchange) by selling them 13.33 million shares at $2.25 each. Fairfax will also sign up for $100 million of mandatory convertible bonds due in 2018. It is intended that the funds raised from the issue of the mandatory convertible bonds will be used to fully fund the UBN purchase and the remainder be used to fund the bank (expansion of the market, treasury and fintech business lines and product offerings) and participate in the UBN rights issue.

Atlas Mara is a company incorporated in the British Virgin Islands (largely a tax-free territory – no income, withholding or capital gains taxes) and is the holding company for a group that provides bank and financial services across sub-Saharan Africa which they intend to disrupt. Atlas Mara was formed in November 2013 by Atlas Merchant Capital LLC and the Mara Group, led by Robert E. Diamond Jr. and Ashish J. Thakkar, respectively. In 2016, Atlas Mara had $2.7 billion assets and $ 9 million profit in 2016.

Africa footprint: Besides UBN, they also own 100% of Finance Bank of Zambia (the 5th largest bank in Zambia, serving 2 million people), and 62.1% of Banque Populaire du Rwanda (swelled by a merger with BRD Commercial Bank). Also ABC Holdings – Botswana (owned 62.13% by the Company and 37.87% by Atlas Mara Financial) owns 100% of African Banking Corporation Zambia, 100% of ABC Holdings (Zimbabwe), 68% of Tanzania Development Finance Corporation, 97% of African Banking Corporation of Tanzania, 100% of African Banking Corporation of Mozambique SA, and 100% of African Banking Corporation of Botswana

Atlas shareholders are Guggenheim Partners Investment Management (11.22%) Wellington Management Company, LLP (9.91%) Owl Creek Asset Management, LP (7.99%), Trafigura Holding (6.23%), UBS Asset Management: O’Connor (8.10%) Janus Capital Management LLC (3.92%). Of the founders, Atlas – AFS Partners LLC has 0.5% and Mara Partners FS has 0.13% while Mr. Diamond beneficially owns 1,000,000 Founder Preferred Shares and Mr. Thakkar beneficially owns 250,000 Founder Preferred Shares.

UBN is a mid-tier bank with about 3% market share of assets and loans and deposits in Nigeria. It was established in 1917 and rescued from insolvency in 2009 along with other banks. It now has 3 million customers, 900 ATM’s and 414,000 mobile banking users and, in 2017, UBN  signed agreements with Visa and MasterCard

UBN Plans: While Atlas Mara is not going for a majority stake in UBN (though they may choose to do this), they will;
– Push UBN to be a leading Tier II bank in Nigeria
– This will be done using fintech and treasury initiatives
– They will use UBN to secure more lending
– After 2019, they will push UBN to be a Tier I bank by acquiring another Nigerian bank

Risks facing UBN: Nigeria has recently experienced significant depreciation of the Naira, inflation and economic recession. Also, UBN’s loan book is exposed to the oil and gas sector which comprises 47% of its lending. Also, there is currently a 12.9% free float of UBN’s shares, which is below the mandatory 20% free float requirement prescribed by the Nigerian Stock Exchange Listing Rules.

Fees: $1.9 million will be paid to Atlas Merchant Capital LLC, the investment fund co-founded by Bob Diamond, upon completion of the transaction.

The deal deadline is 29 August.

Extracts from the Atlas Mara prospectus.

EDIT August 30 Atlas Mara is pleased to announce the closing of the offer period for the recently launched Placing and the Open Offer on 29 August 2017. The Placing and Open Offer, together with the recently announced strategic investment from Fairfax Africa (comprising a Mandatory Convertible Bond and a Firm Placing) constitutes “the Strategic Financing”. The Strategic Financing will support Atlas Mara’s growth initiatives in the acquisition of additional equity interests in Union Bank of Nigeria Plc (“UBN”) and scaling up the Markets and Treasury and Fintech business lines. ..Bob Diamond, Chairman of the Board of Atlas Mara, said: “We are thrilled to have Fairfax Africa as our long-term partner. This transaction puts Atlas Mara in a very strong position to deliver on our strategic goals. We remain focused on execution and delivering on cost discipline and profitability.”

Ethiopian Airlines merges with Addis Hub Plan

Last month, Ethiopian Airlines announced that the Ethiopian government had decided to create a new Aviation Holding Group that would include the airline as a centre point.

.. (the)  new Aviation Holding Group with various diversified aviation strategic business units like: Ethiopian Airports Enterprises, Passenger Airline, Cargo Airline and Logistics Company, Ethiopian Aviation Academy, Ethiopian Inflight Catering Services, Ethiopian MRO Services, Ethiopian Hotel and Tourism Services etc.

It will promote customer services by a marriage of passenger inflight experiences with service on the ground at Addis Ababa, Ethiopia. The model seems to be along the lines of Dubai, and is one that Kenya Airways management has lamented about the need to also have at Nairobi –  and getting Kenya’s national airline aligned with other sectors of the airport and city for Nairobi to be a true aviation hub.

The ultimate aim is to upgrade the customer experience at the airport to meet global standard and thereby making ADD (Addis) airport the best connecting hub in Africa.

More from this Addis Fortune newspaper article:

  • The merger, which is said to be requested by the leadership at Ethiopian Airlines, gave the Group a mandate of providing airport services without discrimination including constructing, expanding, maintaining and managing airports, according to its establishment regulation.
  • Established with an authorised capital of 100 billion Br, the Group was formed after the approval of the regulation by the Council of Ministers. Before the merger, a committee chaired by Sufian Ahmed, an adviser to the Prime Minister and Tewolde, made a feasibility study to draft the regulation.
  • Founded in 1945, Ethiopian Airlines claims to be sub-Saharan Africa’s largest carrier with more than 95 international and 21 domestic destinations. In 2014/15, Ethiopian Airlines earned a net profit of 3.5 billion Br, which makes it among the highest profit earning state-owned enterprises in the country. During the same period, the Airports Enterprise also netted a profit of over half a billion Birr.
  • One of the major goals of the merger of the two state-owned enterprises is also raising the efficiency of the airports and profit.