Category Archives: Corporate governance

Increased Scrutiny of Bank Directors

Today’s newspapers have the annual general meeting (AGM) notice from Cooperative Bank (Coop). There are some subtle differences from years past, which may indicate stricter rules for all banks, especially in light of the recent bank issues at Chase and Imperial. This is in terms of clearing directors who are meant to be the safeguards for the banks and they depositors whose funds the banks collect and hold.

There are now separate shareholder votes for members of audit committee each year. Questions have been asked about the quality of audits done at Chase and Imperial, and internal auditor and external auditors report to board audit committees.
Also in the past, nominees would be appointed by bank shareholders. But you see wording to the effect that shareholders are voting to approve directors, but that this is “subject to regulatory approval” i.e the Central Bank of Kenya (CBK) will have to vet and approve that the individuals proposed to sit on the boards are fit & suitable.
It is also said that the 70 year age rule is now being challenged. Companies have in the past voted to re-elect directors over 70 years, but it is said that the CBK is now challenging the necessity of having elderly, long-serving directors continue to sit on bank boards, in light of the needs to reinvigorate boards with new blood who understanding modern banking challenges.

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Reading the Tea Leaves at Chase Bank: Part I

24 hours in the life of a bank:

In the April 6, 2016 Standard newspaper, Chase Bank republished their FY 2015 accounts, but with some fine print added.
Mid-day: At a press conference, the Central Bank of Kenya (CBK) governor said he would not comment on rumors about any bank.
In the afternoon, Chase Bank announced the Chairman and Group Managing Director would step down from the board. This first appeared in a blog, then in an official tweet, from the Bank.
In the April 7 newspapers, Chase Bank had an advertisement about the board changes..but
On the same morning of April 7, 2016, the bank didn’t open. Customers instead found a notice from the CBK placing Chase Bank in receivership for a year.

So What happened? The bank was in the midst of celebrating their 20 year anniversary – dubbed #Chaseat20 , but all that changed in 24 hours. Throughout the day, there was an active discussion online, on what the changes at the bank meant. And offline, it seems people acted and, went to the bank and withdrew cash in droves.

FY 2015

The bank accounts published last month last week, and and again in the April 6 newspapers, are the same, but there were a few differences:

No auditor was mentioned last week, but in the new notice, there was a mention that Deloitte had qualified the Chase Bank accounts. What does ‘qualified mean? Investopedia notes that this may mean the financial statements are materially misstated due to misstatement in one particular account balance, class of transaction or disclosure that does not have pervasive effect on the financial statements. or that the auditor is unable to obtain audit evidence regarding particular account balance, class of transaction or disclosure that does not have pervasive effect on the financial statements.
While there was no difference in major items likes assets (Kshs 142 billion), deposit, loans, and profits (Kshs -1.1 billion) in both the newspapers, there were a changes in one item; Insider lending which was Kshs 5.2 billion last week, was now Kshs 13 billion in the Standard this week. It’s doubtful that insider lending went up by Kshs 9 billion in a week, but it’s more likely that the money had been borrowed by directors/shareholders/associate firms before, and that the auditors just discovered that the borrowers were related to directors of the bank. (A material matter which may have led to the board changes?)
There was no change in provisions and non performing loans. While the amounts jumped from by a staggering amount, between 2014 and 2015, with non-performing loans going from Kshs 3 billion to Kshs 11 billion and provisions from Kshs 757 million to Kshs 2.1 billion, this has been the norm with (it seems) a stricter regime at the Central Bank of Kenya, requiring banks to be stricter on provisions in 2015, compared to 2014.

Social Media

While twitter usage may be considered small, Whatapp is very active. There are messages I saw, and, I can imagine, many more that I didn’t see, on WhatsApp, but it’s clear that social media had an impact on the run at the bank.

Bank Runs:

A bank run can happen, any time, to any bank. Banks only keep only so much money at their branches for everyday use. If they have a panic, and they only have Kshs 10 million or Kshs 100 million at the bank, and 1,000 customers all come to the bank to send instructions, or to withdraw all their cash, then even the strongest bank will have no recourse. Chase Bank was a darling of big investors, and SME’s funds, and you can imagine how the panic withdrawals exhausted the banks reserves.

Note: I’m a Chase Bank customer.

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What Africa means to Barclays

Last week, Barclays Africa released their our 2015 Integrated Report (PDF). It comes in the backdrop of the Barclays Africa sale that is still reverberating, with denials that the Bank will be divesting from Africa.

It notes that :

The Barclays PLC sale is meant to deconsolidate Barclays Africa from an accounting and regulatory perspective and that the Barclays Africa chairman, Wendy Bull, has already resigned from two Barclays (UK) PLC boards so there’s no conflict of interest.
The 2015 results demonstrate that we are delivering against our strategy and ambition. We made a profit of R14.3bn, with headline earnings up 10% and a return on equity of 17%.
Barclays Africa has a presence in 10 countries. Kenya is the second largest of the 10, but they all trail South Africa by a large margin (79% of the group revenue is from South Africa,). Tanzania has similar numbers to Kenya, but they are contributed by two different banks (BBT and NBC)
Barclays parent owns, 62%. The other top 10 shareholders include Public Investment Corp (SA) with 5.6%, Stanlib assets 2.2% and others with 1% each including old Mutual, Sanlam, Prudential, Vanguard, and Blackrock.
Barclays Africa has 12.3 million customers.
Retail & business banking account for 72% of revenue, corporate & investment-banking 20%, and wealth management 7%.
They paid 8.6 billion rand in dividends, 7.3 billion in taxes and 20.9 billon rand in salaries to their 41,000 employees across Africa.

The report (We actively sought shareholder views so as to further develop our remuneration reporting) has a levels of disclosure,that would be welcome in Kenyans banks and companies who have endured a horrible year of governance issues with almost 20 companies declaring profit warnings after previous ‘robust’ years, under long-serving CEO’s.

It details the salaries and bonus of the CEO (Rand 28 million), top executives, and non executive (independent) directors of board members (which included the Barclays Kenya chairman).
It also lists the performance dashboard of al the executives, and of all the key segments of the bank in their own pages. Not like Kenyan banks which have the Chairman’s statement noting the tough economy, then (after magic happens) the super profit that was achieved.
It lists key matters discussed by the board , tabled month by month, and incorporates the balanced scorecard.
No individual director or group of directors has unfettered powers of decision-making.

1 Rand was about Kshs 7.2, and 1 Rand was about $0.07 in December 2015.

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NBK: Board PR vs. Blog

The month of March has seen quite a bit of online activity at National Bank of Kenya (NBK).

On one side has been the public relations for the bank, of which I get the releases. Yesterday (March 28) the bank sent one, full of caution, urging their customers to ignore, a blog. I wasn’t aware of any, so I searched and found this blog story (by @C_NyaKundiH ) with the headline that the National Bank Board Sacks Munir Ahmed (the CEO of the bank).

At the beginning of the month (March 1) , the bank had issued another press release with a warning, and a threat to sue a blogger. The bank also said it had written to the Central Bank of Kenya Governor and the Cabinet Secretary (a.k.a. Minister) in charge of Information, Communication and Technology (ICT) about defamation of banks emanating from unregulated blogging.

The Bank requests members of the public and media to disregard any malicious stories spread by ill-intentioned persons on social media or otherwise about the bank who will soon face the full wrath of the law.

Immediately after that, the Bloggers Association of Kenya reacted strongly against blanket condemnation of bloggers. in a statement that noted that blogger are regulated by a code of ethics, and that (i) bloggers could be international (i.e. beyond the jurisdiction of Kenya), and that (ii) NBK should consider charging the said blogger for defamation, which is legislated in law.

Today, the bank sent a press release that indeed, the Board of National Bank has announced that the Bank’s CEO and five top managers have been sent on compulsory leave pending an internal audit process.

The Central Bank of Kenya, then released its own statement, welcoming the decisions of the board.

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Why Imperial Bank May Not Reopen – Part II

Now’s it’s out in the open. That is the story of the non-executive directors and shareholders at Imperial bank.At a press briefing today they broke free of a media blackout that was requested by the Central Bank (CBK) and the Kenya Deposit Insurance Corporation (KDIC) (the receiver manager of the bank), but which they now feel has been used to leak only one side of the story on the collapse of the bank.

Discovery: Governance rules exclude non executive directors from running the bank, so they are blindsided by the 13-year long fraud at Imperial.
CBK & PKF failed in their audit duties; PKF in their tests, and CBK in supervision and not responding to whistleblowers
(The late Managing Director) Janmohamed was friend & none could imagine the betrayal; that a disturbed man with weak managers destroyed the lives of Imperial Bank depositors

Reaction: From when they discovered fraud, the non-exec directors & shareholders have tried to protect Imperial bank depositors & bondholders
CBK & KDIC asked them not to speak, but we should have been more proactive in communicating with depositors and bondholders.

Recovery Plan: After discovery of the fraud, Imperial Bank directors took CBK a plan that called for recapitalization of the bank, recovery from wrongdoers, a payment of Kshs 1 million to all depositors and attracting a strategic investor within 12-18 months of reopening
When they presented the recovery to CBK/KDIC, Imperial Bank had good liquidity – ~Kshs 20 billion cash.

Way Forward: They, as shareholders (& associates) are ready to capitalize Imperial Bank, but only after a due diligence is done.
While directors have joined the bank suit against Janmohamed’s estate, they say KDIC is not pursuing all people involved in the fraud at the bank.
The CBK Governor is a principled man but his institution is being let down by dishonest people, a similar situation to what happened to them at Imperial.
They are unaware of what KDIC / CBK plan for the bank, and are concerned that Imperial Bank customer data has been shared with KCB and Diamond Trust banks.

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My take, is still the same as in Part I

The only way for Imperial Bank to survive is if it is bought out by a large, multi-national, or regional bank. That bank will have deep pockets and will have done its due diligence on the true value and exposure that Imperial Bank carries, and received a waiver of obligations above an agreed threshold and from additional liabilities, prior to their agreeing to buy the bank. And if such a deal happened, the new bank will want to take on the Imperial customers and business but erase all traces of the Imperial Bank name, forever.

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Bankelele

Nairobi writer on Banking, Finance, Technology, and Investments

Category Archives: Corporate governance

Increased Scrutiny of Bank Directors

Reading the Tea Leaves at Chase Bank: Part I

What Africa means to Barclays

NBK: Board PR vs. Blog

Why Imperial Bank May Not Reopen – Part II