Category Archives: HFCK

When Bankers own Banks

Managers and employees are often given a chance to become part owners in the banks. This ‘aligns their interests’ with the institutions and gives them an added incentive to help the institutions do better as it individually rewards them for the good performance. The incentives are usually facilitated through employee share option schemes (ESOP’s) which convey some tax benefits and discounted buying prices. Typically, in conventional ESOP’s,  there a general pool for all employees and another for senior managers.

The method of calculation and award of these benefits is done in secrecy, usually by board committees. This is to ensure the privacy of employees and security of their families, but one outcome is that any revelation of these perks sparks a lot of interest.  In fact, you sometimes find a higher level of disclosure of compensation practices at listed banks in Uganda and Rwanda, than you do with Kenyan ones.

Stanbic Uganda compensation guide

Consider these examples:

CBA: Shareholders include a ESOP who own 2.5%.

Chase Bank: Employees of the bank own  4.3% of Chase through an ESOP. Elsewhere a bonus to the former chairman was one of the deals that the auditors queried in 2015.

Cooperative Bank: Stories about shares to bank management and directors first surfaced in 2008, ahead of the IPO in which bank staff got 9% of the shares. and has been on twitter this year. The company’s accounts show that the CEO owns 2% and the bank links the story to a smear by a former CEO who has an ongoing tax case with the bank.

Equity Bank: CEO owns 4%, while an employee ESOP owns about 3%.

Jamii Bora:  The CEO own 1% and is also an investor in the largest shareholder of the company.

Family Bank: In 2011, shareholders voted in an ESOP for managers and a transfer of 1 % transfer of shares of the (then-new CEO , which he purchased at a discount as part of his employment package.

Housing Finance: Has has an ESOP since 2006 that’s open to  all employees: Eligible employees pay for the units by cash at a price determined by Trustees either in full or by instalments until price is paid in full. The Unit holder is not allowed to sell, transfer or otherwise dispose of Units registered in his name to another Unit holder or to any third-party whatsoever.

KCB:  When KCB CEO Joshua Oigara declared his wealth (assets of Kshs 350 million comprising land, buildings, motor vehicle, cash bank balances and shares) and salary (with allowances that totaled  Kshs 4.9 Million a month),  last year his statement added that  “..My public declaration is driven by the need for us as private sector players to initiate greater transparency. Kenya is bleeding from corruption mainly driven by secrecy in organizational operations..”

$1 – Kshs 101.

Capital Gains Tax in Kenya

It’s a new year, and with it comes the reintroduction of the capital gains tax (CGT) in Kenya. This is not the first time it’s appeared (it was suspended in 1985), but previous attempts to reintroduce it in 2007 and 2011 were set aside by parliament. This time it has stuck and is now the law, with the a 5% tax imposed on the transfer of land, buildings and investment shares.

While guidelines have been published by the Kenya Revenue Authority (KRA) it’s still unclear how the tax is to be determined such as on the buying and selling of shares.

For the last few weeks there’s been a mini-rush to complete the sale of some land and share deals. e.g. Equity Bank’s divestiture from Housing Finance with a sale of 24.9% to British American Investments (Britam) for Kshs 2.7 billion ($30.3 million) was concluded on December 31, 2014 (presumably beating the tax deadline).

With land deals, there may be some double taxation, in that  that while a buyer pays stamp duty of 4% of the sale value, the government will also deduct 5% from the amount paid to the seller for the same piece of land.

CGT will apply when  a property is gifted, abandoned or when the rights to a land title. Exemptions allowed under CGT include transfers that involve retirement benefits, divorce, land that is less than 100 acres, when a company issues shares, motor vehicles, estates of dead people, in corporate restructurings, and if someone sells a house they have lived in for more than 3 years.

Curiously the guidelines have something special for Kenya’s budding extractive industry, but which some investors are not happy about as for sector, which includes, oil, gas, and minerals comes up for some special attention: The net gain on disposal of interest in a person owning immovable property in the mining and petroleum industry is 30% for residents and 37.5% for non residents. 

Award Season

Capital Market Awards: These took place late in January 2011 and were organized by Think Business who also organize awards for the banking and insurance industry. The awards gained notoriety when they started a few years ago when the regulator capital markets authority (CMA Kenya) complained about their implied association /endorsement as a result of the name.

Some of the winners this year included;
Custodian of the year: KCB
Bond deal of the year: Housing Finance
Stockbroker of the year: Genghis Capital
Fund manager of the year: Genesis Kenya
Legal transaction advisors: Hamilton Harrison & Matthews
Unit trust: British American (which was launched 5 years ago)
Research team: Kestrel capital
Lead transaction advisor: Dyer & Blair
Investment bank of the year: Dyer & Blair

D & B director Jimnah Mbaru mentioned that they had used Hamilton Harris & Matthew in most of their deals, and had been represented in several deals including NIC (Uganda), Bralirwa (Rwanda), CRDB (Tanzania) and the largest was KPLC in Kenya which was a complex deal. He added that its not just technical know-how that wins them deals (everyone had talented transaction employees) but it’s a more about relationship management and understanding people, politics, social economic (and that many runners up had recruited staff from D&B). But he also spent 5 minutes telling what looked like it was going to be a very funny accounting or golf joke, only that it turned out to be one everyone knows as it ends with a lawyer answering ‘how much do you want 2 + 2 to add up to?’

The CMA awards were mostly deserved, but there are a few glitches that were evident:

– The organizers insisting on presenting awards (best performing NSE company won by British American Tobacco) that were not voted or verified by the auditors (who stated this before the award was given)
– Some categories listed had no entries (IPO of year, Chairman of year, PR transaction advisor), or two winners in same category (CEO of the year shared by Nasim Devji and Martin Oduor Otieno) and some prizes winners not showing up.

Other Awards up for grabs
Poptech: Nominate a Poptech Social Innovation Fellow
Property Awards: Organized by Property Expo Kenya, these take place on February 24 at Sarit centre and will award property developer of the year, real estate agency of the year, mortgage company of the year and real estate journalist of the year

Other Media Awards include
– Diageo Africa Business Reporting Awards
– East African media awards by East Africa Business Council

Real Estate Moment

Buy Buy Buy Many signs are pointing on the need to invest in property/real estate; from a mentor who says that land is the only commodity that is not increasing, to Dr. Laila Macharia, who in her TEDxNairobi talk said the boom is yet to come. NSE listed Centum Investments now has real estate projects on Uhuru highway and at Runda, and even a local reality show star (runner up in Tusker Project Fame) Nganga said in an interview, that if he had won, his Kshs 5 million ($62,500) would have been deployed into real estate.

Also, last week Hass Consult and CFC Bank released a report showing that real estate outperformed stock market in returns; I’m yet to find the report, but a post in 2006 shows that the debate of shares verbs property returns is not a new one.

Money flows in real estate? A lawyer who specialist in commercial law has found herself doing more real estate transactions – and is surprised by both how much money is being invested in land deals and how expensive Kenya is compared to south Africa – e.g. a 120 million Nairobi Muthaiga property, can be trumped by a better one or Kshs 50 million in Cape Town.

Is land over-valued? A notice board had these ads of land for sale last week – 10 acres in Isinya for Kshs 5 million, 2.3 acres in Karen for Kshs 14 million, 30 acres in lanet for Kshs 40 million, 100 acres in naivasha kedong at 60 million (600,000 or $7,500 per acre), 1005 acres in ruiru for 301 million (310,000 or $3,825 per acre), 1,295 acres in thika for Kshs 1.1 billion (i.e. Kshs 850,000 or $10,400 per acre) and 250 acres at 20 million per acre in ngong road.

The recent prices are subject to much debate Is it simple demand (for 500,000 homes a year) & supply (150,000 new houses built a year in Kenya)? Is it Somali money or foreign investors & donor agencies, or is Kenya an investment Mecca for the east Africa region?

Banks are tempting: Last weekend the annual homes expo was held at KICC and present were several bank exhibitors: For comparison, a Kshs 10 million ($125,000) mortgageloan can be obtained from Barclays (at 12% up to 20 years at 110,039 per month), co-op (at 13% up to 20 years at 117,157 per month), Equity (at 15% up to 10 years at 161,335 per month) Housing Finance (up to 20 years at 137,257 per month), and National Bank (up to 20 years, subject to retirement age of the borrower). Most give up to 90% finance, and advise borrowers to factor in 5 – 9% for closing costs.

Housing Finance wrapped up a mortgage bond offer that realized Kshs 7 billion ($88 million) against an initial target of 5 billion. The bank has been in turnaround mode, gone from cost/income ratio in 2005 of 73% to 58% in 2009 and non-performing from 35% to 4% over the same period, and has fended off interest from Equity Bank. The Bank’s MD also called for the Capital Markets Authority to green light real estates investments trusts (REIT’s) as the bank also became the latest corporate to join the world of twitter (@housing_finance).

But few are biting: How many mortgages in Kenya? A central Bank of Kenya source says there are only 14,951 mortgages, in a country of 38 million people. (0.04%) with a total value of about Kshs 60 billion, for an average mortgage of Kshs 4 million ($50,000) Samuel kantai – so banks are not the source of real estate developments.

Any other thoughts on real estate?

Housing Finance 2010 AGM

The 2010 annual general meeting of Housing Finance (HF) took place on April 28 2010 at the Bomas of Kenya. It marked the end of an interesting month for the bank which was featured in media stories of a boardroom coup as well merger talks with Equity Bank. The AGM was chaired by Steven Mainda (who has been Chairman for a few weeks) and featured Frank Ireri the MD of the company.

Hot-button: Issues revolved around Equity Bank and the dozen shareholder questions were mostly on the subject.

Merger or not?: Perennial shareholder A. Chami set the ball rolling as the first (as usual) questioner praising Equity and calling for a merger. He noted that it would save marketing costs and enable HF to sell their products deep in rural Kenya (where Equity was) not just urban centres. He heaped blame on the previous anchor shareholder CDC (UK) for their years at the helm which were marked by no dividends.

Chairman replied that HF had an opportunity of a lifetime after 44 years to sell products across Kenya and even in Sudan (pointed out that director Prof Shem is chair of Equity-Sudan) and wanted to get value, for shareholders who had invested in the company. Later he seemed to step back from these remarks (on the HF board leaning towards a merger) and after more pressing questions they became now adamant that it was a collaboration with Equity, Britak and other shareholders like NSSF (3rd largest) that would continue, and wondered where the media got the merger talk!

– Directors said they had invited Equity and Britak to invest in HF, and have since collaborated with Equity in terms of funding (notes show a 700 million loan from equity), and shared services (Equity handles all clearing for HF) as well as with Britak with products e.g. Home Freedom – in which one can use up to 60% of a pension to get a 115% mortgage (that is inclusive of the ~20% home mortgage closing cost)

How will Equity work with HF when they are competitors? Chair said Equity is a commercial bank, while HF is a mortgage bank and it was going to work with shareholders like Equity, Britak and partners like Shelter Afrique.

Equity strong arm? one shareholder warned that Equity had muscled its directors onto the HF board making a merger inevitable while another added that shareholders at National Bank of Kenya were already getting jittery about Equity’s interest. CEO replied that it was an unfair charge leveled at Equity – noting that they only had the 2 directors entitled to them, as did CDC, the previous anchor shareholder. He added that when CDC showed they were not actively interested in investing in HF, the Board went out seeking new anchor shareholders and talked to 16 banks, before they picked on Equity/Britak.

Past Board Promises: One shareholder complained that the board is making another big promise today (w/Equity) while other big promises in the past have turned out to be duds – they were promised big dividends which never materialized, then took part in a rights issue that cost Kshs. 20/share and subsequently shares dropped to about 14/=. CEO replied that they are serious this time, and they paying about ½ the profit as dividend; on the rights issue, he said it was held in 2008, after which came some NSE challenges (he mentioned post-election, but should have mentioned stockbrokers collapsing) and global crisis – during which all NSE shares had dropped, some by as much as 60%. He said the share is now back above Kshs. 20 today

Risk Controls: Are risk & credit controls strong enough to prevent a mortgage meltdown like US? CEO mentioned they are careful about lending only to those able (and willing) to repay loans, noting they had brought down NPA’s from about 80% or 8 billion in 2004 to half a billion in 2009. chairman added that a strong Central Bank and Governor would not allow Kenyan banks to go down that road of lending to people unable to pay (on the hope that rising home values would plug the gap). Separately the Chairman warned off a shareholder who advised the bank to seek off-shore assistance, with the dreaded word ‘Madoff’!

Dividend: One shareholder compared this to being as useful as a glass of water while the bank spent big on expensive corporate social responsibility, while another asked why it could not be higher as the bank had reserves of Kshs. 2.8 billion. CEO said they have been paying increasing dividends over the last 3 years.

Director elections: Earlier a shareholder had asked chairman Steven Mainga how he had ended up there. Director Peter Munga who doubles up as the chairman of the HF Board nominations committee (but is better known as the Equity Bank chairman) drolled through the new chairman’s exemplary CV, and revealed that he was picked from a database of distinguished Kenyans (huh?). During elections, most shareholders walked out to get lunch and the media rolled up their equipment – seems they had they come for news of Equity that the Board was not going to disclose more.

The Chairman and Prof Shem Migot-Adholla (Equity director) were later confirmed as directors, but not so for the previous chairman Kungu Gatabaki, and director Naftali Mogere, who while listed on the agenda for elections, had tendered their resignations earlier in the month. The former two had been appointed in April 2009 when two others resigned – Helios/Equity’s Babatunde Soyoye and the Permanent Secretary (Government of Kenya)

Shareholders also amended the HF company articles to allow for use of newspapers, e-mail, and the company website for the shareholder news & notification as well as publishing of annual accounts. They also approved for HF to consider electronic or mobile payment of dividends.

Goodies: While one shareholder said there were no gifts, the company was rather generous to whatever number of their 31,097 shareholders who showed up. They got a lunch-box from Panafric Hotel (juice, yogurt, cold roast chicken, sausage, apple, sandwiches (cheese & cold beef), boiled egg. HF also hired buses to ferry shareholders from downtown Nairobi to the AGM venue – about 5km away