Will KCB’s takeover move for National Bank mature?


The announcement that Treasury is reviewing a proposal to allow Kenya Commercial Bank (KCB), the country’s largest bank by assets, to swallow up troubled National Bank of Kenya (NBK) has left many wondering what this means for both institutions, the Government and the banking industry.

When the stock market opened on Monday, investors read that National Bank was a worthy bet and KCB would take a beating from the transaction. NBK shares soared by nearly a tenth while KCB slid the most in almost seven weeks.

The KCB stock traded heavily within the week, transacting more than three million shares on Thursday.

But as the dust settles, market analysts are not confident that the deal will go through, questioning whether it is strategic for KCB to buy its State-owned rival.

Deliver value

Treasury believes the two lenders are competing unnecessarily and see the acquisition as a solution to the problems at NBK, which has repeatedly failed and had to be propped back with taxpayers’ cash.

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For markets, though, a merger has to deliver value or fill a missing link even if one of the businesses is being acquired at a discount.

“NBK has almost half of its loan book as non-performing and KCB also has asset issues. There is no reason why KCB would go for it,” said head of banking research at Ecobank, George Bodo.

As at March this year, NBK had Sh29 billion as non-performing loans of the Sh58 billion it had lent out. KCB, on the other hand, had lent out Sh362 billion, of which Sh29.8 billion was bad loans.

National Bank’s liquidity ratio is so thin that it is barely above the legal requirement of 20 per cent, at 26.5 per cent. Its assets cannot cover its risk with a 2.9 per cent deficiency of its capital-to-total weighted risk.

Mr Bodo said KCB could find a better bank to buy than NBK, even as it is bent on acquiring a local lender to grow. KCB opted out of Chase Bank, where it had served as a receiver manager, when the Central Bank called for expression of interest.

The banking industry has turned inward-looking after forays abroad left lenders with burnt fingers – especially in South Sudan where both KCB and Equity Bank are scaling down operations.

Analysts have also pointed out that the acquisition process may be lengthy and quite expensive that in the end would be too much trouble for KCB.

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First, employees would have to be laid off with benefits and then the lenders would have to hire advisors since the transactions have too many parties, some of whom are not on board.

According to the KCB proposal, the acquisition will be two-pronged; involving taking up the stakes held by the State and National Social Security Fund (NSSF) before compulsorily acquiring the piece held by the smaller shareholders.

The doubt is informed by the fact that the deal, which is still in conceptual stage, has dragged for over a year already.

“The expression of interest by KCB was made last year and negotiations were at an advanced stage. We are waiting for KCB to finalise its appraisal and give us a quotation,” said National Treasury Cabinet Secretary Henry Rotich, adding that there was “a lot more work” to be done on the proposal.

KCB estimates that the cost of the deal would be Sh2.8 billion and wants Treasury to foot the bill.

Restructuring costs

Treasury Principal Secretary Kamau Thugge has been quoted in local dailies saying he is opposed to the idea of having the National Treasury and NSSF foot the bill for restructuring costs on the grounds that it would entail giving KCB more capital and spending scarce cash on a commercial investment at a time when the Government was “under pressure to raise money for more compelling social obligations”.

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Then there is the issue of NSSF who are not willing to let go of the bank. The State pension fund controls 48 per cent of the ordinary shares while Treasury has a 22.5 per cent stake.

Shortly after news of the merger leaked to the public, NSSF quietly approved a shareholder loan of Sh2.9 billion to NBK, sending a subtle message that it would not give in easily.

At the centre of the dispute are NSSF’s preferential shares that the fund is not willing to be treated as ordinary shares, which would then be converted to an equal share at KCB Group.

When NBK was bailed out in 2003, long-term loans worth Sh5.675 billion from NSSF and Treasury were converted to preference shares. The Treasury holds 900 million while NSSF has 235 million, or a fifth, of the special stocks valued at five shillings each.

The two could not agree on conversion of the shares into ordinary stock at the ratio of one to one, which has crippled attempts by the lender to raise Sh13.5 billion from a rights issue since 2014.

“The biggest problem for the KCB deal will be pricing given that NSSF is still not willing to convert its preferential shares at the ratio of one to one, which stalled the capital-raising attempt,” said Mr Bodo.

Formal discussions

Francis Mwangi, head of research at Standard Investment Bank, said that being a share swap deal, the tie-breaker would be how many shares of NBK would be exchanged for each share of KCB.

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“KCB will have to value itself and then value NBK and determine for every share of KCB how many will be given to NBK. This could be the deal breaker or sponsor,” he said.

When Weekend Business contacted NSSF, a spokesperson said they would stand by the word of NBK’s management and would not give a comment.

NBK, on the other hand, said such a deal could only be reached if all shareholders were on board.

“The board has not received an expression of interest from KCB Group to acquire majority stake in National Bank of Kenya thus as at now, no formal board discussions have begun on such a transaction. The decision to merge NBK and KCB can only be undertaken with the full approval of all shareholders,” the lender said in an emailed response.

Mr Mwangi said this would add to the complexity of the transaction because the board will have to approve it, send to shareholders for endorsement and then agree on the price offered by KCB, or decline the deal.

However, if the deal manages to slip through the stumbling blocks, it may unlock the creation of a behemoth of an institution in the banking sector’s biggest ever transaction.

KCB says in the takeover proposal documents that the acquisition would help access most of the Government’s banking transactions, including for various ministries and departments.

Presently, NBK is the unofficial banker for Government institutions because it is largely controlled by the National Treasury.

Boost capital

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KCB is also seeking Government deposits through a Treasury single account, which would boost its capital significantly and allow it to have bigger muscle to lend.

It is even ready to give the youth, the housing sector, agriculture, small and medium enterprises and micro enterprises loans at single-digit rates of between eight and nine per cent.

NBK would also give KCB Sh92 billion in customer deposits, boosting the latter’s Sh456 billion in deposits to over a half a trillion, with Sh781 billion in total assets.

Analysts, however, say Kenya does not have huge deals that would need such a huge bank with a deep-pocketed balance sheet.

“This market does not require such a big bank. If you look at the corporate debt market, we do not see transactions that are over Sh3 billion,” said Mr Bodo.

Mr Mwangi said KCB may not get all Government deposits even through the Treasury given that the single account is set in such a way that Central Bank is the one to hold all Government deposits, and not a commercial lender.

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