How blind ambition sunk National Bank

On Tuesday last week, the banking sector was thrown into yet another moment of truth with the announcement that National Bank chief executive Munir Sheikh Ahmed and five top managers had been sent home for creative accounting.

But unlike the Imperial Bank closure shocker, the story of National Bank had been the talk of town just waiting for official confirmation.

What was immensely surprising was the number of people sent home and later the announcement that the bank had in just three months moved from after-tax profit position of Sh2.25 billion to a loss of Sh1.2 billion.

National Bank story is an incredible narrative of how untamed ambitions and pursuit of growth for growth sake ends up unravelling.
The mid-sized lender first signalled its ambition to play in a higher league when it placed an advert in the highly-respected The Economist magazine seeking a replacement to the long-serving MD Reuben Marambii, now deceased.

Indeed the lender said Mr Ahmed had been picked after an “international competitive process”.
Mr Ahmed took over as the managing director on August 1, 2012 with much gusto. With a banking career spanning 16 years at the Standard Chartered Bank, mainly in South Africa, where he was director in charge of regional transaction banking for Africa operations, Mr Ahmed was apparently equal to the ambitious objectives that the lender had set for itself.

The board of directors led by youthful Mr Mohammed Hassan needed at the helm a dynamic person who could inject vigour and vitality into the lender.
Thus, from the onset, Mr Ahmed was unequivocal on what he wanted to achieve; transform NBK into a top-tier bank by 2017. “I am confident that this goal is achievable with the continued support of the shareholders, customers and staff of the bank,” he said.

To translate this dream into reality, Mr Ahmed planned to increase the branch network by 60 per cent to 120 from the 75 at that time, recruit new 2,000 banking agents, and raise more capital.

He also sought to diversify its products in a bid to bolster its market presence. To cut over-reliance on traditional retail banking, the bank introduced new business segments such as corporate banking, SME lending and treasury services.

The lender was clearly on a mission to break from its lethargic, murky and complacent past. This was underlined by its decision to overhaul its image by rebranding, a move geared towards shedding the tag of being a struggling State-owned bank best known for dubious lending to political cronies of former president Daniel arap Moi.

However in the midst of all these earth-shaking changes, there were subtle hints that all was not well with the lender. Sample this; two months before the rebranding and seven months into Mr Ahmed’s tenure, it made an announcement whose ominous import escaped the attention of many analysts. It said full-year earnings for 2012 would be heavily impacted by ballooning cost of funds in a high interest rate regime.

National Bank’s after-tax profit for 2012 plunged to Sh730 million from the previous year’s net profit of Sh1.5 billion. This was a more than half decline in performance. The high interest rates of 2012 exposed NBK’s soft underbelly of being highly dependent on retail banking for lending. All these cast a pall over the new leaf that the lender was keen to turn.

“The high interest rates for most of the year have had particular adverse impact on the bank due to its retail banking bias,” Mr Ahmed said.
On a warm Friday evening - May 24, 2013 – NBK rebranded and changed its logo and colours from the predominantly green to yellow, and a new brand promise themed “Bank on Better.”

National Bank, as the lender preferred to be called after sprucing up its image, proceeded to hire global consultancy McKinsey & Co to help develop and implement a turnaround strategy known as the ‘Transformation Program.’

On the advice of McKinsey, Mr Ahmed went on to set up an array of new business lines including retail, business, Islamic (sharia-compliant) banking, corporate and institutional banking, treasury, bancassurance, investor services, micro-finance and Chinese business. NBK also re-organised its C-suite by scrapping two posts of deputy CEOs and hired new executives to head the newly created divisions.

READ: Questions raised over surprise Sh1.2bn NBK loss

Mc Kinsey, known as the global ‘Mr fix-it’ for companies and governments, is synonymous with job cuts. Whenever it undertakes corporate restructuring deals, a number of employees are bound to be sent packing and its NBK assignment was no exception.

The ‘Transformation Program’ appeared to have paid off when full-year earnings for 2013 jumped 52 per cent to hit Sh1.1 billion. Dividend payout was increased by two-thirds to Sh0.33 a share from Sh0.20 in 2012.

However the good news did not last. Dark clouds started gathering last year when NBK announced net earnings had dipped by 22 per cent for 2014, and that bad loans had gone up sharply.

FUTURE PROFITABILITY

Mr Ahmed attributed the profit decline to a Sh1.1 billion one-off severance pay to retrench 200 workers in a cost-cutting move, “upon which future growth in profitability will be hinged”.

NBK’s gross non-performing loans jumped 72 per cent to Sh7.2 billion as at December 2014.
The bank then set on a buying spree – acquiring corporate loans from other banks – with promises of better interest rates. Some of the toxic loans acquired include one it bought out from another bank, and which had been advanced to Kenya Red Cross Society to build Boma Hotel.

The hotel, officially launched in January 2013 by President Mwai Kibaki, has run into financial turbulence and has defaulted in repaying the loan.

NBK is also stuck with a loan of Sh250 million from a taxi company while a hotel in Nairobi’s Upper Hill owes the bank Sh400 million, a matter that ended up in the courts.

National Bank is also exposed to the tune of Sh1 billion in a loan to Kaab Investments whose title deed for a land parcel in Lamu was annulled by the National Land Commission in 2014. This contentious Lamu land loan was also taken over by NBK from another bank.

Presbyterian Foundation was also involved in a court battle with NBK in 2014 over a Sh519 million loan that was bought from another bank.

But despite all these major setbacks, Mr Ahmed remained optimistic that NBK was on a growth path. However, with an increased scrutiny and question about the sustainability of the business model — high operational cost, high risk loans and tightening banking ratios — the bank went into a public relations overdrive, bombarding newsrooms with press releases complete with high resolution photos showing success of the so-called “transformation program.”

Despite the MD painting a rosy picture, it was clear that something was amiss. With income hard to come by, the bank started selling assets to keep the transformation dream alive. The Q3 2015 earnings were boosted by a Sh1.72 billion income from the sale of 12 buildings. NBK posted a net profit of Sh2.25 billion in the nine months ended September 2015, in what Mr Ahmed dubbed as “the best annual performances by the bank in its 48 years history.”

“Our performance over the years since 2013 is a result of structures that have been put in place to ensure that business runs efficiently and meets the international banking standards to deliver excellent results,” said a bullish Mr Ahmed.

“We expect this to go on as we implement the remaining projects in the transformation plan.”
Then the Easter weekend set off a chain of events that completely changed the face of NBK. Two panic statements, one on Good Friday and the other on Easter Monday, sought to assure shareholders that all was well. On Tuesday evening last week, NBK board of directors suspended Mr Ahmed and five other executives pending investigations into alleged breach of fiduciary duty and failure to adhere to corporate governance rules.

Mr Ahmed, who became Kenya’s first banking chief executive to be sent on compulsory leave in more than a decade, was replaced by Mr Wilfred Musau, previously the bank’s director in charge of retail and premium banking.

And in a move that almost revealed its regulatory hand in the move, CBK welcomed the executive changes. “The CBK welcomes these timely actions to strengthen the NBK while maintaining smooth operations, and that will protect the financial system,” said CBK Governor Dr Patrick Njoroge in a statement.

And in what seemed to disclose that the changes were done were on the instruction of a third party, NBK chair Mr Hassan used a different PR agency to send in a statement of support to the team he had just thrown out on forced leave.

“To protect careers of professional bankers now under temporary suspension against undue harm from incorrect media reporting and to abide by policy in place at National Bank of Kenya for Human Resource Management, we wish to make the following facts widely known. The management in place has performed well over the last three years,” said a statement from the board.

“However, due to increasing negative publicity which has continued to affect the public confidence in our bank, the board has felt the need to clear the air by conducting a thorough internal audit to address all claims in the absence of Managing Director and five other directors. They will as such be invited to defend any faults reported in their conduct by the audit process.”

The statement went ahead to credit the management with a raft of achievements including a successful rebranding and branch network expansion.
However, the board failed to keep its word to replace the managers by making “appointments albeit on an acting capacity within 24 hours”.

Fast forward to Wednesday morning when NBK fired a profit warning notice to the Capital Markets Authority and Nairobi Securities Exchange. It blamed the poor performance on a sharp rise in bad loans and unrealised gains from disposal of property. Later at midnight the same day, NBK released full-year results without first publishing the profit alert in the dailies.

NBK reported an unprecedented net loss of Sh1.15 billion for 2015, plunging into the red for the first time since 2002.

NBK’s earnings were hit by a sevenfold increase in loan costs. The provisions to cover for bad loans hit Sh3.7 billion compared to Sh525 million as at December 2014. The bank’s gross toxic loans grew by nearly two-thirds to Sh11.7 billion in the period under review, reflecting deteriorating asset quality.

Mr Ahmed’s score: NBK now has 80 branch outlets, 1,500 agencies nationwide, and Sh1.2 billion loss. From a high pedestal of ‘transformation’ and ‘growth’, Mr Ahmed now earns the dubious distinction of being the chief executive who returned NBK to red with the bank having last made a loss of Sh323 million in 2001.