KCB prepares to buy National Bank, documents indicate

The Kenya Commercial Bank has quietly lodged an expression of interest to acquire the National Bank of Kenya, setting the stage for a merger of two of the largest state-controlled banks, documents seen by the Nation indicate.

If the transaction takes off, it could carry major implications for competition, potentially sparking off a scramble for government deposits and banking business on a scale never seen before in Kenya’s history.
Both the National Treasury and KCB’s top brass remain tight-lipped on the proposed transaction following enquiries by the Nation, with those who spoke in confidence citing market sensitivity – but more significantly because the Capital Markets Authority has to be formally notified before any announcements can be made.

However, we can reveal today that KCB has formally approached the National Treasury and the National Social Security Fund, the major shareholders of NBK, with a written proposal and that away from the limelight the parties are busy exchanging letters, debating the pros and cons of a deal being touted as the government’s best shot so far at finding a lasting solution to the perennial problems of the trouble at National Bank.
In a nutshell, KCB proposes to acquire a minimum of a 70 per cent stake in NBK’s issued capital through a transaction known in business jargon as a share swap which means that KCB will not have to pay for the shares in cash, according to documents seen by the Nation.

MARKET VALUATION

Under the deal, the National Treasury, NSSF and other significant minority shareholders of NBK will instead of being paid for the shares in cash be issued with KCB shares in exchange for NBK shares based on the market valuation of both banks.
The deal has been designed such that after the share swap, the National Treasury and NSSF’s collective ownership in KCB will increase from 23.6 per cent to over 30 per cent, giving the State a bigger say in the corporate governance of the largest commercial bank in Kenya and in the region.
Technically, the entity buying NBK is the holding company, KCB Group. This is why the proposed transaction has been designed in such a way that in the initial stages, KCB Group – the non-operating holding company – will temporarily manage and operate two separate brands: KCB and NBK.

In the second phase, the plan is to merge the two banks into one large bank, inevitably leading to closure of several unprofitable branches and staff layoffs at the NBK.
According to KCB’s estimates the merger process may entail closure of 50 per cent of NBK’s 78 branches. In the third and final phase, it is proposed that KCB will acquire the 30 per cent of NBK shares in the hands of the public, with the small shareholders being paid on the same terms as the two principal shareholders. Nobody will be paid in cash.
In terms of cost, KCB has estimated that branch closures and staff layoffs will amount to Sh2.8 billion. According to KCB, the bill for restructuring costs should be picked by the National Treasury and the NSSF.
Buried in the fine print of the proposal by KCB is a request to the government to introduce an arrangement whereby 80 to 90 per cent of all government deposits, accounts and banking business in other banks will be closed and everything centralised into a so- called “treasury
single account” at KCB. This will effectively put KCB light years ahead of its peers in the fight for the lucrative government banking business and deposits.

IN RETURN

And what does the government get in return for granting KCB such business? KCB has suggested that with a treasury single account – with all government deposits and banking business sitting in its books – it will be able to create a new and affordable credit regime where the youth, the housing sector, agriculture, Small and Medium Enterprises and micro enterprises will be charged between 8-9 per cent at two-to-three-year tenors instead of the normal one year.

In the proposal, KCB also says that if its proposal to acquire NBK goes through, it will be in a position to swallow two of the other state-controlled troubled banks: the Consolidated Bank of Kenya and Development Bank of Kenya.
Will this proposal by KCB see the light of day? As it is, signs are that the National Treasury has more or less embraced the proposal, only raising minor issues. In a letter dated, May 10, 2017, National Treasury Principal Secretary Kamau Thugge, generally agreed with the proposal, pointing out that he had no objection to a deal as long as it could be demonstrated the proposal could turn around the fortunes of NBK without causing
adverse risks to the financial health of KCB.

MINOR POINTS

In brief, Dr Thugge’s letter raised few minor points. First, he raised concern that the proposed treasury single account could be perceived as unfair and discriminatory against other banks.

Secondly, Dr Thugge opposed the idea of have 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. Thirdly, Dr Thugge demanded clarity on timelines for the entire transaction.
Finally, the National Treasury maintained that as a shareholder, it will have to determine the pricing of the transaction. That the National Treasury appears receptive to the proposal by KCB does not surprise.
Over the years, NBK has gone through a series of bailout programmes, none of which has proved sustainable. NBK has recently returned to familiar territory of poor financial
performance.

The non-performing loan portfolio, at 32 per cent, is one of highest in the banking sector. In 1998 the bank experienced a run occasioned by liquidity problems forcing the Treasury and NSSF to bail out the bank to the tune of Sh4.5 billion and Sh1.1 billion respectively.
These shareholders were converted to preference shares in 2003. In 2006, the Cabinet approved another massive bailout of the bank through the issue of Sh21 billion in Treasury bonds, ostensibly to repay general government indebtedness. Since 2012, it has unsuccessfully tried to do a rights issue.

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