Why Consolidated Bank needs cash as privatisation beckons

Consolidated Bank

Consolidated Bank of Kenya birth’s on December 7, 1989 was meant to make financial institutions rise above an era of costly errors that saw banks collapse with customers’ money, 

In January the following year, the then Vice President and Minister of Finance George Saitoti launched the new bank terming it as a “major step in the development of banking industry in Kenya”.

The bank, a product of nine lenders that had collapsed, surfaced with a promising tagline: “We are better together,” capturing the fact that various institutions had merged into a single wholly State-owned commercial bank.

The nine insolvent financial institutions that were merged included Jimba Credit Corporation, Union Bank of Kenya Ltd, Kenya Savings and Mortgages Ltd, Estate Finance Company of Kenya Ltd, Estate Building Society, Business Finance Company, Citizen Building Society, Nationwide Finance Company and Home Savings and Mortgages Ltd.

But 29 years later, the bank, which is fully owned by the Government with the majority shareholding (78 per cent) being held by National Treasury, is in dire need of cash.

This, even as hurdles stand in its way to raise capital. Last week, the Privatisation Commission opened a tender for consultancy services leading to the privatisation of the lender and then follow with a rights issue.

“The Privatisation Commission invites sealed proposals from interested eligible consultants for the provision of the above services,” read the tender notice by acting Chief Executive Jacqueline Muindi.

The bank is hoping to raise Sh2.5 billion this year through a rights issue, casting doubts on an earlier plan by the Government to merge all State-owned banks.

Consolidated Bank had a core capital of Sh444 million against the statutory requirement of Sh1 billion as at end of September last year.

The successful consultant will be expected to advise on the requirements to undertake a successful rights issue, valuation of the shares of the company and preparation of documents required to support the issue.

In July last year, when the bank convened its Annual General Meeting, it confirmed that it needed money.

The bank made an after-tax loss of Sh211 million as a result of the capital constraints it faced and the general challenging macro-environment.

In 2015, it had posted a profit of Sh44 million. According to the bank’s Director Joseph Koskey, the interest rate capping and lack of adequate capital to meet regulatory requirements and support execution of the bank’s business plan for the year weighed down the State lender’s performance.

“In the last four years, the bank has not met the minimum capital ratios prescribed in the Prudential Guidelines,” reckons Kosney in end year report. The bank’s board and management have been consulting the National Treasury on how to recapitalise the financial institution to enable it to unlock its full potential.

Turning to a rights issue is not new for the bank. It first tried out the issue in April 2016 but none of the shareholders was willing to participate hence the offer flop.

Capitalisation is one of the key pillars of the bank’s five-year strategic plan that comes to an end next year.

The lender is desperate to secure the money. For the last two years, it has been in search for the strategic investor without success.

To guarantee success in the new rights issue, the bank wants to bring an underwriter on board to take up any shares that may not be taken by existing shareholders.

“With an Underwriter on board, I am confident that this time around the bank will secure the requisite capital to resolve the capitalisation challenges facing the bank,” says the bank’s CEO Thomas Kiyai (Inset). Underwriting the rights issue means that the underwriter will be required to mop up all rights that are not exercised. This move will dilute the position of shareholders who fail to take part in the cash call. Initially, the bank had targeted to complete the rights issue by the fourth quarter of last year but that did not materialise.

The latest financial results covering nine months of trading to September last year show that the lender was in breach of three Central Bank of Kenya (CBK) ratios.

Its core capital to total deposit liabilities ratio is at 4.6 per cent against CBK’s minimum requirement of eight per cent. This means that the bank is holding more customer deposits than its core capital can support.

In addition, core capital to total risk-weighted assets ratio is at 3.7 per cent against the minimum statutory requirement of 10.5 per cent meaning that its tier I capital is too low and cannot even allow the bank to pay any dividend.

It also limits its ability to even grow loan book. Consolidated Bank’s total capital to total risk-weighted assets has been declining.

It touched 5.8 per cent in September, being below CBK’s threshold of 14.5 per cent. The bank sunk deeper into losses at the close of September.

It posted a loss of Sh301.5 million, up from a loss of Sh203.5 million in a similar period in 2016. Due to a series of losses, the lender now has an accumulated loss of Sh1.17 billion.

In January 2012, the accumulated loss was only Sh140 million. In the process, the company has wiped out shareholder’s money in six years.

In January 2012, shareholders’ money was Sh15.3 billion but as at September last year, this has shrunk to just Sh1 billion.

National Treasury holds 77.9 per cent stake while National Social Security Fund (NSSF) holds five per cent. The remaining shareholding is spread over 24 parastatals and other quasi-government organisations.

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