KCB-NBK Buyout Standoff

Parliament has ordered the Treasury and NSSF to reject KCB’s proposed buyout of the cash-strapped National Bank of Kenya (NBK), throwing into confusion the already under way multi-billion-shilling transaction.

The National Assembly’s Departmental Committee on Finance and National Planning has, in a report tabled Thursday in the House, said the takeover deal undervalues NBK and is not in the best interest of workers, taxpayers, NBK staff and minority shareholders.

The move goes against the Central Bank of Kenya’s (CBK) warning that failure to rescue NBK would lead to its collapse.

“Considering submissions by stakeholders, the committee recommends that the principal shareholders (National Treasury and National Social Security Fund (NSSF), should not accept the offer by KCB on the acquisition of 100 percent shares of NBK,” states the committee chair, Joseph Limo.

NSSF holds 48.05 percent shares of NBK, while the Treasury controls 22.5 percent, giving them 70.5 percent total ownership.

Conversion of NBK preference shares into ordinary stock has seen the Treasury and NSSF control an even bigger effective shareholding of 93.23 percent, taking them above the minimum legal threshold required for a takeover transaction to be declared successful.

The Sh5.8 billion share-swap deal is already open for acceptance by shareholders, with the offer expected to close at the end of this month.

MPs have recommended that the government seeks cash to recapitalise NBK, a feat that the Treasury has failed to achieve in the past decade pushing the bank to the brink of collapse.

The committee has also proposed that the Treasury seeks alternative ways of funding NBK to ensure that it is compliant with the Banking Act capital ratios so as to continue lending and taking in more deposits.

“The National Bank should pursue the Rights Issue in order to raise enough capital,” states the report.

The Capital Markets Authority (CMA) Thursday said the transaction is entirely government by the Takeover and Mergers Regulations, 2002, indicating that shareholders of NBK have the final say on the matter.

“Our role as the Authority is to ensure that there is adequate disclosure around the transaction so that investors make an informed decision about the offer in line with our investor protection mandate.

“It is then up to the NBK shareholders to accept or reject the offer. If the threshold for acceptances is not met then the offer fails but if it is met it is deemed successful,” said the CMA in a statement.

Acting Treasury Secretary Ukur Yatani did not respond to our queries on whether the government will heed the directive by MPs.

KCB Group, Kenya’s biggest lender by assets, is seeking to acquire NBK through 10 for one shares swap.

The MPs have faulted KCB’s valuation of NBK at Sh6 billion against an independent valuation of Sh9 billion.

“The offer given by KCB does not reflect fair value of NBK. There was no competing bid by the time the Committee was through with the investigation,” the committee says in its finding.

The MPs say NBK is a strong lender with 86 branches across the country.
“The main challenge facing the bank is core capital to Total Risk Weighted Assets Ratio (2.4 percent) which is below the minimum statutory requirement of 10.5 percent.

“In addition, the total capital to Total Risk Weighted Asset ratio is at 3.8 per cent against a statutory requirement of 14.5 percent,” the committee says.

NBK is operating at 2.2 percent in terms of core capital to deposit ratio, against a minimum prudential limit of eight percent.

“The current scenario has curtailed the bank from lending and also taking more deposits. As far as liquidity ratios are concerned, NBK is performing well at 40.4 percent as compared to KCB which is at 35.6 percent,” the committee notes in the report.

The MPs say NBK is a principal collector of revenue on behalf of the Kenya Revenue Authority hence it is a strategic institution of the government.

KCB announced that it expects the takeover deal to close by October this year, subject to approval from shareholders of the two banks as well as market regulators.

It has made a proposal to maintain NBK as a stand-alone subsidiary of the Group for a period of two years post-acquisition and thereafter fully integrate NBK into KCB.

KCB shareholders had approved the acquisition bid, which is part of KCB’s ongoing strategy to explore opportunities for new growth while investing in and maximising returns from existing businesses.

The Treasury had thrown its weight behind the NBK takeover by KCB, saying it is the only way to save the lender from imminent collapse.

During the NBK-KCB takeover inquiry, then Treasury Secretary Henry Rotich told the committee that the merger presented an opportunity to avert risk of failure by NBK and prevent a potential banking sector crisis.

The National Assembly’s Public Investments Committee (PIC) chaired by Mvita MP Abdulswamad Nassir has directed Auditor-General Edward Ouko to conduct a special audit on NBK’s books of accounts.