12 February 2018

Kenya: Consolidated Plans Rights Issue for U.S.$25 Million This Year

The Kenya government-owned Consolidated Bank has announced a decision to raise Ksh2.5 billion ($25 million) this year through a rights issue, raising doubts on an earlier merger plan of all state-owned banks.

The rights issue is to be underwritten, opening the door for a strategic investor to take up a stake in the bank through the cash call.

An underwriter ensures a rights issue is successful by mopping up all rights that are not exercised, a move that dilutes the position of shareholders who failed to take part in the cash call.

Consolidated Bank failed to execute a rights issue in 2016 after the National Treasury, which is the majority shareholder -- with a 78 per cent stake -- sat it out.

A rights issue also signals failure by the bank to attract a strategic investor. It has been looking for one in the past two years.

"The bank plans to raise Ksh2.5 billion in 2018 through a rights issue to ensure compliance with statutory requirements and support business growth as envisaged in its strategy," said the Privatisation Commission.

The government previously planned to merge Consolidated Bank with listed lender National Bank of Kenya and Development Bank -- which have all been struggling to comply with statutory capital requirements.

Capital requirements

In 2016 it appointed a consultant to advise on the merger.

Consolidated Bank has struggled to comply with capital requirements in the past five years, which has forced it to cut back its business operations, sinking to loss territory.

The underwriter to the rights issue should be ready to take ownership of the bank given that the government has previously failed to honour several pledges to pump additional capital into the bank, putting to doubt its participation in the new offer.

The underwriter, if absorbed as a shareholder, would relieve the government the burden of steering the bank's privatisation.

Other shareholders are National Social Security Fund (5 per cent), the defunct Kenya National Assurance (4.3 per cent), the Kenya National Examinations Council (1.5 per cent), Kenya Pipeline Company (1.6 per cent) and National Hospital Insurance Fund (1.3 per cent).

Consolidated Bank had a core capital of Ksh444 million ($4.4 million) against the statutory Ksh1 billion ($10 million) as at end of September 2017. The bank was holding more customer deposits than its core capital can hold with its ratio at 4.6 per cent against the mandatory eight per cent.

Privatisation

The Central Bank of Kenya has in the past been forced to hold back issuing an operating license to the lender due to its capital woes.

International audit firm PricewaterhouseCoopers had advised that the bank be privatised through an initial public offering, now made unviable by its recent loss making. A company is required to have recorded profits for the last three years of operations before listing.

The government is now seeking another consultant to advice on the future of the bank as the game of musical chairs continues at the cost of the bank.

Recently, the government disclosed plans to merge the development-financing bank with government-sponsored revolving funds further highlighting the lack of a clear plan on state-owned financial institutions.

In the announcement made last month, Development Bank is to be merged with Kenya Industrial Estates, Uwezo Fund, Youth Enterprise Development Fund, Women Enterprise Development Fund and Industrial Development Bank of Kenya.

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