Consolidated Bank was formed in 1989 when the government took over and merged the management of nine banks that were said to be insolvent.
The core role of the bank was to collect debt from companies and individuals who had taken loans from any of the lenders.
However in 2001, the government licensed the debt collecting entity into a full-fledged bank.
The bank has over time battled with accumulated losses and narrow capital margins in the competitive industry and is now seeking to raise funds in the capital markets.
Head of finance Joseph Njuguna spoke to the Business Daily on the bank’s corporate bond, financial performance and outlook.
The bank is issuing a Sh4 billion corporate bond, which closes today. What will the funds be employed to?
If you check the bank’s growth rate over the past six years, it has been huge. Coming from a loan book of Sh1.6 billion in 2006 to more than Sh9.2 billion as at December of last year. Our deposit base grew from Sh2.5 billion to Sh12 billion in December, that is a compounded annual growth rate of 35 per cent.
But if you check on the capital side, you will realise that the growth has not been as much because the shareholders have not injected funds but we have been generating internal capital through retained earnings because our profitability has also been growing. In 2006, we were generating profits of Sh16 million by December 2011 we were at Sh250 million.
The Sh4 billion is coming to fund accelerated growth. It will be taken in two tranches.
In the first tranche, we are looking for Sh2 billion of which Sh1.75 billion is senior notes and basically all this is money for on lending to customers.
Sh250 million is subordinated so that apart from providing funds for lending, we will also be boosting our tier two capital because as per the prudential guidelines, that money counts towards calculation of your total core capital.
The corporate bond matures after seven years. What advised this period?
What we have seen over time is that with the kind of funds we have, we are only able to give facilities of 36 months, probably at most 48 months, but our customers actually require longer term financing so that they are able to manage their cash flows much easier.
So, essentially, we are looking for long-term funds so that we are able to extend the term that we provide to our customers.
When do you expect to tap the second tranche?
It will depend on how fast we are able to utilise the first tranche. We are hoping that within a year we will have utilised the first Sh2 billion then we can go back to the market if the conditions are suitable.
How is the corporate bond priced?
It is priced off the seven-year yield curve plus a margin of 1.15 per cent. The current seven-year yield curve is at 12.1 per cent, then add 1.15 per cent. If you check the direction of the rates, they are likely to go down. So, for an investor this is a good rate since it means you are able to lock in a very good rate and for the bank there is sufficient margin.
We expect the lending rates to come down, as they have already started, but where we see the rate settling is around 19-20 per cent. That margin is still sufficient for the bank to on-lend competitively.
Are the returns on a floating or fixed rate? It depends on the investors’ risk appetite. For the floater, we have pegged it at the 182-day Treasury bill plus a margin of two per cent with a floor rate of 10 per cent and a cap of 13.75 per cent.
It will purely depend on the investors as we have not said that this portion is fixed or float — so investors have a choice.
The bank has been operating with accumulated losses. Have this been cleared?
By last month, we had wiped out all those losses, which means we have no accumulated losses. In 2006, we had accumulated losses of Sh600 million, which were inherited from the legacy institutions and this has been hurting in two ways. First, the amount of money you can lend to one borrower is limited to 25 per cent of your core- right now we can do up to Sh250 million. Also, If we had resources we could have grown much faster.
The bank has been operating marginally above the minimum capital requirement ratios, which the Central Bank intends to raise.
How does the bank intend to make sure it does not breach this requirement within the given time frame of 18 months?
The PS has confirmed that Treasury is giving us an extra Sh500 million, which is basically to boost tier one or core capital as we go about with privatisation.
With the Sh500 million, we are able to take our core capital to about 13 per cent and also with the bigger muscle, we will be able to generate adequate retained earnings.
The bank recently received a Sh700 million loan from European Investment Bank; are you not over leveraging?
The money we are got from the European Investment Bank is long-term and the rate was favourable as even now we are able to lend it at a much lower rate of 18 per cent. So even in terms of strategy that was the right strategy as this money is available for development projects.
This funding is basically widening the bank’s resource base and is providing the funds for SMEs from various sources.
The growth we are having has to be funded from the traditional sources- deposits – but also from other sources and at the moment we don’t have any other debt in our books. If you check other banks, even the large banks, there is a bit of leverage debt. Basically, the bank is widening its sources of funding to ensure we continue growing at the same rate if not an accelerated rate.
What are the bank’s expansion plans?
In the next two years, we intend to open 10 more branches and also provide our services through agents. Right now , we have been licensed to operate 20 agencies and are in the process of branding those agents.