Mauritian group in Sh2.7bn buy out of troubled Fidelity Bank

Mauritian financial services firm SBM Holdings has reached a deal to buy out troubled Kenyan lender Fidelity Commercial Bank in a transaction worth up to Sh2.7 billion that is likely to end speculation about the bank’s future.

SBM Holdings, which is listed on the Stock Exchange of Mauritius, will reportedly pay Fidelity Bank shareholders up to Sh1.3 billion and make a capital injection of Sh1.46 billion into the lender.

Fidelity’s troubles have been mostly visible in its liquidity ratio that has over the past one year fallen well below the statutory minimum of 20 per cent — signalling a cash crunch.

The lender’s latest available financial results (for the quarter ending March 31) indicate that it had a liquidity ratio of 11 per cent.

Lack of liquidity is a major precursor for bank collapses, as it signals inability to honour day-to-day obligations to customers.

Fidelity said the Mauritian investor has concluded due diligence on its books, with the final valuation expected to be done in the next two weeks.

There were reports that some of the sale proceeds might go to the Central Bank of Kenya (CBK) in lieu of overdraft due to the regulator, though Fidelity denied this.

The deal, first announced in a statement by the CBK, will see SBM take up full ownership of the bank.

“The value of the transaction is up to Sh1.3 billion — the bank’s net asset value… the actual valuation amount to be paid to shareholders not CBK will be within this amount of Sh1.3 billion,” said Fidelity general manager for business development and communication Kass Khimji.

SBM had not responded to Business Daily queries on the deal by the time of going to press.

“The deal means that the interest of the shareholders in the bank will end with the acquisition, but for senior management there will be a transitionary period with the new owner,” added Mr Khimji.

The sale, which is pending regulatory approval, was also announced through a statutory filing by SBM to the Mauritius exchange.

Fidelity has not posted on its website its list of top shareholders as required by the CBK, but it is associated with the family of its founder, Sultan Khimji.

It started its operations as a non-bank financial institution in 1992 before changing to a commercial bank in 1996. The lender currently operates 14 branches countrywide.

The CBK ranked the lender at position 31 out of 41 banks in market share at the end of 2015, with a share of 0.39 per cent.

That the consideration to be paid to the bank’s shareholders is equivalent to its net asset value indicates that it is not being sold at a premium.

Fidelity has been looking to sell an equity stake to a strategic investor to boost its thin capital base for some time.

In March the bank disclosed that it had reached an agreement with British private equity firm Duet Group for the sale of a significant stake for Sh1.9 billion, but the deal later fell through. 

Under the sale, Duet was to get seats on the bank’s board, while the existing shareholders of the bank would all have remained on its register even though with reduced stakes.

“The deal, although approved by both Duet and Fidelity was not completed as it was more strategic for Fidelity to partner with a bank as opposed to a PE fund,” said Mr Kass Khimji. 

SBM Holdings is making the buy through its subsidiary, SBM Bank. The firm is the second-largest company listed on the Mauritian exchange, with an asset base of about Sh428 billion ($4.2 billion).

Other than banking it also operates wealth management, treasury, asset financing, stockbroking and asset management units.

The sale of Fidelity comes at a time when smaller banks are tipped to consolidate following the capping of interest rates starting September.

The lack of a premium on the sale of Fidelity is indicative of shifting dynamics of the Kenyan banking sector as more small banks fall into financial stress.

This means that in spite of the CBK freezing the issuing of new banking licences and leaving equity sales as the most viable option for new entrants to the Kenyan banking sector, those looking to sell may not enjoy the benefit of a premium given that buyers are aware of their financial stress.

Two years ago when the sector was in more buoyant health, private investment group Atlas Mara said that acquiring a majority stake in a Kenyan bank would have seen the buyer cough up 3.5 times the book value of the lender being acquired.

With the lower rates accompanied by a minimum floor for interest earning deposits, the smaller banks are likely to struggle to mark sufficient margins to compete in the market.

They have traditionally paid more for their deposits in order to entice customers, in turn compensating by charging higher interest on their loans compared to larger banks.