Teachers to pay more to keep ECB stake in Sh1bn cash call

Equatorial Commercial Bank (ECB) has lined up its second rights issue in three months in a move that will see teachers —who acquired the lender in 2014 — dig deeper into their pockets to raise an extra Sh1 billion.

The lender, which raised Sh500 million in December, has issued a notice to shareholders asking them to approve the injection of another Sh1 billion at an extra-ordinary meeting slated for Tuesday next week.

The ECB said it needs the cash to fund the upgrade of technology, open new branches country wide and boost capital reserves which have been eroded by losses.

“The objective of this rights issue is to provide adequate resources for growth. We want to get a new core banking system and expand our branch network,” said Tim Gitonga, ECB’s chief executive.

“There were debts in our loan book which went sour, but we’re now recovering them,” said Mr Gitonga who was appointed in January to lead the lender.

The ECB plans to sell 200 million shares at Sh5 each to its existing shareholders to raise the Sh1 billion.

Mr Gitonga said the cash call will be closed by end of June but expects the first tranche of Sh500 million by first week of April.

According to a shareholders’ notice seen by the Business Daily, the ECB wants to increase its authorised capital to Sh4.825 billion from the current Sh3.825 billion by creating the additional 200 million ordinary shares.

This means that teachers through Mwalimu National Holdings, the investment arm of Mwalimu National Sacco, will now be required to contribute Sh750 million to defend their 75 per cent interest in the bank.

Mwalimu Sacco first invested Sh1.6 billion to acquire a 51 per cent stake in December 2014, buying out businessman Naushad Merali who founded the bank.

READ: Mwalimu Sacco gets green light to buy Merali bank

The giant teachers’ sacco last year pumped in a further Sh1 billion for an additional 24 per cent stake.

ECB’s fresh cash call in a span of three months raises queries on the financial health of the lender ahead of Mwalimu Sacco buying into the bank and whether this was priced into the transaction.

Despite the fresh capital provided by Mwalimu Sacco, accumulated losses at ECB wiped off more than 60 per cent of the bank’s capital in 2014.

The teachers’ credit union –ranked the largest sacco by assets valued at Sh28.6 billion— in December put in Sh375 million into the ECB in a rights issue which raised a total of Sh500 million.

Mr Gitonga said the December rights issue was fully subscribed and that the money had helped boost capital buffers.

The purchase of ECB, which started in April 2014, was marred with controversy that sucked in the government and which in turn ordered a special probe into the sale following queries on the valuation, profitability and corporate governance at the bank.

A commission set up to investigate the controversial deal finally cleared the deal in March 2015.

ECB posted a net loss of Sh61.8 million in the nine months to September 2015, reversing a net profit of Sh49 million a year earlier.

The bank’s total capital to total risk-weighted assets stood at 15.21 per cent as at September 2015, against the 14.5 per cent ratio set by the Central Bank of Kenya, giving the lender little headroom to grow its loan book.