The Capital Markets Authority (CMA) was Thursday left in a tight spot after the National Bank reported a Sh1.15 billion loss without prior warning to investors as required by law.
The bank, which sent a Press statement announcing its results at midnight on Wednesday, attributed the huge loss to bad loans that rose by Sh3.2 billion towards the end of the year, leading to a seven-fold increase in impairment charges.
Companies listed at the Nairobi Securities Exchange (NSE) are required to warn the public if their full-year profits will drop by more than a quarter at least 24 hours before announcement of the results, a rule the National Bank did not adhere to.
The law contemplates that such a warning is issued through publication of notices in local media of national reach, the enforcement of which is the CMA’s mandate.
That National Bank managed to continue hoodwinking investors and the public through a series of pronouncements and Press statements indicating that all was well only to drop the bombshell of a huge loss speaks to the quality of the CMA’s regulation.
The annual financial results, which were released two days after National Bank sent its chief executive, Munir Sheikh Ahmed, and five top managers on compulsory leave to facilitate an internal audit, only deepened the mystery surrounding the authenticity of the lender’s financial health.
National Bank’s earnings were hit by a seven-fold increase in loan impairment costs that saw provisions to cover for bad loans hit Sh3.7 billion compared to Sh525 million in December 2014.
The bank’s gross toxic loans grew by nearly two-thirds to Sh11.7 billion in the period under review, reflecting the deteriorating quality of its assets.
“Increasing provisions is a prudent practice in accounting. We have further put elaborate structures in place to manage the recovery of this position,” said acting managing director Wilfred Musau.
Reports, however, indicated that the financial sector regulator, the Central Bank of Kenya, had rejected National Bank’s version of its performance, insisting on higher provisions for bad loans and removal of unrealised proceeds of property sales that the lender had booked in leading to a wipe-out of the profits.
National Bank posted a net profit of Sh2.25 billion in the nine months ended September 2015, in what Mr Ahmed dubbed as “the best annual performances by the bank in its 48 years history”.
Mr Ahmed hailed the “transformation” success and had announced that National Bank planned to venture into South Sudan and even introduced a Chinese department eyeing trade financing with the dragon economy.
National Bank had Sh110.6 billion in customer deposits as at December 2015. The bank’s cost of funds surged 50 per cent to Sh5.8 billion while net interest income declined 5.9 per cent to Sh6.3 billion in the period to December 2015.
But the steep rise in loan impairment costs raises fears that the bank has been suppressing and reclassifying its NPLs before the coming into office of CBK governor Patrick Njoroge who has demanded close scrutiny of lenders’ financial statements.
Analysts at Citi Group have been warning since 2012 that Kenyan banks are inflating their profits by deliberately underprovisioning for bad loans, says the report dubbed, ‘Don’t get Caught When the Music Stops’.
National Bank’s plunge to loss-making zone and swelling non-performing loans portfolio return the lender to its state in the 1990s when it had a huge pile of bad loans accumulated through dubious lending to political cronies of ex-president Daniel arap Moi.
The Treasury owns a 22.5 per cent stake in National Bank while the National Social Security Fund (NSSF) is the largest shareholder with 134.5 million shares or a 48.05 per cent stake.
Mr Ahmed now earns the dubious distinction of being the chief executive who returned National Bank into the red, with the bank having last made a loss of Sh323 million in 2001.
Reuben Marambii (deceased) took over the bank in January 1999 and embarked on a turnaround project which saw the loss-making and technically insolvent NBK make a profit in 2002 and went on to pay a dividend of Sh0.60 per share in 2010 when it made net earnings of Sh2.02 billion.
By 1999 the bank had accumulated more than Sh5 billion in losses and was virtually insolvent. NBK’s gross sour loans was Sh26.07 billion or 70.1 per cent total loan book in the year 2000; with loan loss provisions amounting to Sh18.79 billion.