Consolidated Bank grapples with low capital levels as profit declines 55pc

Government-owned Consolidated Bank is grappling with low capital levels and poor profit, which dropped 55 per cent in the three months to September.

The bank reported a Sh16 million profit after tax for the nine months ended September down from Sh35 million reported in June. The performance is, however, an improvement from a loss of Sh154 million posted in September last year.

The lender is plunging deeper into capital inadequacy as it grows business despite the deficit. The bank was denied a licence by Central Bank of Kenya due to a lack of sufficient capital and it was hoped the government would inject additional capital or actualise plans to merge with another financial institutions.

The bank has been below the statutory capital levels over the past three years but has been given leeway to continue operating due to its ownership by the government.

Despite the capital gap, the bank is yet to issue the remaining Sh2 billion tranche of its corporate bond for which it has regulatory approval.

Management has previously said its immediate need was shareholders’ capital which has seen it plan a rights issue. Early last month, the bank started sourcing for a transaction adviser to spearhead the cash call slated to take place before year end.

READ: Consolidated Bank plans cash call to shore up capital

Consolidated’s total capital to its risk weighted assets stood at 8.7 per cent against the mandatory 14.5 per cent, a position that would be hugely improved by cash from the bond issue. The first tranche of the corporate bond raised Sh1.7 billion against a target of Sh2 billion.

The bank’s core capital to its risk weighted assets stood at 7.7 per cent against the mandatory 10.5 per cent; making it non-compliant and hindering its lending ambition.

The institution, however, continues growing its loan book which is now Sh9.1 billion up from Sh8.7 billion in June. It also collected more savings from the public to push its deposit base to Sh10.4 billion from Sh9.6 billion in June.

The Banking Act allows CBK to stop a bank from booking any new business if it has inadequate capital and to freeze any dividend payout.

Consolidated Bank has not paid out dividends since its formation despite making profits from 2006 to 2012 as it was clearing accumulated losses to the tune of Sh700 million.

As at end of 2011 the bank turned around but due to a lack of new capital to support its growth it slipped back into the red which has seen it accumulate losses of Sh513 million.

The government planned to sell the institution, formed in 1989 as a result of a merger of nine insolvent banks, and had contracted consultancy PwC as early as 2012 to advise on the privatisation process.

Options open to the bank included invitation of a strategic investor and public listing. The loss-making is likely to dilute its attractiveness to investors.

The government last year honoured a three-year promise to inject capital in the bank by putting in Sh500 million which was, however, not enough to lift it from the weak position.