Companies

Chase Bank owners face massive losses in KCB take-over deal

RAFIKI

A Chase Bank branch in Nairobi. PHOTO | SALATON NJAU

Summary

  • The list of shareholders facing a squeeze includes Chase Bank’s former chairman Zafrullah Khan, the bank’s employees, German investment fund DEG and Lake Turkana Wind Power director Carlo Van Wageningen.
  • KCB beat eight other bidders, including Chase Bank’s current shareholders, two foreign institutions and three local banks, to clinch the deal.

Chase Bank’s shareholders were yesterday left facing massive dilution after the Central Bank of Kenya (CBK) announced that KCB Group had agreed to take a majority stake in the troubled lender as part of a plan to reopen its doors beginning Wednesday next week.

CBK Governor Patrick Njoroge told journalists at a press conference that the banking industry regulator, as Chase Bank’s receiver manager, had struck a deal that would see KCB buy an undisclosed majority stake in the troubled lender.

The list of shareholders facing a squeeze includes Chase Bank’s former chairman Zafrullah Khan, the bank’s employees, German investment fund DEG and Lake Turkana Wind Power director Carlo Van Wageningen.

KCB beat eight other bidders, including Chase Bank’s current shareholders, two foreign institutions and three local banks, to clinch the deal, according to people familiar with the negotiations.

Dr Njoroge said KCB would take over Chase Bank’s management beginning next Wednesday when it will reopen to start paying out deposits of up to Sh1 million per customer.

Due diligence

KCB is concurrently expected to conduct due diligence on Chase Bank and, if it decides to proceed with the acquisition, provide additional capital that will give it a majority stake in the business, ultimately diluting the existing owners.

“KCB affords us a way of moving forward in the quickest way possible. We need to hit the ground running,” Dr Njoroge said at a press briefing yesterday without naming the losing bidders.

The CBK said KCB had met the three criteria that were used in picking a potential buyer of Chase Bank — credibility, speed in reopening the bank and ability to provide significant liquidity to sustain its operations thereafter.

“KCB is a solid bank with significant resources,” Dr Njoroge said, adding that the choice of the Nairobi Securities Exchange-listed firm had an additional appeal due to its established brand and the fact that it is homegrown.

Dr Njoroge said the CBK and KCB would provide liquidity when Chase Bank reopens but declined to state whether any cash KCB provides will be counted as part of its investment in the lender.

Though Dr Njoroge did not explain why existing Chase Bank shareholders were not given an opportunity to save the bank, analysts said they may have been locked out because of their perceived role in the corporate governance problems that brought down the lender.

The major shareholders had representatives on Chase Bank’s board and it is presumed that letting them take charge of reviving the lender would result in a business-as-usual position that would not inspire confidence.

By the time it collapsed, Chase Bank’s owners had Sh11.1 billion in the form of net assets, according to restated accounts.

Their claim could fall significantly with the entry of KCB, which will in the next couple of months be seeking to establish the financial health of the lender.

The ownership of Chase Bank’s founders is not clear but they, including Mr Khan, are believed to have interests in a number of investment vehicles such as Rinascimento Global Limited that is the single-largest investor with a 15.9 per cent stake.

Others are Shegas Limited (13.9 per cent), Balst Investment Holdings Limited (11.2 per cent), Festuca Investments Limited (9.3 per cent) and Namaja Investments Limited (three per cent).

Chase Bank’s employees have a 4.3 per cent stake in the lender. Major investment funds Amethis Finance, responsAbility and DEG — which all invested in the bank in 2013 — also rank among the top owners.

Amethis’s equity stands at 10.9 per cent, followed by DEG (6.6 per cent) and responsAbility (3.4 per cent).

It is expected that managing Chase Bank will give KCB insights into the troubled lender’s business, sharpening its due diligence ahead of the envisaged multi-billion shilling takeover.

KCB sees Chase Bank as an attractive purchase, with the collapsed lender having 27,000 customers classified as small and medium sized (SME) businesses.

The planned takeover could therefore give KCB an opportunity to grow and diversify its loan book, with the bank currently ranking among the largest players in corporate and retail banking.

Chase Bank is also a banker to 341 non-governmental organisations and 147 savings and credit cooperative societies (saccos), each with an average membership of 9,200.

The lender, with 62 branches, is also a significant lender to the agricultural sector. Rafiki Microfinance Bank and Genghis Capital, an investment bank, are its subsidiaries.

“It (Chase Bank) is quite extensive,” Dr Njoroge said.

Though details of KCB’s proposed takeover of the bank were not disclosed by the regulator, the listed firm will need to raise more funds from debt or equity sources to close the deal.

Growth in the bank’s current operations has already seen it move to raise Sh10 billion through a rights issue to boost its thinning capital levels.

KCB will on April 29 seek shareholder approval to create an additional one billion new shares, part of which will be offered in a cash call slated for later this year.

The bank’s capital to total risk-weighted assets ratio stood at 15.4 per cent as at December 2015, just 0.9 percentage points above the regulatory minimum of 14.5 per cent.

The move to acquire a majority stake in Chase Bank is expected to see KCB seek additional funds, with the buyout price expected to emerge later depending on the stake and valuation of the troubled lender. If concluded, the takeover will make KCB even more dominant in the local market.

The bank, in which the government has a 17.3 per cent stake, is the largest in most measurements, including assets and absolute profits.