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KCB gearing to raise tens of billions as capital cover thins

KCB Chief Financial Officer Lawrence Kimathi. PHOTO | DIANA NGILA
KCB Chief Financial Officer Lawrence Kimathi. PHOTO | DIANA NGILA 

KCB Group, eastern Africa’s largest bank by assets, is set to raise billions of shillings to shore up its capital in the course of the year as its regulatory ratios become tight.

The management said in an interview that this follows the reduction in the total capital to total risk-weighted assets (TC/TRWA) to just 15.4 per cent against a legal requirement of 14.5 per cent. This leaves a wiggle room of only 0.9 per cent.
The ratio represents the extent to which capital covers risk of loss from loans and is intended to offer a reasonable protection to depositors.
The KCB management said details are still being worked but analysts reckon cash likely to be raised this year would be at about Sh20 billion, and a possible Sh10 billion next year – bringing the total amount to Sh30 billion in two years.

They estimate part of the Sh20 billion will come from a debt instrument to the tune of Sh8-10 billion while the rest would be retained earnings.
“KCB intends to recapitalise this year and we will announce the details in due course. … The total capital has a buffer of 90 bps [0.9 percentage points] thus the bank will need to increase total capital base,” said Lawrence Kimathi, KCB chief financial officer.

Already the lender has proposed to pay a dividend of Sh2 per share which amounts to a total of Sh6 billion payout, leaving retained earnings of Sh10 billion. It means that it could also propose a bonus share issue to capitalise the earnings going forward.

“We see the bank recapitalising through retained earnings and debt. It will probably go for debt through a development finance institution or a debt instrument. A transaction adviser will probably be trying to find the best interest rate for the debt,” said Mercyline Gatebi, an analyst at Genghis Capital.

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The new funds would give the company enough room for expansion of its business without falling foul of the legal requirements for capital.

Ms Gatebi said the bank was unlikely to go for a rights issue because its tier-1 capital is currently strong, and what is actually needed is tier-2 capital which comprises bonds, retained earnings and hybrid instruments or mezzanine financing.

“The bank will probably be looking for Sh8-10 billion in more capital considering that it will have Sh10 billion in retained earnings. Next year, they could also retain a similar amount. So this would take their total capital to total risk-weighted assets to more than 17 per cent,” said Mr Gatebi.

The bank made a net profit of Sh19.6 billion in 2015, a 16 per cent growth from the previous year, with net interest income having gone up by nine per cent but total costs rose by a lower margin of four per cent.

KCB is looking to expand regionally and said it had set out to gradually grow the Ethiopia business over time. It is currently operating a representative office there, but says it was strengthening partnerships with different stakeholders on the ground with the hope of progressing it into a fully-fledged operation in the next few years.

“We will continue to monitor the progress and provide updates on this new operation as it sits very well within our regional growth strategy,” said Mr Kimathi.

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