Ideas & Debate

Mwalimu Sacco needs over Sh2bn to turn around ECB

Equatorial Commercial Bank in Nairobi. PHOTO | FILE
Equatorial Commercial Bank in Nairobi. PHOTO | FILE 

This week it emerged that a commission set up by the Ministry of Industrialisation and Enterprise had surprisingly issued the final greenlight for the acquisition of a 51 per cent stake in Equatorial Commercial Bank (ECB) by Mwalimu Sacco.

Mwalimu Sacco’s buyout of ECB has been done through a vehicle known as Mwalimu National Holdings.

Unfortunately, the bank, as it is right now, may not be able to return the cost of capital that Mwalimu Sacco has injected both on a short- and medium-term basis.

But the purchase price aside, Mwalimu Sacco members should now be prepared to inject even more money into ECB to be able to match its returns with what Mwalimu Sacco itself is currently generating for its members.

In 2013, while ECB returned just four per cent on its shareholders’ equity, Mwalimu Sacco declared a dividend payout of 12.15 per cent for its members.

In 2012, while ECB was generating negative returns, Mwalimu Sacco declared a 11.5 per cent dividend payout. So matching these kinds of returns is going to be a long-term project for the teachers.

And just how much will Mwalimu Sacco need to inject into ECB, on top of the purchase price, and what will this money be used for? First, the bank has been operating on very thin capital adequacy buffers.

At the close of third quarter 2014, the bank’s capital adequacy ratio was at 13.2 per cent at a time it should have been gearing to comply with the new minimum ratio of 14.5 per cent, which took effect in January.

So to generate sufficient buffers that can sustain a 20 per cent year-on-year growth in customer assets, the bank will need a Tier 1 capital injection to the tune of Sh1 billion.

As at Q3 2014, a Sh1 billion capital injection would create a buffer of six per cent, which can quite accommodate a double-digit growth in customer assets.

Capital is an issue because ECB is an asset-driven bank and generates 70 per cent of its revenues from lending. Second, the new shareholders will have to significantly invest in enhancing the bank’s deposit franchise, which is relatively weak and has not been helpful in as far as liability generation is concerned.

Indeed the bank has had challenges generating sufficient low-interest bearing liabilities. Between 2012 and 2013, bank’s cost of funds including long-term borrowed funds was in the double digit territory, which is very high.

So to help alleviate existing funding constraints, some Sh1 billion, on average terms, will be required to ramp up distribution network including alternative channels.

Third, the bank would then need to upgrade its product offerings to reflect the new shareholder’s strategy and also reconfigure its target market.

This would include enhancing capacity of existing systems and banking platforms, and even tweaking both its business origination and customer acquisition processes.

And it looks like the strategy could lean towards a mass-market driven approach, given the background of Mwalimu Sacco; so it might cost some money.

Finally, there could be some previously undisclosed liabilities that may require clean-up by Mwalimu Sacco.

As was reported in the Business Daily, the commission noted that even Ernst & Young, which was appointed as the due diligence consultants, had advised a go-ahead but expressed some reservations regarding ECB’s credit risk management.

This report by E&Y isn’t public yet but, from afar, it looks like they were questioning the bank’s non-perfoming loans classification procedures.

Such holes, if any, would have to be painfully filled and it will indeed be an additional cost to the sacco’s members.

In terms of investment horizons, this full turnaround, if indeed is the strategy of Mwalimu Sacco, could last north for two years.

Overall, for Mwalimu Sacco, it doesn’t just stop with the purchase price, but further investments in ECB above Sh2 billion will be required in a bid to scale up shareholder returns. It looks like a long-term investment by Mwalimu.

The writer is an investment analyst.