The bank, which is 22.5 per cent owned by taxpayers through the Treasury, attributed the profit alert to mounting volumes of bad loans and unrealised gains from planned disposal of property.
The profit alert took the market by surprise given that the mid-tier lender had reported a net profit of Sh2.25 billion in the nine months ended September 2015, in what Mr Munir, who was suspended on Tuesday alongside five other senior executives, said was “the bank’s best annual performance in its 48 years history”.
National Bank’s cautionary notice means that the net earnings for the full year ended December 2015 will drop by at least a quarter — meaning shareholders should expect a maximum net profit of Sh653 million based on the Sh871 after-tax profit it reported in 2014.
It effectively means that more than Sh1.6 billion of the Sh2.2 billion profit that the bank reported for the first nine months of 2015 vanished in the last three months of the year.
A less than Sh653 million profit will be National Bank’s lowest in nearly a decade, putting to question the validity of the bank’s numbers before the appointment of Central Bank of Kenya governor Patrick Njoroge, who has demanded close scrutiny of commercial banks’ financial statements.
“National Bank’s non-performing loans portfolio increased towards the end of 2015 leading to a sharp increase in the level of impairment charges,” the bank’s chairman, Mohamed Hassan, said in a statement.
The bank’s loan impairment costs grew 76 per cent to Sh586 million as at September 2015.
Mr Hassan said the projected sale of one low-yielding asset was not completed in the year thereby reducing the projected income from the same.
National Bank’s third quarter earnings in 2015 were boosted by a Sh1.72 billion booking from the sale of 12 buildings.
The Capital Markets Authority requires companies to make declaration — if earnings are projected to fall by more than 25 per cent — to warn investors of the risks of capital losses and reduced dividend payment as a result of the drop in profit.
The 2015 results will mark National Bank’s second consecutive drop in profits. The bank’s net earnings declined 22 per cent to Sh871 million in 2014, weighed down by higher operating expenses and a Sh1.1 billion one-off severance pay to retrench 190 workers in a cost-cutting move.
No explanation was given as to why National Bank waited till the eve of the March 31 deadline for banks to announce results to make public the fact that the anticipated one-off gains were from sale of property that had not been concluded by year end.
This suggests that National Bank had booked the proceeds of the property sales before they were realised and planned to backdate them in fourth quarter to boost its earnings.
“You only recognise earnings in the period they are realised,” said George Bodo, a research analyst.
“The biggest problem with that statement is that they (National Bank) are alluding to a non-core business.
National Bank is not in the business of asset sales, and usually asset sales, when realised, are recognised as one-off exceptional items.”
Francis Mwangi, who heads research at Standard Investment Bank, said the sale of assets is not a recurring activity but a one-off item that should not be used to project earnings.
National Bank in March 2013 issued a profit warning — seven months into Mr Ahmed’s tenure — saying full-year earnings for 2012 would be heavily impacted by ballooning interest expenses.
“The bank paid high market rates on deposits but chose to cushion its borrowers by not passing the entire increase in the cost of funds to its lending portfolio, which was predominantly concentrated in the retail sector,” Mr Ahmed said.
Consequently, National Bank’s profit for the year 2012 more than halved to Sh730 million from the previous year’s net profit of Sh1.5 billion.
The listed bank’s cost of funds tripled to Sh3.7 billion compared to Sh1.4 billion in 2011 while interest income grew by a third to Sh8.4 billion.
Some of the toxic loans at National Bank include the one it advanced to the Kenya Red Cross Society to build the Boma Hotel. National Bank is also stuck with a loan of Sh250 million from a taxi company, while a hotel in Nairobi’s Upper Hill owes it Sh400 million, a matter that has ended up in the courts.
The bank is also exposed to the tune of Sh1 billion in a loan to Kaab Investments — whose title deed for a land parcel in Lamu was annulled by the National Land Commission in 2014. National Bank took over the contentious Lamu land loan from another bank.
Presbyterian Foundation was also involved in a court battle with National Bank in 2014 over a loan that was bought from another bank.