NBK revival remains work in progress

Clearly, the revival of the National Bank (NBK) is work in progress. This is what you see on examining the results of the lender’s first year under the ownership of the Kenya Commercial Bank.

First, the good news. KCB injected Sh5 billion into the bank without which capital regulatory ratios would be worse. Before the acquisition, the bank was tipping towards dangerous levels that could have precipitated enforcement action by the Central Bank of Kenya.

The second piece of good news is that KCB installed new management of the bank. We all know that management is just about the most important thing in a bank. Indeed, management is what makes the difference between a successful bank and a failed bank.

The third piece of good news is what the new management of the banks has managed to achieve in cleaning up in terms of aggressive collections coupled with aggressive provisioning for bad debts.

According to the results, the bank added a fresh Sh1.9 billion in provisions compared to a mere Sh185 million in the previous year.

When a bank increases provisions in such a big way, the signal by the new management has decided to set aside billions from it income t to cover expected loan losses. The rot in the bank was very deep. The thinking is that as recoveries rump up, some of the monies that have been provided which are recovered later will go straight into the profit and loss statement as new income.

The fourth piece of good news I read from the published results is the fact that the peers of the National Bank appear to have given the acquisition a vote of confidence. This is what you when you look at the line ‘deposits and balances due to local and foreign bank’.

According to the results, this number would appear to be large and increases.

Plainly, other banks are willing to increase their exposure to the National Bank. But I will still maintain that the National Bank of Kenya is still work in progress.

unpopular decisions

Even after the new shareholder pumped in Sh5 billion in the capital, compliance with important mandatory capital requirements and ratios remains unsatisfactory.

As you examine the disclosures in the accounts on parameters such as core-capital — to- deposits- liabilities and core capital to risk-weighted assets and total capital to risk-weighted assets, the trend you see is unsatisfactory performance especially when these ratios are set against the statutory minimum for each of these ratios.

Clearly, the new shareholder may have to inject more capital going forward to bring the bank into compliance with regulatory capital ratios.

In the coming year, I also see the management of the bank coming out more aggressively to make politically unpopular decisions such as staff retrenchment, closure of branches and reducing ICT costs.

Even though the numbers show that the management has marginally slowed down, the picture doesn’t look so good, especially when you calculate the most important ratio-namely, the cost to income ratio.

But perhaps the biggest challenge to the management going forward is going to be growing the loan book by doing what banks are licensed to do — growing deposits and lending it to viable borrowers.

The disclosures in the results show that the bank has been keeping a high liquidity ratio of 46 percent well above the regulatory minimum of 20 percent, a clear marker of low intermediation.

Not surprisingly, the loan to deposit ratio which measures how much you intermediate is at 50 percent.

There other signs showing that the revival of the banks is still work in progress. Non-performing loans are still at 20 percent, which is way above the industry average.

Still, NBK retains positive strengths. It is a major collector of government revenues. It is a major banker to large parastatals, notably, the Teachers Service Commission and important regulatory institutions such as the Kenya Civil Aviation Authority and driving licence revenues. It maintains a privileged branch presence at all entry points into the country.