The Press statement by the Kenya Commercial Bank (KCB)announcing its move to acquire the National Bank of Kenya(NBK) through a share swap did not give much detail.
The statement only said that the deal would involve 10 ordinary shares of NBK for every one ordinary share of KCB. If it works, we will have seen the end of one of the most troublesome chapters in the country’s banking sector. Even though NBK has a weak balance sheet, it will bring to the table strong customer-facing assets for the combined entity. It has retained branches in exclusive locations at airports, ports of exit and entry into the country, giving it advantage when it comes to inter-trade business.
Secondly, it has over the years retained exclusive viable public sector clients. In the past, NBK was the designated bank for receiving landing fees for all aircraft landing and taking off from Kenya. It retains a substantial part of the business.
NBK used to be the banker for the largest employer in the country — the Teachers Service Commission. It still retains a substantial portion of the business. It used to be the designated banker for receiving payments to Kenya Revenue Authority and still retains a big chunk of this business.
So, what are the likely outcomes of the proposed merger? First, the government’s stake — now at 17 percent — is bound to increase with consequences for the corporate governance of the largest bank in the country.
The public float, a broad and impressive spectrum currently holding in excess of 80 per cent, may also suffer dilution.
When the details of the transaction are finally put out, it will be interesting to see how the vexing issue of the mainly government-owned preference shares in the books of the bank — which have always been the deal breaker for investors interested in buying the bank — will be treated.
NBK has a peculiar capital structure of having normal ordinary shares and at the same time preference shares with equity-like features that, unlike normal preference shares, allow these securities to share in the profit of the bank.
Indeed, transaction advisers hired in the past to sell the bank have advised that no sale transaction of the NBK is possible unless the preference shares are converted into ordinary shares first, and on a 1:1 basis.
Predictably, the National Social Security Fund (NSSF) has been opposed to the 1:1 conversion formula, arguing that such a move would dilute its current near majority 48 percent stake of ordinary shares of the bank.
This is because, when the 1:1 conversion formula is applied, the Treasury’s stake rises to 70 percent of ordinary shares from the current 23 percent, giving it power to make unilateral decisions on the future of the bank.
It will be interesting to see how the National Treasury and KCB will navigate through this shareholding quagmire.
With the shares of the NBK currently trading at its lowest multiples and at a steep discount on the book value, this transaction could put the government and the NSSF in a position where they can start realising a return on their investments in the bank.
The two investors have not been able to earn a return either by way of capital appreciation or dividends from the billions they invested in the company in nearly two decades. But more significantly, a takeover of NBK will serve as a strong signal that distressed State-owned banks will no longer be artificially kept alive even after they have long outlived their usefulness.
Indeed, many of the State-owned banks have been in poor financial health, only managing to limp along because of support and regulatory forbearance from the Central Bank of Kenya (CBK) .
A good number are currently suffering crippling liquidity problems, forcing them to resort to complete dependence on the CBK discount window for liquidity. In the interbank market, they are unable to access liquidity easily because the large banks are not willing to lend to them, choosing to deal only with their large peers.
How I hope that the proposed merger of NBK and KCB will just be but the beginning of structured changes that will eventually give us a long-lasting solution to widespread distress within the State-owned segment of the banking sector.