From left: KCB finance director Lawrence Kimathi, chairman Joseph Kinyua and CEO Paul Russo during the release of the 2023 full-year financial results in Nairobi on March 20, 2023. PHOTO | POOL
KCB Group is letting go of the National Bank of Kenya (NBK) about four years after the acquisition in a development that underlines the pressure that the loss-making unit had brought upon the more than 100-year-old lender.
KCB’s board had since September last year toyed with different ideas including putting in an additional capital — something it had done on several occasions before. But NBK looked like a bottomless pit.
KCB finance director Lawrence Kimathi said KCB had sunk about Sh14 billion into NBK since acquiring it in December 2019.
Keeping NBK would have required KCB to inject in between Sh5 billion and Sh8 billion as additional cash to comply with Central Bank of Kenya (CBK) minimum capital ratios and also support the operations of the lender, according to Paul Russo, CEO at KCB Group.
But the board, having seen the headroom on capital ratios of KCB Bank Kenya, which accounted for 67.8 percent of the group’s profit, become thin, did not want to entertain the idea of seeing the Kenyan unit join NBK in breaching CBK ratios.
The board had three decisions: pump in money, fully integrate NBK into KCB Kenya or dispose of it. In the end, the board decided that selling it at 1.25 times the book value—a figure that comes to about Sh13.2 billion—is the best option. “I love NBK but divided attention is not going to help. I don’t know how people who have two wives survive. The right thing to do, for the good of all stakeholders, is to accept a binding offer from Access Group,” said Mr Russo.
The decision to sell NBK to the Nigerian lender will give KCB Group a “predictable future” and save it from requiring to raise additional capital for NBK at a time when it also wants to add money in KCB Kenya.
The board says it stumbled on unending “legacy issues” in NBK. But the one that altered their prospects about NBK was when it lost a multi-billion shilling legal battle to a former MP Basil Criticos. Mr Russo calls it “exceptional.”
"We have been hit with an exceptional case that made sure that we were not compliant on capital. It is the duty of the board to resolve those issues,” said Mr Russo.
KCB Group unsuccessfully sought to stop the award of Sh2.3 billion to Mr Criticos on the finding that NBK unfairly auctioned the ex-MP’s sisal farm about two decades ago. By acquiring NBK, KCB had brought upon itself much more than just the assets.
The payout to Mr Criticos was enough to sink NBK into a Sh3.34 billion net loss in the financial year ended December 2023, down from a Sh719.78 million net profit posted a year earlier. This became a mountain to climb for KCB, given that NBK core capital and total capital ratios have remained in breach despite piecemeal interventions with fresh capital.
Mr Russo says he has been on a “clean-up” exercise in KCB Bank Kenya and NBK but the development in NBK forced the board to “take tough calls for the future.”
This has extinguished the deal which was in 2019 hailed as one that was going to give KCB “a stronger edge to play a bigger role” in driving the financial inclusion agenda in the East African region.
KCB Kenya closed December 2023 with both core and total capital ratios having a buffer of 1.3 percentage points, a thin headroom compared with five years earlier when the headroom was 5.1 and 3.1 percentage points above the required minimum.
Mr Kimathi said the thin capital buffer for KCB Kenya was a “massive concern” to the board and shareholders. This in fact became the reason the group has had to skip dividend payout for the first time in 21 years in order to conserve capital and boost capital levels for KCB Kenya.
“We still believe that KCB Kenya is not yet where we would want it to be from a capital point of view and it is for this reason that the board has decided that we shall not be having any dividend payout out of the 2023 results. This year, we want to conserve capital,” said Mr Kimathi.
Besides the capital preserved from the dividends, the KCB board has also gone for two Sh26.6 billion long-term loans.
