Markets & Finance

KCB loan deal opens new battle for City Hall cash


KCB banking hall. The bank has bought out a Sh5 billion loan that Equity had advanced to cash-strapped City Hall. FILE

KCB’s takeover of Equity’s Sh5 billion loan to the Nairobi county government has intensified the quiet but bruising battle for control of City Hall’s billions between Kenya’s two top lenders.

Transfer of the debt to the rival means Equity’s loan book is set to shrink by a margin of Sh3.3 billion that KCB is paying back immediately and blocks interest income estimated at Sh300 million it was to earn annually.

Equity does not stand to gain from early repayment of the loan because the banking industry has since agreed to drop the penalty they have been levying customers who settle their debt ahead of the agreed term.

Proposed terms of the takeover also show that KCB has demanded exclusivity as City Hall’s banker for revenue accounts, project account, ward development account and cash back facilities for Members of the County Assembly (MCAs).

KCB has asked City Hall for an undertaking to remit all receivables through the bank and for exclusive banking rights as one of the conditions set out in a document signed by its chief executive Joshua Oigara.

Kenya’s biggest and most profitable bank also wants the Evans Kidero-led county government to facilitate its establishment of a branch at City Hall before approving the loan – a move that would position it close to Equity Bank’s branch that opened in the same location as part of the original loan agreement.

Nairobi county executive in charge of finance Gregory Mwakanongo said Equity would be allowed to keep its premises as per the lease agreement.

The Nairobi county government said it had sought new financiers to help relieve it of the heavy loan servicing burden it has been carrying after Equity increased the interest rate to 18.5 per cent from the initial offer of 10 per cent in 2011.

The loan is repayable every three months at a monthly rate of Sh110 million.

READ: Nairobi County saddled with Sh44 billion debt

Under the new deal with KCB, City Hall will service the loan at the rate of Sh67.2 million a month besides getting a Sh700 million top-up.

KCB is expected to pocket Sh40 million upon signing the deal, being a negotiation fee charged at the rate of one per cent.

Equity insiders, however, said the lender has welcomed the takeover as City Hall had stopped servicing the loan and had transferred its revenue remittance to other banks.

City Hall did not service the loan last year, resulting in arrears of Sh978 million. Loan arrears impact bank profit performance as the lender is forced to make provisions that would cushion it in the event of a default.

Banking rules require that a lender sets aside an equal amount of money for a loan that goes for more than six months without a payment.

Equity Bank’s non-performing loans doubled to Sh8.1 billion in 2013 – pushing its loan loss provisions to Sh1.8 billion from Sh1.4 billion the previous year.

A source at the bank who cannot be named because he is not authorised to speak for the lender said City Hall had stopped funnelling its revenues to the Equity account, denying the bank the pool of funds from which it was to deduct the loan instalments.

This means that Equity had already lost the revenue income associated with the account.

KCB is, however, hoping to push the score beyond the City Hall account to rope in individual employees of the county government. KCB had a loan book of Sh228 billion at the end of 2013 compared to Equity’s Sh171 billion.

KCB and Equity have been fighting bruising business, customer recruitment and staff poaching battles since they overtook Barclays to become Kenya’s two banks three years ago.

KCB last year raided Equity’s executive suite for its chief financial officer, Collins Otiwu and managing director of Kenyan unit, Samuel Makome who headed Equity’s Tanzanian business.

Equity also lost Winnie Mbugua who KCB has hired as head of bancassurance among other mid-level managers.

Equity’s strength, however, remains its control of more than half of Kenya’s bankable population, giving its brand unrivalled visibility.

It is also the poster child for homegrown business success in Kenya, having converted to a bank in 2004 when KCB had built its nearly 100-year history and grown to become the biggest bank.

Besides recruiting millions of unbanked Kenyans into the financial services market, Equity has used partnerships with the government and State agencies to grow its clientele.

Last year’s collapse of the bank’s relationship with Narok county government for the Maasai Mara gate collections job and now the loss of Nairobi loan deal have, however, marked an anti-climax of that effort.

READ: Equity Bank loses court bid to get back Maasai Mara deal

Equity has been able to score big on the corporate front, having gained control of big accounts such as EABL, Nairobi Securities Exchange and CDSC.

The bank has extended multi-billion-shilling credit to firms like Rift Valley Railways and Kenya Power.

KCB has also exploited its long-standing relationship with the government to finance State organs but its poor cost management and legacy issues have in the past stopped it from dominating the profitability race.

The latest annual results show that KCB had to rely on its foreign subsidiaries to beat Equity, which outperformed it in the key Kenya market.