NBK turnaround is work in progress

The transformation going on at the National Bank of Kenya is an interesting study on how to execute bank turnarounds. We must not forget that several past attempts to change the fortunes of the bank through expensive State-funded bailouts yielded zilch.

So, when I met the managing director of the bank, Paul Russo, recently, we agreed we would restrict our conversation to discussing tangible action by the new management: what, exactly, had been implemented to improve the fortunes of the bank and whether the bank was indeed on a recovery path.

I was not there to listen to pipe dreams and business school jargon on how to implement bank turnarounds. As you examine the results of the bank’s second year under the ownership of KCB #ticker:KCB even the most strident of cynics will admit that the finances of the bank are on the mend.

My reading is that in terms of the tangible measures, most of the action has been in the area of managing non-performing loans. In retrospect, it seems to me that the reason past attempts to revive the bank did not succeed is that management continued to make unprofitable loans.

The bank would receive billions of shillings in State-funded bailouts only to continue to make loans to unreliable borrowers. Managing the bad book, reining in in bad lending practices, and stopping the making of risky new loans were difficult because of the symbiotic relationships that existed between insiders and favoured customers.

Russo explained that in order to kick off an aggressive loan recovery process, the new management tasked PricewaterhouseCoopers with digging up data on the loans and pledged securities to inform an independent assessment of the non-performing loan problem.

The next stage was to execute a deft disruption of the relationships and the cronyism that had bedevilled loan approval processes in the bank for a long time and was hamstringing aggressive recovery.

In a matter of months, the new management had moved to overhaul its panel of lawyers, dropping those who had for a long time been representing the bank in cases involving the biggest problem borrowers.

A key part of this strategy has been the reopening of the written-off book through aggressive and ruthless tracking of problem borrowers in the old list of defaulters.

But where is the evidence of the green shoots of recovery on NBK’s non-performing loan book? According to audited accounts the non-performing loans have come down from a level of 50 percent pre-takeover to 39 percent.

The second lesson we have learnt from the NBK turnaround process is creative ways in timing of pumping in fresh capital. KCB injected Sh5 billion into the bank without which capital regulatory ratios would have been worse.

When KCB moved in, the new management found a situation where liquidity had deteriorated to the levels where the bank was struggling to keep these key customers happy.

Maintaining credit lines with domestic and domestic correspondents was a huge problem and credible borrowers were being forced to abandon projects midway because the bank could not disburse approved loans on time.

There was a huge backlog in critical IT investment. In the circumstances, the Sh5 billion capital injection by KCB made a huge difference because it made it possible for the bank to scale up service and to restore the confidence of its key customers and correspondent banks. KCB will be making another capital injection of Sh3 billion this month.

The third important lesson form the turnaround is better and more transparent governance. The board of the bank was reconstituted to incorporate directors of the KCB group who also sit and chair some of the key committees of the board.

Still, I maintain that the NBK turnaround is a work in progress. 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.