No sympathy for the banks despite pandemic heroism
Businesses and individuals, who had borrowed to finance their dreams and aspirations, are now relying heavily on the strength of the balance sheets of the very banks that made those dreams and aspirations a reality. PHOTO | SHUTTERSTOCK
There is no acknowledgement that the businesses and individuals, who had borrowed to finance their dreams and aspirations, are now relying heavily on the strength of the balance sheets of the very banks that made those dreams and aspirations a reality.
In 2001, I was part of the team in a bank that won the mandate to be the lead transaction adviser for Safaricom’s first foray into the debt capital markets.
The brand new mobile telephony company was looking to raise what at the time was an eye-watering Sh4 billion medium-term note to fund its capital expenditure programme for equipment that would help it grow its subscriber base.
The transaction was fraught with all the typical drama of a corporate finance deal at the time, from a reluctant credit approval chain that wanted to see guarantees from the more reliable Vodafone parent in order for the bank to underwrite the transaction to rambunctious book builders in the name of stockbrokers who were all jostling to be part of a landmark deal which needed the deep balance sheets of the few large institutional investors in Kenya at the time.
One particular stockbroker, whose ego was only dwarfed by the size of the Windsor knot on his necktie, talked a big talk and ended crawling a puny walk as he delivered only about 20 percent of what he had said his firm would raise.
As the team grappled with a looming transaction close and shaky potential investors, the quietest but most senior stockbroker delivered hundreds of millions of shillings without much flourish and the champagne was eventually unleashed, glasses raised to toast the success of a highly nerve-wracking assignment.
The team leader, my boss at the time, was John Ngumi who went on to stamp an indelible mark on the face of corporate finance within the region. As we closed the files on the transaction and the dust had settled on the myriad congratulatory emails up and down the bank’s international chain of approvers, John chuckled and told the team “Success has many fathers, but failure is an orphan.”
I remembered this very apt statement last week as the tier one banks began to publish their quarter three results in the media. On June 1, 2020, I wrote on this column that banks were the unglorified heroes in the pandemic period as they offered lifelines to thousands of businesses and individuals whose loan repayment capacity had been compromised by the economic effects of the lockdown and closure of industries such as hospitality and recreation.
I wrote that the loan restructuring in some cases and potential classification to doubtful in other cases would take a hit on the income statements which we would start to see in the coming months. The numbers that were published last week saw a double-digit drop in the profit after tax results for a number of the tier one banks, driven largely in part by the increase in loan loss provisions.
But here is the interesting thing. I didn’t see any social media chatter evincing concern for the toll that the pandemic was taking on bank profitability. No chatter from the usual group of politicians who spewed bile during the great interest rate capping debate in 2016 saying that banks needed to be tamed through a social experiment in the form of a reverse profit share via lower interest to borrowers.
No acknowledgement that the businesses and individuals, who had borrowed to finance their dreams and aspirations, were now relying heavily on the strength of the balance sheets of the very banks that made those dreams and aspirations a reality.
The banks are now facing significant strain not only on their profitability but, in some cases, a strain on their regulatory ratios particularly around capital as their retained earnings start to take a hit. Retained earnings, I hasten to add, that came about after years of profitable lending and have been maintained on the bank balance sheets to buttress the institutions during a crisis of the proportion that we are currently enduring.
The central bank is quite likely on the edge of its seat watching these financial results keenly and working overtime to ensure that the banks have the bench strength to withstand a sustained attack on their core capital, including putting dividend restrictions in the short to medium term. So I look back at my former boss’s words and paraphrase them thus in the current banking industry circumstances: success has many bashers but failure is indeed an orphan.
