KCB had initially estimated a capital injection of up to Sh7.5 billion, with the actual figure pegged on the success level of NBK bad debt recovery.
The money will also shore up NBK’s hitherto inadequate capitalisation and fund its growth during the first two years when it will operate independently before merging with the country’s biggest bank by assets.
Last year, NBK’s capital slipped below the statutory Sh1 billion and remained so throughout quarter three of 2019 but the bank will now be compliant with central bank regulations after the injection of the new money.
KCB Group has made a Sh5 billion capital injection into National Bank of Kenya (NBK), representing the largest such recapitalisation in Kenya’s banking history.
The fresh funding for the newly-acquired subsidiary is expected to improve the liquidity of the struggling lender and allow it to mobilise deposits and extend more loans.
The money will also shore up NBK’s hitherto inadequate capitalisation and fund its growth during the first two years when it will operate independently before merging with the country’s biggest bank by assets.
Last year, NBK’s capital slipped below the statutory Sh1 billion and remained so throughout quarter three of 2019 but the bank will now be compliant with central bank regulations after the injection of the new money.
Previous large industry deals have involved purchases of stakes with the most notable one being the recent Sh5.1 billion Africinvest and Catalyst Principal Partners’ payment for a 24 percent stake in Prime Bank.
KCB share rose 2.82 percent during yesterday’s trading at the Nairobi Securities Exchange to Sh54.75 but NBK remained flat at Sh4.12 per share.
NBK’s bad debts have over the years piled up to nearly half of the bank’s loan book of Sh60.4 billion, pushing the lender into losses and eating into its capital reserves.
The bank’s capital-to-deposit ratio fell from 17.4 percent to 2.1 percent between 2012 and 2018 while bad loans grew from Sh2.2 billion to Sh31.46 billion in a similar period.
However, analysts said the capital injection will not affect the performance or dividends paid out by KCB, which has earnings that are strong enough to absorb the investment.
“The Sh5 billion will barely move the needle at KCB. This is just 0.006 percent of their Sh765 billion balance sheet,” said Martin Kirimi, the banking research analyst at Standard Investment Bank. “KCB made a 20.5 percent jump in operating profits in the third quarter last year. It has enough reserves.”
Patrick Mumu, a research analyst at Genghis Capital, also said the allocation of one subsidiary to the other would not have an impact on the group.
“KCB is providing a capital buffer. Remember, NBK has been operating below required capital. However, it will not have an impact on the group as this is a related party transaction between the subsidiaries of KCB Group,” Mr Mumu said. “The listed entity is KCB Group and not the bank, so the share price will not be affected since this was already priced in as an interparty activity among the group subsidiaries.”
The funds are set to see NBK comply with capital adequacy requirements after almost five years of breach of regulatory capital requirements.
KCB’s move to strengthen the lender’s assets was set to expand NBK’s business under an ongoing productive debt recovery plan expected to have hit Sh7 billion by end of 2019. As at March 2019, the bank held a non-performing loan book of Sh27 billion, representing a growing dud assets ratio of over 50 percent.
NBK chief executive Paul Russo in November said the lender was pursuing the top 30 debtors who owed it about Sh22 billion.
The gross non-performing loans are projected to drop to 20 percent this year and 10 percent by 2023, as the bank will continue to operate as a stand-alone after KCB dropped an earlier plan of integrating the operations of the two banks within two years after last September’s merger.
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