Mauritian lender, SBM Holdings, booked a bargain purchase gain of Sh3.82 billion in a deal that saw the Central Bank of Kenya (CBK) allow it to carve out certain assets and liabilities from the collapsed Chase Bank Kenya.
A bargain purchase occurs when a firm is bought out at a lower value than its fair market value.
This type of transaction is common when businesses are sold due to a crisis.
“The estimation of fair values makes use of observable and non-observable inputs and involves a high level of estimation and uncertainty.
This exercise of purchase price allocation resulted in a bargain purchase gain of Mauritian rupees (MUR) 1,313 million,” SBM disclosed in its latest annual report for the year ending December 2018.
This is an equivalent of Sh3.82 billion and means that the State-owned bank made a gain out of the transaction even as investors who bought corporate bonds worth Sh4.8 billion in Chase Bank were left out.
The Chase Bank buyout deal was completed on August 18 last year with SBM only paying MUR162,158 (Sh471,335) as cash consideration.
SBM entered the Kenyan market in May 2017 after it acquired Fidelity Commercial Bank for a Sh100 cash consideration.
SBM says that the purchase gain in the Chase deal was subjected to deferred tax of MUR 356 million (Sh1 billion) on the basis of preparation of consolidated financial statements in accordance with International Financial Reporting Standards (IFRS).
It therefore booked a net gain of MUR 958 million (Sh2.78 billion), which was included in the books of account under ‘other operating income’ segment.
The group is already reaping from the Chase Bank deal, according to disclosures for the less than five months it has operated as a consolidated business.
“For the period from 18 August 2018 to 31 December 2018, the newly acquired assets of Chase contributed a net interest income of MUR 428 million (Sh1.24 billion) and profit before tax of MUR 112 million (Sh325 million) to the group's results,” SBM states.
This net interest income from the acquired Chase is equivalent to 7.32 percent of SBM group’s Sh16.99 billion net interest income while the gross profit is 6.9 percent of its before tax profit of Sh4.71 billion.
The good performance saw the Kenyan unit - SBM Kenya - lend out Sh4.7 billion as a short-term placement with SBM Bank Mauritius as disclosed in the third quarter of trading ended September last year.
The Kenyan unit posted Sh1.32 billion net profit at the end of 2018, a significant improvement from the Sh330 million posted in the previous year. Net interest income grew 6.6 times to Sh1.1 billion.
During the Chase Bank deal, SBM valued the total assets acquired at Sh69.59 billion, with property, plant and equipment assigned a fair value of Sh1.25 billion. Total liabilities were valued at Sh66.68 billion while deposits from non-bank customers were Sh56.9 billion.
Taking over the carved out assets and liabilities of Chase enabled SBM to consolidate its banking business in the Kenyan market to become a strong tier II bank with increased market share.
The process of completing the Chase deal involved identifying and estimating the fair value of all assets and liabilities assured and allocating the purchase price to their respective fair values.
Against the Sh3.8 billion gain, SBM only incurred acquisition-related costs of MUR 38.9 million (Sh113 million) on travel, professional fees and due diligence costs.
As part of the deal, SBM also acquired for free Sh21.34 billion written off loans that were largely unsecured or characterised by inadequate credit or security documentation.
“As required by IFRS 3 Business combination, this portfolio was therefore, recognised at nil fair value at the acquisition,” says SBM.
Any recoveries from this written off portfolio could therefore hand it an additional gain.
There were also certain properties with a market value of MUR 2.51 billion (Sh7.31 billion) in which Chase had an interest, but could not be transferred to the group by the acquisition date.
As a result, the properties were recognised at fair value of nil in the carved out balance sheet.
The deal also saw SBM take over the Islamic portfolio with the carrying value of MUR 1.09 billion (Sh3.179 billion).
However, it says that it is in the process of disposing of these loans.