The Mauritian lender SBM Holdings has written off Sh1.2 billion in goodwill following its 2017 acquisition of Fidelity Bank through its subsidiary -- SBM Bank Kenya.
The firm said in its annual report for 2018 that the decision was taken because the unit is yet to become profitable.
“In May 2017, the goodwill which arose on the acquisition of SBM Bank (Kenya) Limited was MUR 418 million (Sh1.21 billion). The subsidiary is operating at a loss since acquisition,” said the lender.
“Management determined that there are indicators that the recoverable amount of the cash generating unit (CGU) to which goodwill is assigned might have been less than its carrying amount.”
The decision is despite the Kenyan unit having posted Sh1.32 billion net profit at the end of 2018, a significant improvement from Sh330 million loss posted in the previous year. Net interest income grew 6.6 times to Sh1.1 billion.
Goodwill is an intangible asset and usually arises when one company purchases another and recognises the expected value to be derived from the acquired company’s brand name, solid customer base or good customer relations.
After initial recognition, goodwill is measured at cost less any accumulated losses.
Discounted cash flows
In writing off the goodwill in the Kenyan unit, SBM Bank management says it considered discounted cash flows since acquisition.
“Based on the results of the impairment assessment, management determined that the estimated fair value of the CGU is nil at the reporting date,” it said.
SBM entered Kenya in May 2017 by acquiring Fidelity Bank at Sh100 cash consideration, followed by Sh2 billion ($20 million) capital injection in the bank.
It followed it up with August 18 last year’s deal that saw it acquire majority of Chase Bank assets at cash consideration of Sh471,335. The group then committed an additional recapitalisation of $60 million (Sh6 billion).
SBM booked a bargain purchase gain of Sh3.82 billion in the Chase Bank deal, meaning that it got the assets at a cost that is less than what the same assets could have fetched when sold at open market.
The group is already reaping from the deal, according to the disclosures for the under-five months of 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 discloses.
This net interest income from the acquired Chase Bank is equivalent to 7.32 per cent of SBM group’s Sh16.99 billion net interest income while the gross profit is 6.9 per cent of the group’s before tax profit of Sh4.71 billion.