Don’t let vested interests derail our best chance at saving NBK

We predicted in this column that private parties with vested interests in the troubled National Bank of Kenya would come out strongly to oppose the proposal to merge it with Kenya Commercial Bank.

Yet such a merger represents our best bet at closing the worst chapter in the history of government investments in the banking sector.

For over 30 years, we’ve been running around in circles, throwing hundreds of taxpayer millions at this problem without success.

The NBK does not have adequate capital to support its business and is unable to meet Central Bank of Kenya’s prudential capital limits, thus putting its banking licence at risk.

It can’t meet prudential ratios — its core capital is significantly below prudential guidelines.

The bank’s shares have plummeted from a high of Sh31.4 as of January 2014 to the current Sh3.7, a massive fall in shareholder wealth.

PRIVATISATION

Critics of the proposed merger argue that the transaction should have been spearheaded by the Privatisation Commission (PIC).

Yet past attempts by PIC to privatise NBK have failed, sabotaged by vested interests — mainly influential and well-connected debtors of the bank and powerful individuals with an interest in maintaining the status quo.

We forget that NBK was on the PIC’s privatisation programme that was approved by the Cabinet as far back as December 2008.

Then, the PIC spent hundreds of millions of shillings in paying consultants to advise it on the privatisation of NBK.

The critics have also cited the controversy surrounding the preference shares in NBK’s share register and argued that the formula proposed by the merger transaction on converting them into ordinary shares was biased against small shareholders.

Yet these are issues which have been — through expert advice from independent consultants — competently handled, dealt with and closed in the past.

AUDIT

Way back in May 2010, the government contracted the financial advisory services group PricewaterhouseCoopers (PwC) to study and advise on the preference issue matter.

The legal firm Coulson Harney was also roped in to offer independent advice on the correct treatment of the preference shares.

It was these independent experts who came up with the conversion formula of 1:1, which the critics are now howling about.

In July 2014, the National Treasury prepared a Cabinet paper on the redemption of all the preference shares that also adopted the 1:1 conversion formula.

We have thrown too much money at the NBK problem for just too long but without success. Indeed, we started doing it without success way back in 1998.

Following a run on the bank in 1998, the government pumped in a Sh4.5 billion in the form of a shareholder loan to the bank.

Subsequently, in 2003, a decision was made to convert government loans and part of the deposits of the National Social Security Fund that were held in the bank to preference shares to qualify for core capital and shore up the bank’s capital base.

But the bank’s financial situation kept deteriorating.

MERGER

In yet another rescue operation, in 2006, the government pumped a whopping Sh21 billion into the bank in the form of Treasury bonds. That did not help.

I hope this NBK/KCB merger will be consummated within this calendar year. For, when you look at it critically, it’s a case where common shareholders in both banks are proposing to consolidate and rationalise their stakes.

The Treasury and the NSSF are dominant shareholders in these two institutions.

With the shareholding of NBK trading at its lowest, and at a steep discount on the book value, the proposed merger could see the government and the NSSF start realising returns on their investments.

More significantly, the merger would serve as a strong signal that the remaining distressed state-owned banks will no longer be artificially kept alive even after they have long outlived their usefulness.

RECEIVERSHIP

Critics have argued that NBK could contaminate KCB’s books with its problems. Yet, in terms of balance sheet size, KCB is nearly six times NBK, making the risk of contamination almost non-existent.

What if the vested interests against the merger manage to lobby Parliament to block the transaction?

I’m not afraid of that because the Treasury has a nuclear option it can deploy against them: get the Kenya Deposit and Insurance Corporation put the bank under receivership.

We need a bigger and stronger capitalised bank with capacity to finance large infrastructure projects, and here we have a unique opportunity to create a Sh1 trillion balance sheet bank in the next four years.

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