How KCB board can sell NBK acquisition to shareholders

KCB Group’s #ticker:KCB intention to acquire National Bank of Kenya (NBK) #ticker:NBK has been on the cards since 2015. In fact, I remember when they first floated the idea to the National Treasury in November 2015. But back then, the Treasury never warmed up to the idea and instead reportedly opted to engage a consultant on the matter.

The Treasury was still fixated with the idea of first merging NBK with Consolidated and Development banks — a transaction that has been in the pipeline for God knows how long.

Additionally, the Treasury and the National Social Security Fund (NSSF), both the majority owners of NBK (and KCB), were at loggerheads over the manner in which some 1,135,000,000 non-cumulative, participative, convertible and redeemable preference shares they held in NBK were to be converted into ordinary shares.

Street chatter had it that the Treasury had always preferred a 1:1 conversion, a formula which, if actualised, would reduce NSSF to an inferior position. It appears both parties amicably settled for the 1:1 conversion.

But with the transaction visibly headed for consummation, focus now shifts on KCB shareholders, who are much diverse in terms of holdings and opinion. And so the question is how best does KCB board sell this transaction to its shareholders? There are four viewpoints.

First, NBK’s strong public sector franchise will be a valuable addition to KCB’s own liability strategy, especially the domiciliation of public sector related liabilities. For instance, last year, NBK collected slightly over Sh100 billion in taxes, making it one of the top five largest collectors.

Combined, KCB and NBK would become the largest collection platform, which would increase the stickiness of the floating component (usually, banks have a sweeping arrangement with the Kenya Revenue Authority of T+2 ).

Secondly, asset acquisition, in itself, can be a growth story. I note that since 2016, which coincides with the operationalisation of the Banking (Amendment) Act, 2016, KCB’s annual asset growth rate has trailed industry growth levels. For instance, in 2018, while industry growth came in at 12 percent, KCB recorded a 10 percent growth. This calls for and supports the case for an acquisition-driven growth story.

Broadly, the issue of NBK’s poor asset quality is overplayed and I do not believe that it should be a valuation issue, for the simple reason that loan non-performance is system-wide. In fact, show me a bank with a healthy loan book.

Thirdly, there is, in my assessment, minimal (or no) capital implications and shareholders wouldn’t be asked to put in more equity.

Indeed, if KCB onboards all of NBK’s existing risk-weighted assets, its capital adequacy would still be within comfortable levels, both for business and prudential purposes.

Finally, this acquisition, if consummated, and coming hot on the heels of buying of un-scorched assets from the defunct Imperial Bank, designates KCB as a resolution vehicle.

In effect, the door hasn’t been shut for more future distressed acquisitions. That designation comes with certain benefits to shareholders-top of the list being the fact that KCB can acquire an asset at no premium.

For instance, the proposed NBK acquisition price is almost at its book value. Additionally, it entrenches an already strong franchise. However, shareholders’ main concern should gravitate around utilisation. Indeed, utilisation levels will dictate the extent to which shareholder value will be enhanced out of the assets.