KCB faces big legacy debt head-on to shore up liquidity

According to Group CEO Paul Russo, hard decisions had to be made especially on legacy debt

In Summary
  • The lender has embarked on a rapid debt collection plan targeting close to Sh120 billion.
  • Its NPLs hit 17.4% in first six month of the year
KCB Bank Group Chief Executive Officer Paul Russo
KCB Bank Group Chief Executive Officer Paul Russo

Kenya's top bank in terms of asset value, KCB Group is on aggressive book cleaning exercise started last June to stabilise its liquidity.

Although the lender  recorded a 54 per cent growth in total assets to Sh1.86 trillion in the first half of the year ending June 30, eclipsing Equity Bank as the largest lender in East Africa, its profitability has ben slightly dented by high loan provisions and huge non performing legacy debt. 

The lender reported a 20 per cent net profit drop in the six months ended June, weighed down by staff restructuring costs and a near tripling of provisioning for loan defaults.

Profit after tax  for the period under  review retreated to Sh15.5 billion from Sh19.5 billion posted same period last year as the ramp-up in provisions overshadowed earnings from the mainstay business, where revenue grew by 22.2 per cent to Sh73.1 billion.

Furthermore, its operating expenses increased by 60 per cent to Sh50.61 billion as loan loss provisioning increased jumped 2.4 times to Sh10.2 billion from Sh4.32 billion.

Apart from the high loan loss provisioning, the Group undertook a staff restructuring programme worth Sh2.5 billion targeting 400 employees across its subsidiaries and a 79.8 per cent jump in other operating expenses to Sh17.1 billion.

In August KCB Group CEO Paul Russo revealed  that KCB Kenya took a bold move to downgrade Sh34 billion and write off another Sh10 billion.

"Most of the written off loans have been in our books for more than five years. This is just part of the promise that I made, to take the tough calls.All maters constant, The Group's top line is above board,'' Russo said. 

The lender has taken a hit from a number of collapsed private and state firms including Mumias Sugar, Uchumi and Nakumatt Supermarket. 

This has forced the bank to put several entities into receivership with the hope of reviving them to recoup debt owed.

In 2019 for instance, KCB Group put Mumias Sugar into receivership to recover Sh545 million. The sugar producer's  loans stood at Sh12.5 billion at the end of June 2018.

Apart from KCB, it owed Ecobank Kenya (Sh2 billion), French development finance institution Proparco (Sh1.9 billion) and Commercial Bank of Africa (Sh401 million).

The bank has defended its move to place several firms in receivership, with Russo explaining that it is always a long journey before placing a borrower under receivership.

"Even if when we do, our purpose is always to ensure business continuity by seeking reputable managers to guide in turning  them around,'' Russo said.

The bank is counting on a vigorous debt collection exercise to solidify its liquidity, with Russo revealing that at least Sh45 billion has so far been collected.

''Someone had to make a tough call. As a leader, i made a conscious decision to take a hit now to guarantee solid liquidity going forward and ensure maximum credibility,'' Russo said. 

In February, the bank set up a special team reporting directly to chief executive to recover billions of shillings in bad loans.

Furthermore, some of the group's subsidiaries have suffered huge losses in  legacy legal charges, particularly the National Bank of Kenya (NBK).

For instance, NBK sank into Sh3.84 billion net loss for the half year ended June on the back of a Sh2.3 billion payout to a former Member of Parliament as compensation for auctioning his sisal farm about 16 years ago.

Besides, KCB has so far invested an estimated Sh8.45 billion in NBK to bring it into compliance with capital requirements.

This includes a Sh5 billion equity financing when buying the bank out in 2019 and a Sh3.45 billion loan later converted to equity.

Apart from high NPLs, legal fees and tight liquidity crisis in Q1, the lender continues with its expansion plan, growing its assets to Sh1.8 trillion in the first half of the year.

Shareholders’ funds increased by 20per cent to Sh218 billion from the increase in profits for the period.

KCB Group maintained healthy Capital ratios complying with regulatory limits. Core capital as a proportion of total risk-weighted assets stands at 15 per cent against the statutory minimum of 10.5 per cent

The total capital-to-risk-weighted assets ratio was at 18.4 per cent against a regulatory minimum of 14.5 per cent.

All banking subsidiaries operating outside Kenya were compliant with their respective regulatory capital requirements.

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