Treasury’s failed promise for cash hits Consolidated Bank

Consolidated Bank acting MD Japheth Kisilu. Photo/FILE  NATION MEDIA GROUP

By George Ngigi

In Summary

• The bank’s shareholder funds, also called the core capital, have dropped to 8.7 per cent when measured as a ratio of total deposits, which is just 0.7 per cent above the Central Bank of Kenya’s bottom limit
• The government-owned bank reported a 74.2 per cent drop in profit for the nine months to September, which also showed a drop in customer deposits in a reflection of the lender’s struggle to remain within the regulator’s statutory limits
• In the three months to September the bank’s deposits declined by Sh400 million, helping its core capital to deposits ratio improve from 8.4 per cent to 8.7 per cent

Consolidated Bank’s headroom for taking new customer deposits has shrunk to within one percentage point of the legally allowed limit, restricting the lender’s ability to grow its loans book even as a promise for capital injection by the Treasury remains outstanding.

The bank’s shareholder funds, also called the core capital, have dropped to 8.7 per cent when measured as a ratio of total deposits, which is just 0.7 per cent above the Central Bank of Kenya’s bottom limit.

The government-owned bank reported a 74.2 per cent drop in profit for the nine months to September, which also showed a drop in customer deposits in a reflection of the lender’s struggle to remain within the regulator’s statutory limits.

In the three months to September the bank’s deposits declined by Sh400 million, helping its core capital to deposits ratio improve from 8.4 per cent to 8.7 per cent.

Consolidated Bank’s pleas to the government for capital injection have gone unanswered for the past two years, putting brakes on its growth plans.

The bank, categorised as a small-sized lender as per CBK classifications, has loaned out 80 per cent of its deposits, which gives it little headroom for growing its loan book in the absence of new shareholder funds.

Attempts to get comments from the bank’s management were not successful as the acting managing director, Japheth Kisilu, was said to be on leave.

Inadequate capital has seen the bank’s profit drop three years in a row. The government had agreed to inject Sh500 million in the lender last year, but the sum was never disbursed.

To cover its capital deficit, Consolidated Bank issued a Sh2 billion corporate bond with an equal tranche held off for a later date. The first tranche raised Sh1.7 billion.

“The proceeds will be used for onward lending to clients and to boost tier II capital of the bank,” it said in the information memorandum for issue of the first tranche of the corporate bond last year.

The money helped to improve its total capital ratios to risk weighted assets, which currently stand at 13.5 per cent, 1.5 percentage points above the regulatory minimum.

“They need to change their risk weighted assets or inject new capital,” said Standard Investment Bank head of research Francis Mwangi.

Banks can change their risk weighted assets by reinvesting money collected from loan repayments to less risky options such as government securities.

The scenario is expected to worsen for Consolidated Bank next year when new capital requirement guidelines come to effect in June, which will force it to inject fresh capital. The government did not allocate funds for the lender this financial year.

Consolidated Bank completed a turnaround from loss making in 2010 when it cleared its accumulated losses without capital input from the government, but its growth has been slow without financial muscle.