Closer look at Chase Bank results exposes industry’s underbelly

 

Chase Bank depositors outside a Nairobi branch after the lender was put under receivership by the CBK on April 7, 2016. PHOTO | FILE 

In Summary

• What did the auditor discover that was different? I guessed that the answer was sitting in the other operating expenses line as it had moved by a similar Sh200 million, from Sh2.3 billion in chameleon accounts to Sh2.5 billion in gospel truth accounts.
• Gross NPLs moved from Sh3.1 billion in 2014 to Sh11.3 billion in 2015, an increase of Sh8.2 billion and a figure quite close to the movement in the other assets line stated above. Insider loans grew from Sh1.3 billion to Sh10.5 billion in 2015, an increase of Sh9.2 billion.

Last week, I started reflecting about the key issues that were driving the current turmoil in the banking sector, and concluded that both the regulator’s supervision unit as well as the guilty bank boards were culpable.

Today, I want to take a closer look at the financials of one of those banks, Chase Bank, as much was written last week regarding the disputed audited financials that gave rise to the run it experienced that led to its closure.

I began by pulling up what they published on their website as the audited financials for the year 2014. I then looked at what was published in black and white, tucked into the back end, classified section of the Standard newspaper on Wednesday, April 6. I will refer to these as the gospel truth accounts.

This was a good six days after a full set of colour financials had been printed in the Daily Nation newspaper on March 31, which was the last date that a regulated financial institution in Kenya could publish their full year audited accounts.

A few items clearly stood out as having been restated in the 2014 audited accounts. What do I mean?
The 2014 audited accounts that were published in 2015 did not have a qualified opinion — I will refer to these as the chameleon accounts.
However, when the gospel truth 2015 accounts were published on April 6, 2016, a few items in the 2014 numbers had been restated, which begs the question: what caused the chameleonic changes?

Let’s begin at the top. In the published 2014 chameleon accounts, customer loans had been booked at Sh53.8 billion.

In the gospel truth accounts, customer loans for the same 2014 financial year were now reflected as Sh64.4 billion, a difference of Sh10.6 billion.

READ: Detectives to question Deloitte, CBK officials on bank fraud

Evidently in the 2015 audit, the auditors decided to treat certain assets differently, and found Sh10.6 billion worth of new loans in the 2014 financial year, which had previously not been picked up in the 2014 audit that had been passed.

But a balance sheet doesn’t just change dramatically; the movements on one line have to balance with movements on another. So I dug a little deeper and found the offending items. In the 2014 chameleon accounts, “other assets” were booked at Sh11.9 billion.

This is where the Islamic financing assets were said to have been parked. In a sudden change of heart — likely caused by missing documentation to convince the auditors that the other assets were indeed booked appropriately as Islamic financing products — the 2014 numbers restated “other assets” as Sh3.4 billion, suddenly yielding up Sh8.5 billion as the corresponding surprise entry in loans into the gospel truth accounts.

But that means that I needed to find Sh2.1 billion in order to balance the figure of Sh10.6 billion in new loans that appeared in gospel truth accounts.

The only other significant movement that I found was that 2014 chameleon accounts showed that cash held at the Central Bank of Kenya was Sh7,105,986 by December 31, 2014. The gospel truth accounts reflected a different position of Sh4,953,180 by the same December 31, 2014, a difference of Sh2.1 billion.

Now that is a remarkably curious finding to which I have no answer. How does the same auditor convert funds that are reflected as held at the Central Bank in one year into customer loans the following year?
I bundled on some roller skates and slid into the profit and loss statement, as this was becoming an interesting ride. The 2014 chameleon accounts reflect a total staff cost figure of Sh1.9 billion while gospel truth accounts restate this amount to Sh1.7 billion a difference of Sh200 million. The auditor, come the 2015 review, clearly did not accept some staff costs.

Staff costs