KCB risked losing Ksh1 billion it lent a customer in the form of trade credit guaranteed by Chase Bank, according to Business Daily. It quotes an investment bank report that offers new insights into why Kenya’s biggest bank entered the takeover race for the troubled lender.
The report indicates that KCB had disbursed the money through letters of credit (normally given to businesspeople as trade loans) to a customer with guarantees from Chase Bank.
While 60 per cent of the exposure (Sh600 million) matured and was paid two days after the bank went into receivership, KCB is said to have been closely watching whether the customer would pay the remaining Sh400 million. Failure to do so would force KCB to make loan loss provisions that would eat deeply into its profits.
“We had Sh1 billion in off-balance-sheet exposure to Chase via letters of credit (LC) but 60 per cent of this matured two days after the bank was put in receivership, with no call on the guarantees,” Renaissance Capital, an investment bank, said quoting a senior KCB manager.
Commercial banks are usually exposed to each other in the form of such guarantees, in the interbank markets, horizontal repos, cheques, deposits, among other things. When the exposures are big and extend over many institutions, they pose a systemic risk to the entire industry. Any off-balance-sheet exposure means the risk is not factored in publicly available accounts.
“It [KCB] has Sh400 million in outstanding off-balance-sheet exposures, which management is watching closely, as a call on this will depend on Chase customer first defaulting followed by Chase Bank’s own failure to satisfy the cash call under the LC guarantee requirements,” said Rencap.
KCB management had not responded to our questions by the time of going to press. Recap said the KCB management remained cautious about the Chase Bank acquisition, insisting it will not commit any money until it completes due diligence. Any liquidity needed in the near term will come from either the CBK or Chase’s internal funds.
“It is important to highlight that KCB has simply been appointed as manager and none of its funds or capital will be committed to Chase during this period. Any liquidity requirements of Chase will be sourced from Chase’s internal funds or from CBK funds,” said Rencap.
KCB is expected to act as the Chase Bank manager as it conducts due diligence alongside the planned reopening of the troubled lender next Wednesday. KCB expects to be paid a management fee, which will presumably cease on the day it firms up the acquisition.
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