Crane Bank acquisition: What next for DFCU?

Kampala- dfcu Bank managed to pull-off the second largest bank acquisition in Uganda since Standard Bank of South Africa bought Uganda Commercial Bank (UCB), now Stanbic Bank, in 2000.

dfcu was on Friday confirmed to have acquired the entire stake in what was Uganda’s fourth largest bank by assets, Crane Bank.
With assets of about Shs1.8 trillion by end of 2015, Crane Bank was targeting to become Uganda’s largest bank in the next five years.

On the other hand, dfcu was placed as the sixth largest bank in Uganda with assets of about Shs1.6 trillion by end of June 2016.

In essence, dfcu with that acquisition may have created Uganda’s second largest bank with assets of about Shs3.5 trillion. Only Stanbic Bank Uganda has more assets.

Through its liquid shareholders, Rabobank of the Netherlands and Norfinance of Norway, dfcu was able to pull this off after in excess of about $40m was provided by both parties.

Our sources reveal that Bank of Uganda (BoU) zeroed down on dfcu after fending off competition from about 13 other financial institutions.

The Sunday Monitor did report back in December last year that four of those 13 financial institutions had expressed interest. By the second week of January 2017, dfcu had submitted a bid and it was considered to be the best.

“We were looking for many things, the financial status of this acquirer; we looked at who was behind this acquirer. Are they able to put in the capital? Do they have strong shareholders?

We were looking for shareholders of reputable character and dfcu emerged the winner,” Ms Justine Bagyenda, the executive director of research at BoU, says.

Crane Bank became significantly attractive to dfcu after BoU stepped in and started a process of cleaning the bank of non-performing loans (NPLs) and any governance issues.

It is understood that during the negotiations, more toxic assets had been ring-fenced to ensure that dfcu inherits a clean bank.

On January 25, the dfcu board approved the transaction to acquire the assets and liabilities of Crane Bank for an undisclosed fee.

However, more importantly, was the commitment – in writing – that there will be additional equity investment in the bank.

“Further supplemental actions to give effect to this integration will continue to be implemented by both the bank and company, including additional equity injection by the company into the bank,” a statement issued by the dfcu board of directors reads.

For more than a month, Crane Bank (under BoU management) had secured the services of Knight Frank, a property valuation and management company to start the process of accepting bids to sell properties of defaulting Crane Bank customers.

Some of the properties that had been put up on sale belong to Vaya Property Development, Horyal Investments and Khadhar Investments, among others.

Crane Bank had the highest non-performing loan portfolio in the banking sector, with at least 20 per cent of their total loans going bad by September 2016, according to BoU.

When BoU took over the management of Crane Bank on October 20, last year, it had been identified that the NPL portfolio had eroded the bank capital to below the requirements of the regulator. dfcu’s board is riding on the back of the fact that the mess within Crane Bank’s portfolio has been cleaned up and there are no toxic assets being taken over.

Ms Bagyenda said during the period in which they had taken over the bank, they recovered Shs30b of the non-performing loans. However, the damage was too big and as such the bank was still undercapitalised.

Previous bank takeovers in Uganda have been mixed, however, turbulence is experienced whenever it involves some of the largest banks.

It took almost three years for Barclays to fully integrate the assets and liabilities of Nile Bank in 2006. Equity Bank struggled to integrate the assets and liabilities of Uganda Microfinance Limited (UML) in 2008. More significantly is that these takeovers come with job losses and integration of branches.

“The transaction of the Crane Bank acquisition has been done in a transparent manner and I believe there is going to be stability during this time of integration,” Mr Juma Kisame, the managing director of dfcu Bank, told Sunday Monitor on Friday.

In creating the second largest bank in Uganda, there is a factor that some people are expected to lose their jobs as the bank integrates.

Crane Bank has about 900 employees, whereas dfcu has in excess of 600. In districts such as Mbarara, Mbale, Masaka, Mukono and Hoima, both banks already have branches.

Additionally, both banks had 45 branches across the country, even making the possibility of job cuts a reality. The decision-making process of integration and any redundancies is expected to happen in mid-February.

“Crane Bank was operating in places where dfcu is also found; so the challenge is now to decide on which branch should be shut-down and which one should be left,” Mr Richard Byarugaba, the National Social Security Fund (NSSF) managing director, said on Friday. NSSF owns 5.93 per cent of dfcu bank.
Crane Bank has been one of the go-to-banks by micro-enterprises and the real-estate sector.

dfcu’s target is mostly long-term credit facilities into areas of value addition, mortgages and micro-loans and operate more like a development bank and less like a commercial one.

Now they will integrate a bank that has been lending the highest to the real-estate sector, an entirely different culture approach. Some minority shareholders are unhappy with the transaction in that regard.

“The failed Crane Bank operated with low underwriting standards and sector concentration basically with an unknown credit quality of asset book- risky stuff setting up dfcu for a long firefighting episode. I wonder how we shall merge those two cultures and come out better,” Mr Andrew Muhimbise, a dfcu limited minority shareholder, says.

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