Cytonn Report
On Friday CBK released a statement on the status of Imperial Bank’s expected reopening. The statement seemed to be blaming IBL’s shareholders for the delay in reopening the bank. Regardless of whether the current shareholders are culpable of any offences or not, the events that led to the current closure of IBL happened under their watch. Consequently, it would not be prudent for past shareholders to lead the resolution of the situation, especially given that a credible resolution will most likely entail wiping out the previous shareholders’ stake and bringing in fresh capital and fresh management. Banking is a game of capital, confidence, and prudent management. Any delay in reopening the bank, continues to erode the little confidence left in the IBL brand, in turn reducing the likelihood of reopening. If past shareholders want to be part of recapitalizing the bank, they should bring the capital in the context of a broader recapitalization plan that is not just dependant on past shareholders. A recapitalization driven by past shareholders comes with various past baggage and vested interests and will take forever to materialize, if at all. For example, and this is just an example, any smart shareholder cannot put in rescue capital unless there was assurance against any possible prosecution. So of course it makes sense that a term sheet for any capitalization will be bogged down with all manner of non-financial deal terms. It is easier to get capital from the new shareholders, and failure to attract capital from new shareholders will be a clear and quick indicator that the bank cannot be saved hence the next steps would need to be explored. Cytonn Investment thoughts are that CBK should have put the bank under receivership but not closed it, closure only increased panic and further damaged the IBL brand. The market understands clearly why the bank had to go under receivership, it is not clear why it had to be closed since when you close a banking institution or any financial institution, it becomes incredibly harder to operate it. Secondly, having closed IBL, CBK took too long to explain the reasons for closure, further catalysing panic into other smaller banks yet the issues at IBL were not systemic. The long silence before explanation caused the market to speculate on systemic risks. The governor has since held a press conference and explained the issues and the fear of a systemic risk has been contained given the reports of net positive flows into small banks, a big positive for the market. However, it is now taking too long to reopen the bank and the proposed plan, given its significant dependence on past shareholders, does not appear credible. Our view is that CBK should prequalify a few potential bank investors and operators, run a tight one-week auction process, choose the bid that puts the most credible recovery plan on the table and firmly stand behind the winning bid. It is our firm view that there are only 3 scenarios: (i) the aforementioned tight schedule auctioned sale, but it could also be a negotiated sale to a preferred buyer, (ii) a liquidation, or (iii) a full government bailout. The patched up recovery plan that involves hoping past shareholders will recapitalize or recovering fraudulent loans cannot be banked on because CBK does not have the power to force past shareholders to recapitalize and recovery of loans will involve court proceedings. The plan needs to be rethought quickly.
