As the clock of death ticks on Spire Bank, its owners, teachers of Kenya, have a few painful decisions to make.
Through their giant Mwalimu Sacco, teachers will need to pump in at least Sh4 billion to enable the bank meet its statutory obligations and put it on course to getting a strategic investor.
The other decision will be to cut it off and sell it, at a loss. But selling it in its current form will see teachers take a hit on their Sh2.4 billion investments, which will eat into their dividends. It will be a seven-year wait in futility.
Spire Bank's management see reviving the bank as the best option, before selling it, since finding bank buyers in the current environment is a herculean task.
But the management is counting on a fresh strategy, which banks on the education ecosystem to turn it around.
It is eyeing the education ecosystem to give it an edge in the business by targeting its more than 100,000 members through the sacco. But to succeed, it will need teachers, who own it, to be on the frontline in opening accounts and taking loans.
In a presentation to angry teachers, who want the bank sold as soon as possible, Spire Bank management notes that its business has experienced a deep capital diminution over the years, requiring significant recapitalisation.
"Non-compliance has made investors jittery complicating efforts to get back on track," Mr Brian Kilonzo, Spire Bank's acting managing director said in a presentation to teachers.
The tier-three bank says its declining asset base— from Sh3.3 billion in 2019 to Sh2.6 billion in 2020— is the major cause for its declining interest income compared to higher interest costs.
"(There is) inability to generate new assets due to funding constraint as net interest income is negative. Tight collections environment attributed to Covid-19 has disrupted recovery processes following closure of courts between March 2020 and June 2020, hence higher impairments," Mr Kilonzo explained.
The bank is also blaming its woos on the deterioration of Kenyan shilling against the US dollar that has resulted to foreign exchange losses.
The MD says despite the challenges, the bank's notable improvements include high savings in interest expense that were insufficient to compensate for reduced interest income.
The bank also saw a three percent decrease in operating expenses year on year attributed to better cost containment and cost reduction initiatives introduced in 2020.
To turn around, the bank says its focus for 2021 financial year and the main determinants of its outcome will be securing the requisite funding.
It noted that the process of finding equity partnerships with a possibility of on-boarding a new partner is ongoing. The bank is also pursuing debt financing as another option having already identified a prospective funder.
It says it will resume its asset growth targeting a varied client base— retail, sacco, corporate and Small and Medium sized Enterprises (SME).
It is also looking at mobilising deposits. In addition to its own sales team, the bank is also engaging deposit mobilisation agents and partners with a wide network to build additional deposits.
The third part of the strategy is to conduct a cost optimisation exercise. The cost base continues to be reduced through an ongoing rationalisation process. It will also continue to put efforts in recovering non-performing loans.
Replacing CEOs every year
Teachers are being forced to pay the price for a hurried Sh2.4 billion purchase of the bank from billionaire Naushad Noorali Merali in 2014.
More than 70 percent of its loans are non-performing, with the latest financial results showing that it has a defaulted loan book of Sh2.7 billion against total gross loans of Sh3.8 billion.
Its balance sheet contracted by 25 per cent to Sh5.1 billion year-on-year, primarily due to loan attritions, maturities in government securities and accumulated losses.
Its net loans and advances declined by 23 per cent, or Sh756 million, to Sh2.5 billion between 2019 and 2020.
The bank has also been replacing its CEOs every year, in what has made stabilising the lender a shaky affair as management deal with immense turnaround pressure from teachers on one hand, and meet the stringent Central Bank regulations on the other.
The bank's capital and liquidity ratios, among other performance indicators, are also in dangerous territory.
Its liquidity ratio has further contracted to 7.6 per cent in the year ended December 2020, against the minimum statutory ratio of 20 per cent.
All commercial banks must maintain a statutory minimum core capital of Sh1 billion to be allowed to operate. But Spire Bank's core capital currently stands at negative Sh2.63 billion.
If it did not have a deep-pocketed sponsor in Mwalimu Sacco through its 104,000 members, the Central Bank of Kenya (CBK) would already have pulled the rug from under its feet.
By the end of 2020, the bank had accumulated losses of more than Sh8.4 billion. This wiped out all the shareholder funds to negative Sh1.8 billion.
Spire Bank has asked for patience from its shareholders to implement its recovery plan even as it sunk into a Sh1.2 billion full year loss.
The lender, which expanded its losses from Sh472 million in 2019, said it is confident it will turn around its fortunes and return to profitability.
"Both the management and the Board are confident of turnaround of the Bank once the requisite funding is secured," the lender said in a presentation to its shareholders.
The bank has been struggling to lend with negative capital position as loans issued shrunk from Sh3.3 billion in 2019 to Sh2.5 billion at the end of last year.
It only made Sh346 million-interest income from the government and customer loans and made a Sh54 million loss from non-interest incomes because of foreign exchange positions it took.
But will teachers advance the bank Sh4 billion or will they let it die a slow and painful death? Only the ticking clock on Spire Bank’s wall will tell.
