Earlier yesterday(wednsday) when Sudhir told COSASE, a committee of Parliament investigating defunct banks that his bank was taken “illegally” and that Bank of Uganda didn’t do much to save it. The dfcu’s Chairman, Jimmy Mugrewa in response revealed of how Crane Bank was not only undercapitalized but was also a troubled financial institution at the time that was on the verge of crippling the country’s Economy.
“General findings on the basis of information and documentation obtained from BoU remotely and onsite at CBL’s head office, dfcu undertook a due diligence of the operations and business of CBL. The due diligence also took into account the inventory of assets, liabilities and equity of CBL as at 20 October 2016 compiled by PriceWaterhouseCoopers. The inventory which was provided in an abridged format, was dated 12 December 2016, and was provided by BoU on 12 December 2016 in hard copy, ” Mugerwa said.
The key findings
It was discovered that Crane Bank’s net asset position was negative meaning that the liabilities far exceeded the assets Shs 589 billion as at 20 December 2016.
It also emerged that Crane Bank had faced significant liquidity challenges during the course of 2016 and had obtained liquidity support from BoU in excess of Shs 350 billion.
Earlier, Sudhir’s team said BoU actually did not provide support to rescue the bank from its liquidity crisis.
Nevertheless, dfcu said Crane Bank’s “real estate portfolio comprising mainly the branch network as reflected in the fixed asset register was overvalued by over Shs 100 billion.
“Mugerwa told attentive MPs that a “significant part of Crane Bank deposits equivalent to Shs 441 billion was in fixed deposits (62 %) at an average interest rate of 8% and 17% per annum in USD and Shs respectively which was far above the market rate.”
Additionally, revealed Mugerwa, there was a breach of the Financial Institutions (Foreign Exchange Business) Rules 2010 by Crane Bank with a significant currency mismatch in the balance sheet whereby the foreign currency denominated assets far outstripped corresponding liabilities.
“There was a large number of non-Ugandan employees some of whom were performing clerical roles; the terms of the leases under which the branch premises were held were onerous and did not consider the differences in locations; and Crane Bank Rwanda was loss making and undercapitalized and required immediate capital injection to continue in operation,” he added.
Credit related findings
Dfcu’s due diligence discovered a high number of non-performing accounts (some identified, others unidentified).
Based on FIA classification, 50% of the loan book was non-performing (Shs 581 billion out of Shs 1.1 trillion).
Mugerwa went to say dfcu found a high portfolio concentration (related accounts, large exposures, foreign currency portfolio, real estate) at Crane Bank and the classification of some loan accounts did not match the registered days in arrears.
Consequently, the loan classification was not in line with the FIA with the result that provisions were grossly inadequate.
More to this, Shs 516 billion of other assets represented written off loans which were off-balance sheet.
The overdraft facilities were largely hardcore; loans were classified manually and there was noncompliance with FIA requirements on single obligor limits, grouping of related parties and on classification of loan portfolio.
Regarding loan approval/ decision making, there was no clear evidence of risks and mitigations and elaboration in Crane Bank’s credit Committee minutes.
Credit facilities were disbursed while security is not perfected and there was no call-back procedure seen which also was prone to internal fraud and collateral was always released while facility has not been repaid yet.
On the basis of the due diligence findings and in light of dfcu’s strategic objectives and risk appetite, dfcu’s Board of Directors gave management the go-ahead to submit a bid on the terms and conditions set out in the bid document dated 20 December 2016.
Earlier on 9 December 2016, dfcu was invited to bid for the acquisition of all the assets and assumption of the liabilities of Crane Bank.
The bid provided that in addition to discharging Crane Bank’s liabilities, dfcu would pay a deferred cash consideration of Shs 200bn conditional on recoveries on the non-performing loans.
The conditions of the Bid (section 3 of the Bid) took into account the size of the book to be acquired compared to the size of dfcu’s loan book at the time and the potential distortion in ratios that could occur if the acquired assets were reflected in the dfcu balance sheet from the outset.
Purchase of Assets and Assumption of Liabilities Agreement (P&A)
Following receipt of dfcu’s bid on 20 December 2016, dfcu was invited for a meeting at BoU on 23 December 2016 at which it was informed that its bid was being considered. The parties then began negotiations over a P&A over several meetings between 23 December 2016 to 24 January 2017.
The result of the negotiations was set out in the P&A and the Agreement for payment of Shs 200 billion liability assumed by dfcu being a previous liability of Crane Bank Limited.
Responding to Crane Bank’s team on how this was arrived at, Mugerwa elaborated:
In addition to discharging CBL’s liabilities (other than the excluded liabilities set in out in Schedule III of the P&A) from 27 January 2017, dfcu would pay a sum of Shs 200 billion within a period of 30 months.
dfcu would also acquire the assets of CBL as defined in the P&A including all loans and advances (on and off-balance sheet) other than Shs 63 billion in related party loans (insider lending) and the other excluded assets set in out in Schedule II of the P&A.
In short, the total consideration provided by dfcu for CBL transaction comprised customer deposits liabilities amounting to Shs 674,958,000,000; Third party loans of Shs 109bn; letters of credit Shs 23bn and deferred consideration of Shs 200bn.
In this case, the amounts paid by dfcu following cash reconciliation was Shs 50,206,522,909; Shs 171m in employee terminal benefits (gratuitous payment to local employees).
Interestingly, the insider loans stood at Shs 63,612,647,000. Dfcu further made a capital injection in Crane Bank Rwanda of Shs 2,549, 862,914. This was a requirement by Bank of Rwanda.
In submitting a bid for CBL assets and liabilities and agreeing the terms of the P&A, said Mugerwa, dfcu had to ensure that the transaction did not prejudice its depositors and that its shareholders got a return on their investment from the acquisition.
“Following a fair valuation of the acquired assets and assumed liabilities, a net asset position of Shs 268bn was recorded, whichwhen adjusted by the fair valued obligation on the Shs 200bn payable to BoU, resulted in a bargain purchase of Shs 119bn as at 27 January 2017,” said Mugerwa.
He said the actual benefits of the transaction will only be realized if the customer relationships and core deposits are maintained and optimized, and the loans and advances (fair valued at Shs 771bn) are collected within the anticipated timelines.
The terms of the agreement for payment of Shs 200 billion liability were negotiated on the basis of the overall bargain reflected in the P&A.
In their submission today, Crane Bank team said dfcu was not paying interest on the acquired assets.
In response, Mugerwa explained that “interest was not payable by dfcu on the Shs 200bn first because it was not a loan from BoU to dfcu and second because of the magnitude of liabilities agreed to be assumed by it against assets whose value was not immediately realizable.”
He further said the security for payment was government securities of varying maturities, adding, “dfcu is up to date with its obligations and has to-date paid Shs 100bn.”
Dfcu also revealed that it was a condition of the bid that the acquirer should remain compliant with all key prudential ratios after the transaction.
Accordingly, and to ensure dfcu was sufficiently capitalized following the transaction, its principal shareholder dfcu Limited injected USD 50mn (equivalent to Shs 186bn) in additional tier 1 capital.
Fair valuation of acquired business
For purposes of accurate reporting of dfcu’s financial position after the transaction which is a requirement of the FIA and IFRS, a fair valuation of the acquired assets and assumed liabilities was conducted by EY in accordance with IFRS 3. The results of the fair valuation were audited by KPMG as part of the interim and final audit processes for 2017.
Mugerwa said to realize the benefit of the transaction will take hard work on the part of dfcu.
“For instance, although depositors have been paid with effect from 27 January 2017, the acquired loans and advances must be collected and customer relationships maintained and optimized,” he said.
Sudhir today told the MPs that the bad book was illegally obtained by dfcu. He said keeping it would be “criminal.
Mugerwa today explained that in accordance with Article 2.3 of the P&A, dfcu acquired all CBL’s loans and advances defined as “loans, credit facilities, and credit accommodations granted or extended by CBL to customers and arrangements between CBL and customers having similar effect” and the benefit of the associated customer contracts.
“As a matter of prudence and compliance with IFRS and, considering that dfcu had not originated or evaluated the CBL loans and advances, dfcu applied its own credit standards to the acquired book and took full provisions for all the non-performing loans,” he added.
“The loans fully provided for by dfcu (at date of integration) together with those acquired from CBL with full provisions and written off in line with FIA comprise the “bad bank” which is managed off balance sheet. However, in compliance with IFRS3, the equivalent fair value of Shs 245 billion is included on dfcu’s balance sheet to be amortised by the realized recoveries from the bad bank.
”The fair valued loans and advances to customers acquired by dfcu under the P&A were handed to MPs.
Mugerwa said considering the size of the business to be acquired, the identified breaches of regulatory ratios and prudential norms, and the fact that the business and relationships were not originated by dfcu, it was necessary to accommodate dfcu for compliance issues not arising in the course of its business as currently conducted.
For this reason, it was a condition of the bid (Clause III) that certain compliance accommodations would be given.
This website understands this included restructuring of loans of customers to allow them meet their obligations.
Valuation of leasehold properties
Among the assets acquired by dfcu were leasehold properties in relation to which an independent valuation was conducted.
The list of properties and attendant values given by the Chief Government Valuer showed that the total fixed assets value (including the properties) was established to be Shs 90.5bn.
“It is important to note that the Crane Bank fixed asset register as at 30th September 2016 reflected the value of land and buildings as Shs 194.9bn which value was significantly discounted to Shs 79.6bn in the PWC inventory,” said Mugerwa.
This state of affairs after acquiring Crane Bank, according to Mugerwa, necessitated a comprehensive restructuring of dfcu’s existing business model so as to attain an integrated and synchronized business going forward.
For example, the overall headcount was 1,243 employees; the bank had 68 branches countrywide and two core banking platforms i.e. Finacle (for dfcu) and T24 (for CBL).
Thus, dfcu embarked on a comprehensive restructuring and integration process to resolve the duplication of roles in the combined bank organization structure; differences in technology and processes between dfcu and CBL; and the duplication at locations where both dfcu and CBL had a presence (22 locations).
The integration resulted in the merger / closure of 22 branch locations, and 368 CBL staff on account of economic, technological and structural reasons. The redundancy exercise was conducted in the months of February and March 2017 and dfcu complied with all procedural and contractual obligations. The relevant consultations were undertaken with the Ministry of Gender, Labour and Social Development, according to Mugerwa.
Crane Bank Rwanda
Mugerwa said Crane Bank Rwanda was acquired under the P&A.
“The investment in Crane Bank Rwanda was fair valued at Shs 22bn compared to a book value of Shs 34bn. In addition, dfcu had had to inject Shs 2.5billion in capital for it to be compliant with prudential capital adequacy requirements in Rwanda,” he said.
In regard to Crane Financial Services, Mugerwa said dfcu was yet to acquire possession and control of the company due to governance issues.
“Specifically, the only director and Chairman of the Board (Sudhir Ruparelia) has not acceded to dfcu’s requests to him to execute the documentation necessary for effective ownership and management to be transferred to dfcu,” he said.
Mugerwa said the depositors acquired from CBL, close to 600,000, continue to transact with ease at dfcu points of representation and dfcu remains a strong bank with adequate capital and liquidity to meet the prudential requirements and the needs of its customers.
“The above notwithstanding, dfcu and its board and management have continued to suffer unfair attacks as a result of the important role it played in the CBL transaction,” he said.
“These lies and malicious attacks, which have the potential to deter other banks from playing a role similar to that played by dfcu, should be condemned in the strongest possible terms by this Committee.”