How DFCU beat other bidders in the race to acquire Uganda’s Crane Bank

A sharp drop in Crane Bank’s liquidity position and the need to keep it as a going concern saw DFCU Bank beat other bidders to take control of the troubled lender.

Sources said the Bank of Uganda’s demand that Crane Bank be adequately recapitalised, its market presence be retained and its creditors paid, were key to the choice of the winning bid.

Crane Bank was put under statutory management by BoU in October 2016 on grounds of depleted capital levels that fell below minimum capital requirements. A week before BoU’s intervention, Crane Bank’s shareholders were shocked by a supervision audit report that found a $10 million liquidity gap in their books.

A promise by shareholders to fix the anomaly within three days passed with no action as the liquidity gap surged to $45 million after five days.

Signs of deteriorating liquidity levels in Crane Bank’s books were shown by its inability to facilitate withdrawals from fixed deposit accounts. For example, clients seeking to withdraw as much as Ush1 billion ($276,171) from their fixed deposit accounts would receive only Ush100 million ($26,617) and were being told to pick up the balance after four days, the sources indicated.

Commercial banks are required to maintain a minimum capital of Ush25 billion ($6.9 million) alongside a minimum core capital adequacy ratio of eight per cent and a capital conservation buffer of 2.5 per cent of risk weighted assets (RWA).

Efforts by the Central Bank to restore Crane Bank to good health proved futile after nearly three months following evidence dug up by auditors that pointed to insolvency.

Whereas 12 potential buyers showed interest in acquiring Crane Bank Ltd, seven reportedly walked away from the negotiating table over concerns about the financial position highlighted in the due diligence report. This left Barclays Africa, First Rand Bank of South Africa, DFCU Bank, Aethel Partners Ltd, a British owned private equity fund and a Sri Lanka-based financial institution, on the list of suitors.

Out of the five prequalified bidders, only DFCU Bank and Aethel Partners Ltd made it to the final transaction stage.

While DFCU Bank offered to recapitalise Crane Bank with a sum of $21.6 million after take-over, Aethel Partners Ltd offered Ush1 ($0.0003) for the bank’s assets and liabilities and also committed to invest $215 million in Crane Bank to clean the balance sheet and put it on a sound commercial footing, according to correspondence seen by The EastAfrican.

In contrast, Aethel Partners wanted BoU’s to first recapitalise the bank.

Another key condition, sources say, was on retention of the network of 46 branches Crane Bank run across the country. Bank of Uganda insisted on the eventual buyer keeping the branches, Aethel partners said it would discard 20 and retain only 26 seen as viable. DFCU offered to retain them.

Though the losses posted by those branches could not be established by press time, DFCU’s proposal appeared supportive towards the Central Bank’s financial inclusion agenda.

Whereas DFCU Bank offered to clear all Crane Bank’s verified debts, Aethel Partners insisted it would only clear part of the failed lender’s debts, pointing out severe corporate governance and financial risks tied to the bank. This factor equally boosted DFCU’s bid.

“Aethel Partners insisted that it was BoU’s job to recapitalise Crane Bank after taking control of its operations and not the buyer. DFCU on the other hand was willing to recapitalise the bank $21.6 million.

“Questions were also raised by one of the bidders over turnaround risks reflected in its loan book that had been distorted by several years of off balance sheet lending and a collateral portfolio of more than 200 land titles that had proved difficult to sell before BoU’s intervention,” said one of the sources involved in the negotiations.

First Rand offered a zero price for Crane Bank but promised to settle all the bank’s debts within five years while the Sri Lankan lender similarly tabled a zero price accompanied by a cash injection of $70 million meant to settle the lender’s debt over a five year period, sources said.

Data obtained from BoU’s due diligence report on Crane Bank showed its total deposits had fallen to Ush600 billion ($165.7 million) by mid January 2017 compared with the Ush1.4 trillion ($386.6 million) recorded in October 2016 while its loan book was valued at Ush900 billion ($248.6 million), with nearly 80 per cent tied to the real estate industry.

READ: How bad debt, management brought down Crane Bank

Crane Bank’s bad loan portfolio stood at Ush500 billion ($138 million) by mid January 2017 and was dominated by five prominent business people with exposure to the real estate sector while its customer base comprised 750,000 depositors.

Whereas DFCU’s top management sounded upbeat about the takeover, some minority shareholders have expressed pessimism about the impact of the deal.