Where does GCB Bank go from here?

Tomorrow, the GCB Bank will hold its annual general meeting (AGM) after purchasing and assuming the defunct UT and Capital banks.

This AGM is critical for four reasons:

1. Conduct of the bank in recent times in complying with its regulatory obligations under the Banks and Special Deposit Taking (BSD) Act 2016, Act 930;

2. The transparency of processes and impact of the purchase and assumption (P&A) of the defunct banks;

3. The impact of the financing arrangement for the consideration of the P&A of defunct banks and;

4. The way forward for GCB Bank.

Non-compliance

The GCB Bank has breached several disclosure obligations in the last few months and subsequently engaged in deception and misleading publications that have the tendency to hurt its reputation.

Act 930 makes it mandatory for the GCB Bank to display its financial statements as part of a regime of disclosure requirements, as well as filing its financial statements with the Bank of Ghana (BoG).

The bank’s actions, therefore, breached Section 90 (1a) and 90 (1b) of Act 930.

It is important to emphasise that while the GCB Bank was in default of filing its audited financial statements for three months, it is still in breach of publishing its audited financial statements and its auditor’s report in two national dailies as required by law.

For the benefit of emphasis, let me repeat that what was published was a condensed separate and consolidated financial statements in two national dailies. This is alien to the law.

Strangely, the auditors indicated in the said publication that those statements were not compliant with the International Financial Reporting Standards (IFRS), the company’s code, Act 179 of 1963 and Act 930.

This means that one cannot rely on those published statements. This begs the question why the bank published that and what are they hiding.

Due diligence

After the selection of the GCB Bank to undertake the P&A of the erstwhile banks, very little information was made available to the public and has remained same to date. This is not acceptable because the costs of this transaction have been borne by the taxpayer who need to know what our money was used to purchase and assume. The transaction has generated several questions that are begging for answers. Below are a few:

1. Who were the transaction advisors for both the BoG/government and the GCB Bank and how much was paid for this service? A huge and complex transaction of this nature requires a good transaction advisor with clear terms of reference to ensure that the transaction meets key criteria.

2. What was the business case for the P&A by the GCB Bank? It is important to note that one of the services that would have been provided by the transaction advisor or, however, it was concluded would be the conduct of due diligence together with the valuation of the selected assets and liabilities assumed. Where is the due diligence and valuation report?

3. Where is the projected impact analysis of the transaction as part of the due diligence that informed the negotiation of the GCB Bank with BoG and the government to ensure that the transaction will improve shareholders’ value?

It is instructive to note that a review of the report of the chairman of the GCB Bank as part of its annual report for 2017 is revealing.

The chairman of the bank gave two reasons for the bank’s takeover of the troubled banks:

1. To mitigate or eliminate potential market destabilisation and provide for a market of relatively greater stability and consumer certainty.

2. Benefit from the expanded client base and gain access to markets hitherto unavailable to us and enhance growth and shareholder value.

The above are far-reaching bases for such a major transaction.

Mitigating and eliminating potential market instability is a function of the BoG. It is, therefore, strange for a bank to engage in taking up the work of its regulator as the overriding reason for a complex takeover of two troubled banks.

At what costs to shareholders was the bank pursuing this BoG role? For how long is this going to hurt the bank’s bottom-line?

While it is good to seek opportunities to access new markets in order to grow the business, once needs to know what the indicators of value-adding gains from such a transaction are.

What are the numbers looking like for the period of investment in these selected and assets and liabilities? What is the level of profitability and strategic fit of the expanded customer base? Increased size means nothing if there are no demonstrable value propositions for the expansion.

Interestingly, the chairman then provides a dim insight into the immediate impact of the P&A when he says: “The assumption of these two banks, no doubt affected and had significant impact on our expenditures, staffing and systems rationalisation, which affected our bottom-line for 2017.”

Clearly, this was not a thought-through business transaction with shareholders’ interest in mind but to do the job of the regulator by risking shareholders’ funds.

The statements from the chairman reflect a general lack of focus of this transaction on the future of the bank.

One would have expected a forward-looking posturing from the chairman to assure stakeholders of a bigger and stronger bank, following the P&A.

The chairman paints a daunting task ahead of the bank, going forward.

What he sees as a challenge is exactly what would have been known before the assumption.

To say that “our challenge going forward is to prudently adjust our risk-return portfolio and efficiently integrate the business of these two banks to enable us to attain a trajectory of sustained income growth and profitability” is a sad commentary if one reviews the potential negative impact of the deal on the future of the GCB Bank.

Financing arrangement

One needs to understand that the impact of the P&A by the GCB Bank does not lie in the financial performance of the bank in 2017.

A few weeks ago, I read an article in the Daily Graphic titled: ‘2017 financials reveal bigger stronger GCB Bank’, which sought to use the historical performance of the bank in 2017 to show how strong and profitable the GCB Bank had become as a result of its takeover of UT Bank and Capital Bank.

Clearly, it was a non-professional analysis of the impact of the P&A and I hope GCB Bank has nothing to do with that obvious amateurish.

No one looks to the past to determine the impact of a transaction that has future implications.

In any case, the takeover was done in the middle of August and so using the income, costs and positional items in the end-year account to analyse the impact amounts to saying the assumption in the middle of August affected income, costs and positional items retrospectively from January 1, 2017, to August 13, 2017. This is a clear impossibility.

You can only determine the impact from August 14, 2017 by looking at the implications and combined effects of the various selected assets and liabilities, going forward.

While it is important to review the full sets of facts and the business case of the transaction from the due diligence, valuations and projected numbers to do a thorough review of the impact of the transaction, a review of the financial settlement of the transaction and the nature of some of the balance sheet items provide worrying times for the bank.

Bond issue

In April 2018, the government issued a 10-year GH¢2.2 billion bond to the GCB Bank to cover the costs of its takeover of the two banks as a fiscal cost to the taxpayer.

This was to settle the difference between the selected assets and liabilities of the assumed banks.

Interest on the bond is 12 per cent per annum and it is not listed on any Ghana Stock Exchange.

This singular arrangement puts the GCB Bank in a very volatile and critical condition and will hugely impact negatively on the profitability and liquidity of the bank. The following are the reasons:

1. The GCB Bank will lose a lot of interest income as a result of this transaction. In June this year, the government issued a 10-year bond at 16.67 per cent per annum. This means that the GCB Bank is losing 4.67 per cent if it was offered the same rate. This amounts to a loss of GH¢102.74 million in interest income per year and a nominal interest loss over the next 10 years of GH¢1.02 billion to the GCB Bank. This is actually a risk-free revenue that will be lost to the bank.

2. The current inter-bank lending rate stands at about 17 per cent per annum. This means that the GCB Bank will lose about five per cent interest income on this transaction if it could have the liquidity of GH¢2.2 billion to intervene in the market as it has always done. That is an annual loss of GH¢110 million and a total of GH¢1.1 billion in 10 years.

3. The non-listing of the bond on the GSE makes it not tradeable. What this means is that the GCB Bank is saddled with this bond for its 10-year tenure without the opportunity to sell part of it or in whole to improve its liquidity when the need arises. Why will the government compel a listed company to freeze GH¢2.2 billion liquidity in an illiquid asset at such a ridiculous interest rate?

4. The base rate of the GCB Bank is currently 25 per cent. This means the GCB Bank is losing 13 per cent per annum interest rate by holding onto this bond. This amounts to a loss of GH¢286 million in interest income a year and a possible GH¢2.86 billion over a 10-year period.

5. The total deposit liabilities taken over from defunct banks include some deposits in foreign currency. Who bears the risk of the open position on these deposits in foreign currency? In recent times, the cedi has been on a free fall. For each day that the cedi depreciates, the GCB Bank makes foreign exchange losses on the deposits in foreign currency of customers of the erstwhile banks.

6. The GCB Bank is now paying about 19 per cent per annum to take emergency liquidity support from BoG while the government pays GCB Bank 12 per cent for keeping their money and giving them a 10 per cent paper. Clearly, the shareholders of the GCB Bank are subsiding government budget with this outrageous bond settlement.

Conclusion

In order to save the GCB Bank from further bleeding, the government must immediately reverse this deliberate attempt to use the GCB Bank to subsidise the interest costs of the national budget, thereby squeezing its profitability, liquidity and growth.

The government must not kill the hen that has always laid the golden egg. The eagle must soar and not be shackled to death.

By : Isaac Adongo
The writer is the Member of Parliament for Bolgatanga Central.