As news broke of the sale of Renaissance Merchant Bank (RMB) (now Capital Bank) and controlling stake in Afre Corporation ( First Mutual Ltd) in January 2012 to the National Social Security Authority (NSSA), all seemed to have ended well.
What had begun as a sensational claim former RMB major shareholder and Afre executive chairman Patterson Timba had helped himself to depositors’ funds to pay back a loan from businessman Jayesh Shah had become much more than just salacious assertion as details of a forensic audit emerged that the banker had done much more than that.
A forensic audit revealed Timba had violated corporate governance structures, advancing loans amounting to US$13,9 million in related party transactions and insider loans.
A total of US$1 018 286,25 of depositors’ funds were used to pay for Timba’s personal expenses.
Various payments adding up to this figure were made in violation of section 177 of the companies Act (Chapter 24:03).
At deal consummation, Timba had “paid” back loans amounting to US$17,9 million owing to the bank through the disposal of his Afre shares.
All seemed well; Timba had got himself a good deal, while NSSA on the hand had gotten itself a bank and a controlling stake in Afre Corporation, a good investment that institutions such as Econet had shares in.
Years later, Capital Bank which rose from the ashes of RMB, would face an uncertain future.
But where exactly did the wheels come off?
Information presented to the bank’s key stakeholders which is in our possession, shows that the warning signs were there from the word go.
First, the bank inherited a particularly bad loan book. At least 95% of the loan book was non-performing.
The figure was about US$46 million. It was so difficult to get people to pay back that the bank had to hand over the entire loan book to lawyers.
Compounding Capital Bank’s woes was the undertaking the former curator – Reggie Saruchera of Grant Thornton and NSSA had made that the financial institution would pay back US$50 million to depositors within a period of 8-12 months.
But NSSA had only invested US$9,8 million in new money under the US$24 million deal that saw the fund emerge with a bank and a controlling stake in Afre, with the balance being a debt-to-equity conversion.
Apart from a bad loan book and the US$50 million deposits, Capital Bank also inherited an overvalued asset on its balance sheet in the form of Afre shares (now First Mutual Holdings Ltd).
When the curator was trying to recover the US$17,9 million from Timba in loans, he accepted some Afre shares amounting to 32% of the company’s total issued share capital as payment for the outstanding funds.
Saruchera agreed to convert Timba’s Afre shares with a market value of about US$4 million at a Net Asset Value (NAV) of US$23,9 million, automatically creating a capital gap of about US$20 million.
According to the information seen businessdigest, the argument for that valuation was Afre was a good asset with a lot of value and hence the premium.
Capital Bank soon found itself under pressure to liquidate the shares in line with various laws governing banks, effectively blocking banking institutions from holding on to scrip.
The bank got several extensions from the Reserve Bank of Zimbabwe with respect to the disposal of the Afre shares.
As a financial institution, the bank would have wanted the shares valued at US$24 million converted to cash. That way, they would have unlocked a bit of liquidity.
But as the year came to a close, Capital bank’s balance sheet was impaired by the auditors because the market value of the Afre shares was way below the NAV.
As if the impairment on the Afre shares was not enough, the bank was also forced to make huge provisions for non-performing loans in accordance with RBZ guidelines. After this, the bank then decided to write off close to US$30 million in non-performing loans, but the loans are still being pursued through the legal processes, businessdigest has established.
In no time, a combination of bad loans, deposits pay out, the impairment and the writing down of non-performing loans meant the bank had a very thin capital base.
To date, the bank paid is believed to have paid out around US$35 million of the US$50 million in deposits.
Now, the bank’s dream to be a specialised micro bank has been shattered.
Capital bank intends to focus on small to medium enterprises and offer housing solutions to the market. This fits into the shareholder’s other areas of investment such as the FBC Holdings’ building society business.
Attempts to raise capital for the bank has proved challenging, with only NSSA participating. On last year’s US$6 million rights issue, Timba did not follow his rights and suffered a 3% dilution on his shareholding.
The Timba issue has become an albatross around the bank’s survival just as he was when he was running the same institution.
It is not clear what NSSA intends to do with Capital Bank. But other schools of thought seem to suggest NSSA could have gone into RMB merely to acquire Afre, a coveted asset.
Should these proponents be correct in their assessment, then over US$30 million in employee contributions could just go up in smoke when Capital Bank goes under, a big confidence blow to struggling indigenous banks.