Crane bank sale: Cosase interfaces with dfcu officials

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Dfcu officials appearing before Cosase

dfcu Bank returned to Parliament Thursday afternoon for further engagement with the Committee on Commissions, Statutory Authorities and State Enterprises (COSASE).

Yesterday the Board Chairman Mr. Jimmy Mugerwa lead a combined Board and Management team to parliament following an invitation from the Clerk of the Committee to have dfcu testify before committee On The Auditor General’s Special Audit Report On Defunct Banks In Uganda.

In a prepared statement, the chairman informed the members of the Committee that dfcu Bank participated in the resolution of two banks in Uganda, namely, Global Trust Bank Limited (2014) and Crane Bank Limited (2017).

In both cases, dfcu’s participation was at the invitation of Bank of Uganda (“BoU”).

Making specific reference to the purchase of CBL, Mr. Mugerwa said the bank recognised the systemic risk the closure of CBL posed to the economy of the country and so it resolved to progress with the acquisition of assets and assumptions of liabilities of CBL quickly and efficiently with minimal impact on depositors ‘…From the date when the former CBL business re-opened under dfcu, depositors were able to transact normally accessing their deposits in full…’ Mugerwa said.

Following the signing of a non-disclosure agreement (NDA) with BOU, the bank carried out an extensive due diligence under a number of key work streams and established:

  1. CBL’s net asset position was negative meaning that the liabilities far exceeded the assets (UGX (589) billion as at 20 December 2016);
  2. CBL had faced significant liquidity challenges during the course of 2016 and had obtained liquidity support from BoU in excess of UGX 350 billion;
  3. The real estate portfolio comprising mainly the branch network as reflected in the fixed asset register was overvalued by over UGX 100 billion;
  4. A significant part of the deposits equivalent to UGX 441 billion was in fixed deposits (62%) at an average interest rate of 8% and 17% per annum in USD and UGX respectively which was far above the market rate;
  5. There was a breach of the Financial Institutions (Foreign Exchange Business) Rules 2010 with a significant currency mismatch in the balance sheet whereby the foreign currency denominated assets far outstripped corresponding liabilities;
  6. There was a large number of non-Ugandan employees some of whom were performing clerical roles;
  7. The terms of the leases under which the branch premises were held were onerous and did not consider the differences in locations; and

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 that was dated 20 December 2016.

In submitting the bid 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 UGX 268bn was recorded, which when adjusted by the fair valued obligation on the UGX 200bn payable to BoU, resulted in a bargain purchase of UGX 119bn as at 27 January 2017.

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 UGX 771bn) are collected within the anticipated timelines.

The terms of the agreement for payment of UGX 200 billion liability were negotiated on the basis of the overall bargain reflected in the P&A., Interest was not payable by dfcu on the UGX 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.

The security for payment was government securities of varying maturities. dfcu is up to date with its obligations and has to-date paid UGX 100bn.

On 27 January 2017, dfcu took possession of all CBL locations and took necessary steps to secure and validate the assets acquired. The documentation (files and records) related to the assets acquired and the assumed liabilities was handed over to dfcu.

The Chairman informed the committee that the Chief Government Valuer established the total fixed assets value to be UGX 90.5bn.

It is important to note that the CBL fixed asset register as at 30th September 2016 reflected the value of land and buildings as UGX 194.9bn which value was significantly to UGX 79.6bn in the PWC inventory.

In closing Mr Mugerwa outlined the benefits accrued to the economy as a result of dfcu’s participation in the transaction:

(a)    Stabilization of the financial sector;

(b)    Customer confidence in the banking system was maintained;

(c)    Close to 600,000 depositors were and continue to be paid without reference to the Depositor Protection Fund or additional government resources in form of liquidity support to CBL;

(d)    Customer businesses continued uninterrupted; and

(e)    More than 50% of CBL employees were retained and continue in gainful employment.

The engagement with COSASE continued Thursday at 2:00pm.

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