Why acquisition of City Express Finance may be against the well-being of NIB shareholders?

Jan 14, 2020 | Investopaper

Nepal Investment Bank (NIB)  has signed an acquisition agreement with City Express Finance on January 13, 2020 (Poush 28, 2076). With several banks undergoing mergers and acquisitions, Nepal Investment Bank has also entered an agreement to acquire City Express Finance. Before this, NIB has already acquired Jebil’s Finance and started the joint operation.

Here we will try to explore whether this acquisition is a good strategy from the point of view of NIB shareholders. So, we will look into the history of City Express Finance and its current financial status in order to reach the conclusion.

History of City Express Finance

City Express Finance was previously known as Kuber Merchant Finance Limited. Nepal Rastra Bank declared Kuber Merchant Finance as a problematic institution on January 10, 2013, due to its bad lending practices and weak corporate governance. 

Kamalnath Subedi, the then CEO of Kuber Merchant Finance was arrested by the Central Investigation Bureau of Nepal accusing him of embezzling at least Rs. 68 lakhs.

The central bank lifted the ‘problematic’ tag from Kuber Merchant Finance in December 2017 asking to meet certain requirements. The finance was required to raise minimum paid-up capital within two years. Mr. Bhishma Raj Chalise was appointed as the CEO of the company. With the new promoter group and new management, the company changed its name in order to wipe out its bad history.

The finance was set to raise the capital through the issue of 1:1 right share worth Rs. 40 crores. Care Ratings Nepal provided ‘IPO Grade 5’ ratings to the proposed right issue of City Express finance indicating poor fundamentals.

Care Ratings assigned low ratings to City Express Finance right issue citing ” low market share in the industry, operating losses, the substantial decline in PAT during 9MFY19, decline in CASA proportion, and negative reserve and surplus.”

Without issuing the right, the company has gone into an acquisition agreement with Nepal Investment Bank.

Note: PAT = Profit After Tax

           9MFY19= 9 months of Fiscal Year 2019

           CASA= Current Account Savings Account ( Ratio of current & savings account deposits to total deposits)

Current Financial Situation

As of the first quarter of the fiscal year 2076/77, there is no noteworthy improvement in the performance. With the capital of Rs. 40.21 crores, the finance has a negative retained earnings of Rs. 24 crores.

Likewise, the deposits and loans stand at unimpressive 12.08 crores and Rs. 17.30 crores respectively.

With negative Earnings Per Share (EPS) of Rs. 2.50, City Express Finance has per share net-worth of Rs. 64.46.

The financial performance is summarized in the table below:

HEADINGS 1st Quarter, 2076/77
PAID-UP CAPITAL (Rs. In crores) 40.21
Retained Earnings(Rs. In crores) -24
DEPOSITS (Rs. In crores) 12.08
LOANS  (Rs. In crores) 17.3
NET INTEREST INCOME (Rs. In crores) 0.5
PROFIT (Rs. In crores) 0.25
NON PERFORMING LOANS, NPL (%) 2.15
EARNINGS PER SHARE, EPS (Rs.) -2.5
NETWORTH PER SHARE (Rs.) 64.46

To view the full un-audited first-quarter report of the FY 2076/77 of City Express Finance, Click Here.

Conclusion

Nepal Investment Bank is one of the leading commercial banks in Nepal. However, the performance of the bank is lagging in the present context. The decisions taken by the top-level management has hampered the growth of the bank. Banks such as Global IME Bank, NIC Asia Bank, Siddhartha Bank, NMB Bank and others which are 10 to 15 years younger than Nepal Investment Bank are giving intense competition. Shareholders are already disappointed by the performance of NIBL due to its decline in profit in the fiscal year 2075/76, as seen in the Annual General Meeting (AGM) conducted on Poush 28, 2076. Also, the profit has plunged by 20% in the first quarter of the fiscal year 2076/77.

The decision to acquire City Express Finance is another example of bad judgment, as per our opinion. We don’t expect that there is any value addition to Nepal Investment Bank through the acquisition of City Express Finance. The main benefit of merger/acquisition is an improvement in financial strength and more market penetration. However, we don’t see any visible strategic or synergic benefits in this acquisition.

How much impact will acquiring a company with only Rs 12 crores deposits have on a bank with Rs 151 Arba deposits? None. The assets of City Express Finance will be expended while integrating it into Nepal Investment Bank. There won’t be any value creation to the shareholders of NIB. Then why the Board of Directors (BOD) and management team are focused on it while there are several other things to worry about. The profit of the bank is falling while other banks are rapidly increasing their profitability. NIB is losing its position in the Nepalese Banking Industry in terms of market share as well.

So, for the shareholders of Nepal Investment Bank, this may be a losing deal. It will benefit the shareholders of City Express Finance that is struggling to survive. The hidden motive of this acquisition may be to protect the promoters of City Express Finance and connect NIB with the City Express, a rapidly growing remittance company.

We tried to connect with the officials of Nepal Investment Bank. They could not provide any concrete answer and informed that it was the decision of the board of directors.

So, what do you think? Is this acquisition a viable strategy for Nepal Investment Bank?  Will NIB shareholders benefit from this decision?

Free free to send your views in the comment section below.

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One thought on “Why acquisition of City Express Finance may be against the well-being of NIB shareholders?

  • January 15, 2020 at 2:24 am
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    Just a vested interest of the board of directors?.

    Reply

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