DFCU takes over Crane Bank

DFCU Bank has taken over Crane Bank, Bank of Uganda revealed today – three months after the troubled lender was placed under statutory management by the central bank.

Emmanuel Tumusiime-Mutebile, the central bank governor, said DFCU “emerged winner amongst the 13 institutions that bid for Crane Bank.” Mr Mutebile was speaking at a press conference to announce the development in Kampala.

A statement released by the central bank and signed by its governor says Crane Bank was placed under receivership on Tuesday, 24 January, after which it arranged a merger with DFCU Bank.

DFCU’s Board of Directors approved the transaction on Wednesday, 25 January, according to a regulatory announcement issued by the bank, which is listed on the Uganda Securities Exchange.

“A Purchase of Assets and Assumption of Liabilities Agreement between the bank and BoU was signed on 25 January 2017,” the DFCU statement adds.

Bank of Uganda said that an audit of Crane Bank carried out after it took over confirmed that “Crane Bank’s liabilities, as at the 20th October 2016, being the date of take over, grossly exceeded its assets and that it was insolvent, which insolvency has continued to date.”

The central bank’s decision to sell Crane Bank to DFCU shows it was convinced the lender could not return to financial health otherwise. Crane Bank was taken over because it was significantly undercapitalised and posed a threat to the stability of the financial sector. The statutory manager’s main task was to oversee it to a state where it met the regulator’s prudential standards and, if that was not possible, sell it to an entity who could steady its course.

Related: Crane Bank takeover – what you need to know, and implications

Bank of Uganda has now transferred the liabilities (including the deposits) of Crane Bank to DFCU Bank Limited (*DFCU Bank) and in consideration of that transfer of liabilities has conveyed to DFCU Bank, Crane Bank’s assets,” the statements adds.

This means that customers of Crane Bank will now “have their accounts operated by DFCU bank.”

The regulatory notice issued by DFCU says it “has begun the process of integrating the assets and liabilities of CBL into its business.” It adds that the bank will inject capital into its newly acquired business as part of this integration.

Crane Bank was the fourth largest bank by the time it was taken over by the central bank, with assets of Shs1, 794.34 billion (as at the end of 2015). Dfcu, on the other hand, was sixth largest with assets of Shs1,651.63 billion at the end of 2015 (but which dropped to Shs1623.30 billion at the end of June 2016). Therefore, the acquisition of Crane Bank pushes Dfcu up the list of Uganda’s largest banks, but its true size remains unknown given Crane Bank’s recent turbulence, which most likely eroded its asset base.

Until it fell behind Centenary Bank in 2015, Crane Bank was Uganda’s largest locally owned bank. It was started in 1995 by Ugandan Indian businessman, Sudhir Ruparelia, whose shareholding had reduced to 48.67% at the end of 2015, in keeping with regulatory requirements.

But despite its stated aim of focussing on small and medium enterprises, it was done in by exposures to large borrowers, who defaulted on the loans. The bank was responsible for 20% of total non performing loans (NPL) in the banking sector in 2015, according to Bank of Uganda. It was also the worst performing bank in that year, registering its first loss – Shs3.31 billion – in 10 years. The loss was due to an increase in its loan loss provision to Shs50.35 billion in 2015 from Shs11.22 billion the previous year.

But it was not until September last year that the true extent of its troubles came to light. In reaction to speculation and a report in Red Pepper, a tabloid daily, that the bank had been sold of to South African investors, it’s board released a statement saying it was looking for a strategic equity investor to merge with. It also hit back at talk that it was in trouble, and said the investor was to help strengthen its “balance sheet further.”

Read More: Crane Bank denies rumours of sale, says in merger talks with “strategic equity investor”

A month later, it was taken over by the Bank of Uganda which said its continued operation, without intervention, posed “a systemic risk to the stability of the financial system.”

For Dfcu, the deal presents another opportunity to expand on the back missteps by another financial institution. It transitioned from a development finance company to a commercial bank in 2000 after Dfcu Limited, its holding company, bought Gold Trust Bank. And in 2014, it purchased Global Trust Bank from the central bank after a process similar to what happened to Crane Bank.

Dfcu had assets of Shs1,651.63 billion at the end of 2015. It’s net profit fell to Shs35.29 billion versus Shs42.11 billion the previous year. Shareholders equity came in at Shs215.13 billion, compared to Shs191.54 in 2014. The total number of customers was 255,796, while branches and ATMs were both 45.

The bank’s two biggest shareholders are the Netherland-headquartered Rabo Development B.V and Norwegian Norfinance AS, both of which have a 27.54% stake. CDC Group Plc is the third biggest shareholder with 15.00%, while the National Social Security Fund has 5.93%.