By DAGI KIMANI
Forget the investors and the stockbrokers. Commercial banks, already Kenya’s profit behemoths, are set to be the biggest winners in the Safaricom IPO, raking in millions of shillings in commissions and interest charges.
While the brokerage fees for the entire transaction stand at just Ksh750 million ($11.9 million), analysts say that the banks will make several times this sum because they will benefit from both brokerage fees and from lending.
The brokerage fees, representing 1.5 per cent of the offer of Ksh50 billion ($793 million), are to be paid to the commercial banks and 21 brokerages that facilitated the IPO.
Underlining their expectation of handsome returns, by the close of the offer on Wednesday April 23, the banks, licensed fund managers, and stockbrokers had reportedly collectively spent more than Ksh3.2 billion ($51 million) rolling out additional infrastructure and marketing themselves to the public for the IPO.
Commercial banks, which were appointed by stockbrokers to act as agents for a consideration of three-quarters of the 1.5 per cent brokerage fee, are likely to consider this money well spent, given the additional income from charges and interest, mostly borne by applicants.
Among these were the up-front payment of a commitment fee of anywhere between 1 and 3 per cent, depending on the bank, for all loans issued to applicants for buying the Safaricom shares, as well as the imposition of non-refundable interest charges, which were also being paid up-front. The non-refundable interest was pegged to a non-negotiable fixed period.
Some banks have put this fixed period at six months, meaning that an investor will have to pay the interest on the loan he/she took for six months, even if they repay the principal in full on the first day the Safaricom shares hit the market. This is significant, given that some banks were financing up to 100 per cent of applications.
Another measure that has brought banks handsome income is the imposition on all investors who applied through them of a central depository system fee of Ksh1,000 ($16). The Central Depository System Corporation is said to be following up on these charges, since the opening of CDS accounts is supposed to be free.
Calculations by The EastAfrican show that if a commercial bank were to have lent out Ksh20 billion ($317 million) — as one major player says it has – the combination of these fees could add up to nearly Ksh1 billion ($16 million), with the fees for opening 200,000 accounts alone adding up to a cool Ksh200 million ($3.2 million).
By the end of last week, an estimated 1.7 million people are said to have participated in the Safaricom IPO, although the exact figures are expected to be released this week by Citibank.
More than one million new CDS accounts were opened during the IPO. Many applicants relied on bank loans to make their applications.
Analysts say the Safaricom IPO, in which the Kenyan government is selling 25 per cent of the profitable mobile phone company for Ksh50 billion ($790 million at current exchange rates), is expected to be oversubscribed at anywhere between 150 and 400 per cent.
Retail investors in the region alone are said to have made applications in excess of the targeted Ksh17 billion ($270 million). The retail investors had been expected to buy 3.28 billion shares out of the 6.5 billion reserved for local investors, with the remaining 3.22 billion going to local institutional investors.
This is despite the fact that Tanzania barred its nationals from participating.
Until the offer closed last Wednesday, lead broker Dyer & Blair was hoping to persuade Tanzanian authorities to allow the IPO, in which case it had said it would petition Kenya’s regulatory Capital Markets Authority for a country-specific extension.
The unprecedented number of applicants in the Safaricom IPO, as well as the profits expected to be made by the banking sector, are likely to focus attention on the lack of capacity of the 21 or so active brokerages at the Nairobi Stock Exchange. Without the participation of commercial banks, it is doubtful whether the brokerages would have pulled off a process as massive as the Safaricom IPO.
“Banks traditionally handle about 80 per cent of the big IPOs,” Fred Mweni, managing director of Tsavo Securities, told The EastAfrican. “This is unlikely to change any time soon, and it is preferable that the potential of their day-to-day participation in the stockmarket be regularised.”
While the collapsed Nyaga Stockbrokers, for example, had about 130,000 accounts, indications last week were that Equity Bank, which has branches countrywide, had alone processed about 300,000 accounts for the Safaricom IPO.
The massive amounts of money expected to be made by the banks are also raising concern among financial circles about the legal grey area that is created when the financial institutions virtually double as brokerages and lenders during an IPO.
While all stockbroking fees are regulated by law, there are no regulations, for example, to cover the charges that banks can impose on investors who go through them. In the Safaricom IPO, this lacuna was exploited to charge non-existent CDS fees.
There are also no regulations or directions governing a situation where a bank appointed by a stockbroker to be an agent during an IPO channels all applicants through the appointing broker, irrespective of whether the applicants have accounts with the broker or not.
"The way forward is for the CMA to allow commercial banks to open investment banking divisions, or to push towards acquisitions of existing brokerages so that CMA rules apply across the board,” Mr Mweni said. “The third alternative is to issue new licences to new players to widen the spread of brokerage services around the country.”
Given the size of the Safaricom IPO, and the distinct possibility that the size of future offerings will continue to rise, the Central Bank of Kenya is also said to be contemplating regulations on lending during initial public offers to safeguard customers deposits.