HF Group, a listed lender, has turned to shareholders through a rights issue to raise new shares to shore up deteriorating capital ratios that have fallen below the legal minimum, impacting its ability to grow the business.
The bank is set to issue 1.5 billion new shares, three for each of the shares held. The bank currently has 384.6 million shares in issue, which are traded on the Nairobi Securities Exchange at a current price of Kshs 4.15 per share.
The shares to be offered include an option to sell additional shares of up to 30 percent.
HF has not yet disclosed the pricing of the rights shares, the closing date of the register and the sale period as the issue is pending approval from shareholders, the Central Bank of Kenya, the Capital Markets Authority and the Kenya Stock Exchange.
However, at the current share price, the total rights shares would be worth Sh6.23 billion, although rights shares are usually discounted as an incentive for company shareholders to participate in the offer.
“On August 12, 2024, the directors of HF Group Plc have resolved to offer up to 1.499 billion new ordinary shares of a nominal value of Sh5 (including a 30 per cent green shoe option) to shareholders of record on the book closing date in proportion as practicable to up to three new ordinary shares for every share held,” the lender said in a notice published on Tuesday.
The bank’s latest financial statements, covering the quarter ended March 2024, show it had core or tier 1 capital of Sh1.9 billion and total capital (tier 1 plus additional or tier 2 capital) of Sh3.39 billion at the end of the period.
The ratio of core capital to total risk-weighted assets amounted to 5.2%, compared to the legal minimum of 10.5%.
The ratio of total capital to total risk-weighted assets, which has a legal minimum of 14.5%, reached 8.8%, while the ratio of core capital to total deposit liabilities reached 4.5% against the required minimum of 8%.
The bank indicated in its 2023 annual report that it intends to increase its core capital during 2024 to support its business growth.
HF’s last rights issue was in 2015, when it issued 116.67 million shares at Sh30 each, at a rate of one share for every two shares held. The offer raised Sh3.5 billion from investors’ bids of Sh9 billion.
Funds were allocated to expand branches and expand mortgage lending capacity.
Banks typically raise seed capital from existing shareholders, but they can also do so by selling shares either through a private placement or an initial public offering.
According to the Banking Law, core capital represents perpetual shareholders’ equity in the form of fully paid and issued shares, plus all declared reserves, minus goodwill or any other intangible assets, while Tier II capital (supplementary capital) mainly covers revaluation reserves, subordinated debt and statutory loan reserves.
Low capital ratios limit a bank’s ability to lend and receive more deposits, which ultimately affects profitability.
The regulations also impose restrictions on the bank’s ability to lend no more than 25% of its core capital equivalent to a single borrower (single obligor limit), which means that those with low core capital reserves are unable to finance large projects.
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