If there is one true fact in economics, it is that any business can fail and similarly any business can rise to the top. The current financial crisis has left many brass plate names in finance dead in its wake while others have only survived thanks to cosy take over arrangements urged on by government officials, and for some the only option has been to accept a government purchase of shares. In the process, confidence in banks, or more precisely in the quality of credit risk on bank balance sheets, has sunk to an all time low and with it so have market values of banks.
Consider the case of Citibank: At the start of this year, it was the largest bank in the world. Today it can no longer lay claim to that title. This bank, with at least KES240trn (USD3.23trn) in assets, is suffering a huge crisis of confidence amongst equity investors. The fact that it has registered USD65bn in losses, charges and provisions on bad debt has obviously not helped matters. The share price has taken a hammering, having fallen 90% over the past 18 months. The situation is so dire that the board of directors took the whole weekend to review the current state of affairs and consider all options in a bid to boost confidence.
I suppose you are wondering what this has to do with our local stock market. The interesting twist in this tale is that Citibank’s operations in Kenya are actually a branch of the bank in New York. Unlike other multinational banks operating in Kenya whose local businesses are subsidiaries and as such their local businesses are segregated from operations elsewhere, Citibank’s are not. In essence, a subsidiary’s capital is dedicated to local operations and all credit risks are local. In the case of a branch, local capital to back local business does not exist, in contrast the local business is backed by the capital in the home market. More importantly, the local business is fully exposed to the risks generated in foreign markets. This could very well end up being the first direct channel through which the global financial crisis is transmitted into our local financial system. It is interesting contrasting the situation of Citibank with that of AIG, another one of the big problem cases in financial crisis: AIG’s problems in the US are not directly borne by policy holders in Kenya since its local operations are housed in a separate legal entity.
A question for Prof Ndung’u and his team at the central bank would be how they can enforce a certain level of capital to back local deposit taking operations. Additionally, in the event of a failure of Citibank, what kind of counter part exposures would the local banking industry be carrying against the bank? Given that the local business is a top corporate bank and runs a large trading business what, if any, disruptions to the local foreign currency trading platform could be experienced? The bank is a significant deposit taker of foreign currency accounts which constitute available foreign exchange in the hands of the private sector in the calculations of currency reserves. What would happen if these accounts became unavailable to the banking system? From a banking policy standpoint, is it a good idea to let a foreign branch grow into such a large operation in our local banking system? Does its status in any way restrict the ability of the central bank to take precautionary measures against Citibank? Would it not be prudent for the central bank to demand that Citibank converts into a subsidiary with dedicated non-variable capital to back its local operations?
For investors in NSE listed banks, the major concern would be what kind of risks could your bank be carrying in the event of a failure of Citibank? In my view it is unlikely the US government will stand by and allow Citibank to collapse in a crisis of confidence, since the repercussions in these times of uncertainty would be too drastic to contemplate. However, contemplating the possibility does force us to test our assumptions about how immune our financial system is from the unfolding financial crisis.
Read more over Citibank’s dispute with KRA over revenue allocation to their Kenyan branch:
Kenya: Revenue Authority and Citibank to Settle Out of Court in Tax Dispute?
About the Author
Robert Bunyi has worked for Equity Stockbrokers, Liquid Africa, Standard Bank of South Africa, Standard Investment Bank, and Renaissance Capital Kenya before setting up Mavuno Financial in June 2008. Robert can be reached on This e-mail address is being protected from spam bots, you need JavaScript enabled to view it for more information and advice on Kenya’s stock market.
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http://bankelele.blogspot.com
written by bankelele, November 25, 2008
written by bankelele, November 25, 2008
I believe the unit, and the rest of Africa would be sold to another bank with their lucrative Africa business - perhaps HSBC, Stanbic or Stanchart.
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