Understanding the Proposed Deal between Equity Bank and Spire Bank Equatorial Commercial Bank (ECB) was founded in 1983 as a Finance Company. Mwalimu Sacco acquired a 75% stake in the bank in 2015 and rebranded it to Spire Bank in 2016. In 2020, the Sacco bought the remaining 25% stake to fully own the bank. …
Understanding the Proposed Deal between Equity Bank and Spire Bank
Equatorial Commercial Bank (ECB) was founded in 1983 as a Finance Company. Mwalimu Sacco acquired a 75% stake in the bank in 2015 and rebranded it to Spire Bank in 2016. In 2020, the Sacco bought the remaining 25% stake to fully own the bank. Spire Bank is a Tier 3 bank in Kenya with a loan book of KES 1.8 billion (net loan and advances of KES 945 million after applying statutory loan loss provisions) and customer deposits of KES 1.9 billion as of 31st March 2022. The current performance is a deterioration from a loan book of KES 8.3 billion and customer deposits of KES 10.3 billion in 2015 when Mwalimu Sacco acquired a majority stake in the bank. Mwalimu Sacco acquired the bank at KES 2.4 billion and has continued to inject capital into the business; however, it’s proven difficult for the bank to attract cash from peer banks and the Central Bank of Kenya (CBK) due to the deteriorating performance. These developments have led shareholders to explore ways of cushioning the bank’s customers and other stakeholders from losses that would accrue from its failure.
In September 2022, Equity Bank (Equity) announced they had entered into an Assets and Liabilities Purchase Agreement with Spire Bank to purchase of certain assets and liabilities, subject to regulatory approval. The partnership will give Equity access to deposits and loan customers. Equity will take over 3,700 loan customers with a loan book of approximately KES 945 million and 20,000 deposit accounts with deposits estimated at KES 1.3 billion. Going by Spire Bank’s unaudited half-year financial report as of June 2022, Equity will take over 100% of Spire’s loan book (assets) and 68% of its deposits (liabilities).
We sought to answer some key questions about the Equity-Spire Bank proposed transaction; these are:
Q. Is this an acquisition of Spire Bank by Equity Bank?
A. No, this is not a stock purchase of Spire Bank by Equity Bank; rather, it is an Assets and Liabilities Purchase Agreement, which allows Equity to purchase certain assets and liabilities belonging to Spire Bank. Mwalimu Sacco remains the legal owner of Spire Bank. The key difference between an asset purchase and a stock purchase is that; in an asset purchase, the strategic buyer purchases individual assets of the company such as customers, inventory, licenses, equipment, and goodwill. The seller retains the liabilities and legal ownership of the entity. In contrast, in a stock purchase, the buyer purchases all the assets and liabilities and takes legal ownership of the entity. In this transaction, Equity will not be taking over other (non-core) liabilities belonging to Spire Bank; the shareholders of Spire will be expected to meet their financial obligations to remaining creditors, employees, and other stakeholders.
Q. Does the transaction include a cash consideration?
A. There is no publicly available information on the cash consideration, if any, for the transaction. However, a typical asset purchase would include a cash payment or value exchange for the acquired assets.
Q. How does Equity benefit from the transaction?
A. It gives Equity access to an additional 20,000 teachers to bring the total number of teachers being served by Equity to over 100,000. Teachers are a key customer segment for Equity for deposits and loan mobilization. The bank has disbursed a total of KES 33 billion (5% of total loans) to 43,000 teachers; this translates to KES 800 million in monthly repayments. In addition, Equity processes a total monthly remittance of KES 1.8 billion in teachers’ salaries, earning them additional income from fees. Evidently, this segment is contributing to the bank’s interest income and non-interest income lines. Further, this structure allows Equity to only assume liability for core liabilities (customer deposits) and avoid responsibility on non-core liabilities (creditors, employee liabilities etc). In addition, the transaction aligns with Equity’s strategy of supporting economic recovery in a post-COVID world.
Q. How does Spire Bank benefit from the partnership
A. The agreement will allow Spire Bank’s deposit and loan customers to continue accessing banking services through Equity Bank. All factors held constant, the transaction is expected to close on 30th November 2022, and all existing loan customers and depositors of Spire Bank (other than remaining deposits from Mwalimu National Sacco) are expected to become customers of Equity Bank Kenya. This agreement will enable Spire’s customers to reap from a wide branch and agent network as well as digital channels established by Equity. It will also cushion the customers from losses that would arise from the failure of the bank.
Q. What will become of Spire Bank after completion of the transaction?
A. On completion of the transaction, Spire Bank will cease to provide banking services.
Q. Why isn’t Equity acquiring 100% of Spire’s customer deposits?
A. In a market where banks are scrambling for customer deposits, it was surprising that Equity is only acquiring 68% of Spire’s customer deposits. This may be explained by the fact that Equity’s loan book stood at KES 650 billion against customer deposits of KES 971 billion as at June 2022; this translates to a loan-to-deposit ratio (LDR) of 67%; which is lower than the ideal LDR of 80% to 90% for banks. Notably, Equity’s LDR has been in the 70% range in the past, which means that Equity isn’t fully sweating out the customer deposits. That said, a press release by Equity states that “On completion of the proposed transaction on 30th November 2022, all existing depositors of Spire Bank (other than remaining deposits from Mwalimu National Sacco) will become customers of Equity Bank Kenya.” On this basis, it is also possible that the decision was advised by strategic reasons or a matter of preference considering the portion that was left out belongs to Mwalimu Sacco, the only shareholder in Spire Bank. We did not seek to ascertain why Equity did not acquire 100% of the customer deposits and this is purely our opinion based on our analysis.
In conclusion, it’s no surprise that Equity opted for an asset purchase and not a stock purchase because strategic buyers tend to favour an asset purchase because it gives them discretion of what to purchase while excluding some (or all) liabilities from the transaction. In the Equity-Spire Bank case, Equity is a strategic buyer and commits to also purchase certain liabilities; reason being, the liabilities to be acquired are customer deposits, which are core to Equity Bank’s business operations. Sellers, on the other hand, prefer a stock purchase because it encompasses transfer of both assets and liabilities to the new owner and they are free to step away from the business.
The table below compares some transaction aspects between an asset and stock purchase.
Keziah Njeri, Associate Principal InVhestia Africa Ltd.