Financial services firm Britam #ticker:BRIT has lost nearly Sh4 billion in paper wealth from its recent investment in mortgage financier HF Group #ticker:HFCK, whose share has sunk to a 15-year low after a turn of poor financial performance.
Britam has a 48.2 per cent stake in HF or 186.2 million shares, which are now valued at Sh1 billion.
In 2014 and 2015, the insurer invested a total of Sh4.7 billion to raise its stake in HF from 21 per cent to 48.8 per cent — but some share sales last year shaved off this to the current 48.2 per cent.
HF’s share price erosion at the Nairobi Securities Exchange (NSE) has forced Britam to impaire (write off) investment worth Sh2.15 billion in the lender from its books, indicating that its management has had little faith in the ability of the bank’s stock to rebound to its previous levels.
HF is currently trading at Sh5.38 a share, the lowest since January 2003. In the past week, the stock has at times fallen below its par value of Sh5. Since December 2014, the share price has dropped seven-fold from Sh36.
“The impairment indicators considered were the significant decline in the listed share price, the net asset valuation of the associate in comparison to its market capitalisation and changes in the regulatory environment for banks as a result of the interest rate capping regulations effected in August 2016,” said Britam in its 2017 annual report.
“This resulted in an impairment loss of Sh1.31 billion (for the year ended December 2017)…which is included in the ‘unrealised fair value losses’ line in the statement of profit or loss. An impairment of Sh838.5 million was recognised in 2016.”
Britam acquired 57.2 million HF shares from Equity Bank #ticker:EQTY in December 2014 for Sh2.8 billion — adding to the 49.5 million it already owned at the time.
In 2015, Britam took up an additional 64 million shares in the lender after a rights issue, paying Sh1.92 billion for the additional stock.
Earlier this year, the insurer was awarded another 16 million shares in an HF bonus share issue, where shareholders got one share for every 10 held.
Britam is now likely to add further impairment on the investment for the financial year ending December 2018, given that the share is 48.2 per cent down in the year-to-date, and the lender has issued a profit warning for the financial year ending December 2018.
It is the worst performing banking stock at the NSE this year.
HF’s net loss for the nine months ended September stood at Sh332 million, compared to a net profit of Sh159.7 million during the same period last year.
The bank’s performance was weighed down by reduced lending and loan defaults, attributed to the tough economic climate in the real estate sector.
The lender’s balance sheet shows that shareholder funds, or net assets, fell from Sh11.3 billion in September 2017 to Sh10.8 billion at the end of September this year.
In writing off some of its investment in HF, Britam has joined a number of other listed firms that have paid the price for bad investment decisions leading to losses when impairing assets.
The list of bad investments include bonds issued by firms that later fell into financial distress, or in acquisitions that turn sour due to mismanagement and other financial challenges.
Sanlam Kenya #ticker:PAFR reported in its results for the six months ended June 2018 that it had been forced to write off Sh1.15 billion in investments, mainly in troubled cement manufacturer ARM Group (Sh574 million) #ticker:ARM, Real People Kenya (Sh398 million) and aluminium utensils and roofing sheets manufacturer Kaluworks (Sh169 million).
As a result, Sanlam sank to a net loss of Sh1.53 billion in the six-month period, compared to a Sh90.53 million net profit in the same period last year.
Kenya Airways #ticker:KQ has also recently fully impaired its 41.23 per cent equity interest in loss-making Tanzanian carrier Precision Air, which it acquired for Sh230 million in 2003, saying it does not expect the value of the investment to be recovered.
Unga Group #ticker:UNGA, which acquired Ennsvalley Bakery in two tranches in 2016 and 2017 for a total of Sh535 million, has also had to write off 28.2 per cent of this amount equivalent to Sh151 million.
This was after the bakery business ran into difficulties — largely linked to the problems affecting the supermarket chain Nakumatt.