It has been a few busy weeks for DFCU Ltd, whose wholly-owned subsidiary DFCU Bank bought Crane Bank on January 27, and its shareholders thereby increased capitalisation and are now planning a rights issue.

The EastAfrican has learnt that the DFCU board will soon meet to endorse a plan for a rights issue for its shareholders, pending regulatory approvals by the Capital Markets Authority and the Bank of Uganda.
The rights issue will be the third significant move by DFCU.

ALSO READ: How DFCU beat other bidders in the race to acquire Uganda’s Crane Bank

On February 28, DFCU board chairman Elly Karuhanga announced that the Uganda Securities Exchange-listed company had concluded an agreement to borrow from one of its shareholders to raise its capitalisation by $50 million in order to qualify to be among the biggest lenders.

The money was borrowed from Arise BV — a consortium of private equity firms that are among the biggest shareholders in DFCU, including Norfund, NorFinance, Rabobank and FMO — as a $50 million bridging finance facility to support the enhanced capital adequacy requirements of DFCU Bank Ltd.

“Of course, we bought a bank that was bigger than ours, so we had to increase our capitalisation. I signed the cheque the other day,” said Mr Karuhanga.

CMA spokesman Charles Nsamba said on March 7 that he was not aware of any such move because DFCU had not yet submitted its proposal to the capital markets regulator. He, however, concurred that for a company that had bought the fourth largest bank in terms of assets and fifth largest in terms of deposits, a rights issue was necessary.

“Usually the board approves the rights issue; it takes time to prepare documentation to submit to the regulator,” said Mr Nsamba.
A rights issue could also trigger more interest and activity on the counter of the stock whose share price fell from Ush770 (US cents 21.3) on January 10 to Ush760 (US cents 21.1) on January 11, and remained flat, even following the announcement on January 31 that DFCU had acquired Crane Bank.

Stock’s activity
During this period, the only movement was on March 6 when the stock’s share price fell to Ush750 (US cents 20.8) before rebounding to Ush760 the next day.
Despite seeing little activity for some time, DFCU has previously posted good results and remains one of the most stable stocks on the USE. Its stock was trading at a healthy Ush1,200 (US cents 33.3) before it announced a share split a few years ago.
A rights issue is an issue of shares at a special price by a company to its existing shareholders, which entitles them to buy additional shares directly from the company in proportion to their existing share holding.   
Details of the amount DFCU is hoping to raise from the rights issue are still a matter of speculation until the transaction documents are finalised, but capital markets observers say the lender could be targeting about $30 million.
They argue that for a bank that has taken over assets and liabilities of the former major lender Crane Bank, 23 of whose 46 branches DFCU closed after the deal, the group will be informed by the need to raise enough funds to clean up the Crane Bank mess, but also for DFCU to buttress its operational and capital requirements that the central bank demands.

Locking in capital
Bank of Uganda Governor Emmanuel Tumusiime Mutebile announced at the annual bankers dinner last year that the regulator would effective end of December 2016 raise “the minimum statutory adequacy ratios to lock in most of the greater capital that banks currently hold.” 

“The minimum core capital requirement will be raised to 10 per cent of risk-weighted assets and banks will also be required to hold a capital conservation buffer of 2.5 per cent of their risk-weighted assets,” said Prof Mutebile.
This meant that the capital buffers of the big three players in the market — Stanbic Bank, Standard Chartered Bank and Crane Bank — described by the regulator as domestic systemically important banks or DSIBs, are expected to be higher than the new minimum requirement for the rest of banking sector.

The regulator demands that all DSIBs have an additional capital requirement of 1-3.5 per cent of risk-weighted assets added to the minimum capital ratios, to manage the ripple effects in case of such a big bank’s collapse.

After taking over Crane Bank, DFCU is now one of the three DSIBs, BoU director of information Christine Alupo said.
The major DFCU shareholders that will look to take up additional shares in the rights issue are Norfinance, which holds a 27.54 per cent stake, Rabobank Development B.V, also with a 27.54 per cent stake, Commonwealth Development Corporation with a 15 per cent state and other investors with a 29.92 per cent stake