Co-op Bank plans IPO despite objections

In spite of consumer inflation driven by rising oil and food prices, the Co-operative Bank will go ahead with its initial public offering (IPO) at the Nairobi Stock Exchange.

There are fears that the IPO will be undersubscribed. Investor disappointment caused by the near-fiasco of the Safaricom IPO earlier this year is still fresh, and could dampen demand for Co-op Bank shares.

The IPO’s lead sponsoring broker has warned against the venture at a time of worldwide economic uncertainty and inflation. Mr James Wanguyu of Standard Investment Bank was quoted last week as calling for the IPO to be postponed till next year. However, Mr Wanguyu has since changed his mind to support the IPO.

Acting Minister for Finance, John Michuki, has also dismissed calls for a postponement of the Co-op Bank IPO.

The Co-operative Bank of Kenya, Kenya’s fourth largest, hopes to raise Kshs10 billion (US$136,900,000). According to a press statement, the money will finance the bank’s mortgage products, information and communication technology infrastructure and expansion of the branch network.

Back in 2006 the KenGen IPO made history by attracting the largest number of individual investors ever seen in the history of the Nairobi Stock Exchange. Economic fundamentals were different back then, with 6% economic growth, a stable political environment, a boom in consumer spending and billions of shillings in remittances from the diaspora.

Today, consumers are hit by inflation rates of close to 30% due to rising prices for fuel, electricity and food. Post election violence after the December 2007 polls has greatly reduced confidence in the economy whose growth rate this year is expected to fall below 4% at best.

Hundreds of thousands of families, which had invested in previous IPOs, were rendered destitute in the violence as farms and property were looted. Political infighting within the ruling elite hasn’t done much to restore investor confidence in the Kenyan economy.

Gloomy economic forecasts have resulted in job cuts among Kenyan industries. Companies are complaining of reduced consumer demand coupled with higher energy prices. Cuts in electricity and water supplies have added to a worsening of the country’s economic situation.

Economic uncertainties, mostly in the United States, have greatly affected the flow of remittances by Kenyans living overseas. Quite a number of them have already lost their jobs. Unlike previous share offerings, Co-op Bank’s IPO is unlikely to attract much interest from the diaspora.

The fiasco that was the Safaricom IPO tarnished the reputation of the Nairobi Stock Exchange. Apparently, planners at the stock exchange, Capital Markets Authority and the Central Depository had greatly under-estimated the logistics of having so many shares introduced at once. Safaricom shares, by themselves, currently constitute almost a third of all shares at the Nairobi Stock Exchange.

To start with, few people got the actual shares they had applied for. Many ended up with so little that their allocations became meaningless as far as investment is concerned. Cash refunds took too long to process; in some cases individual investors waited months to get back their money. There were allegations that brokers were trading with the cash, hence delays with the refund cheques. It was further claimed that the Central Bank of Kenya issued instructions that refund money be released slowly in order to prevent a crash of the Kenyan currency.

And because of the huge number of Safaricom shares, the share price did not shoot up as expected. Indeed, Safaricom shares are currently trading more or less around the IPO price of Kshs5 (US$0.068) a share. The result has been tangible disillusionment among the mass of retail investors.

Co-op bank hopes that its improved performance after a loss-making streak will attract ordinary Kenyans. Furthermore, Co-op is placing huge bets on an enthusiastic response from the co-operative society sector, which is the bank’s core business. Co-op says it has put in place an automated IPO processing infrastructure that will enable it make refunds within a short time.

Co-operative Bank made a profit of Kshs1.7 billion (US$23 million) for the last financial year ending 30th June 2008 and has a target of Shs3.3 billion ($45 million) for the current year.

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