SHAREHOLDERS’ CIRCULAR ON THE PROPOSED TAKE-OVER … · 1 National Bank of Kenya Limited, Circular to Shareholders National Bank of Kenya Limited, Circular to Shareholders 2 PHASE

SHAREHOLDERS’ CIRCULAR ONTHE PROPOSED TAKE-OVER OFFERBY KCB GROUP PLC

2National Bank of Kenya Limited, Circular to Shareholders1 National Bank of Kenya Limited, Circular to Shareholders

If you have disposed of all your shares in the National Bank of Kenya Limited (“NBK”) please forward this document

to the stockbroker, banker or other agent through whom you disposed of your shares.

This Circular has been prepared to assist the shareholders of NBK to decide whether to accept or reject the Offer from

KCB Group Plc. Details of the Offer are provided within this Circular. Please note that you are required to complete

and return the Form of Acceptance in accordance with the instructions printed thereon. The Form of Acceptance

from KCB is attached separately to this Circular. The completed Form of Acceptance should be sent to the address

indicated thereon.

This Circular is being issued by NBK and has been prepared in compliance with the requirements of The Capital

Markets Act (Cap. 485A), The Capital Markets (Take-Overs and Mergers) Regulations, 2002, The Capital Markets (Li-

censing Requirements) (General) Regulations, 2002, The Capital Markets (Securities) (Public Offers, Listing and Dis-

closures) Regulations, 2002 and the Nairobi Securities Exchange Listing Manual, 2002. The Capital Markets Authority

(“CMA”) has approved the issuance of this Circular, and the transactions described in it. As a matter of policy, nei-

ther the Capital Markets Authority nor the Nairobi Securities Exchange Limited (“NSE”) assume any responsibility

for the correctness of any statements or opinions made or reports contained in this Circular.

National Bank of Kenya Limited(Incorporated in Kenya on 19/06/1968 under the repealed Companies Act (CAP.486))

Registration Number C.7763

THIS DOCUMENT IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

CIRCULAR TO SHAREHOLDERSPROPOSED

TAKE-OVER OFFER BY KCB GROUP PLC.

Dated: 9th July 2019


PHASE 2 – Transaction in respect of KCB OfferEVENT KEY DATESKCB serves NBK with the approved Takeover Document (S.7(4)) - 5days T+0 days - (19th June 2019)

Opening of the Offer Period (Note) T+1 day - (20th June 2019)NBK issues a Shareholders Circular and circulates the Circular and Takeover Offer Document to its shareholders (S.7(5)) - 14days

T+20 days - (9th July 2019)

Deadline for Competing Offer - 10 days before closure of Offer Period (S.13(2) T+28 days - (17th July 2019)

Deadline for KCB to vary its Offer - 5 days before closure of Offer Period (S.16) T+35 days - (24th July 2019)

Closing of Offer Acceptance period (S.8(1)) - 30 days T+42 days - (31st July 2019)

Announcement of Acceptances by KCB (S.20) - 10 days of closing the Offer T+56 days - (14th August 2019)

CMA Final Approval T+61 days - (19th August 2019)

Completion by KCB and Re-designation of Preference Shares & uploading of the Re-designated Shares at the CDSC

T+66 days – (24th August 2019)

Completion Announcements by NBK and KCB T+67 days - (25th August 2019)

PART 1 – INDICATIVE TIMETABLE

The above dates are indicative and timelines are subject to amendment as may be communicated from time to time.


Joint Transaction Advisor Joint Transaction Advisor

Pacifis Advisory LimitedInternational House, 1st FloorMama Ngina StreetP.O. Box 6392- 00100 Nairobi, KenyaAttention: John Kiruthu

Standard Investment BankICEA Building 16th Floor, Kenyatta Avenue P.O. Box: 13714 – 00100Nairobi, KenyaAttention: Job Kihumba

Joint Legal Advisor Joint Legal Advisor

Oraro & Company AdvocatesACK Garden Annex, 6th Floor, First Ngong AvenueP.O. Box 51236-00200Nairobi, KenyaAttention: George Oraro S.C.

Miller & Company AdvocatesStandard Street, Bruce House, 13th Floor,P.O. Box 45707 - 00100 GPO Nairobi, KenyaAttention: Cecil G. Miller

Auditors Independent Advisor

PricewaterhouseCoopersDelta TowersWestlandsP.O. Box 43963-00100Nairobi, KenyaAttention: Michael Mugasa

Standard Investment BankICEA Building 16th Floor, Kenyatta Avenue P.O.Box: 13714 – 00100Nairobi, KenyaAttention: Job Kihumba

Share Registrar Communications Advisors

Image Registrars Ltd5th Floor, Barclays Plaza, Loita StreetNairobi, KenyaAttention: Lawrence Kibet

H+K Strategies EA Ltd7th floor, The Chancery Building, Valley RoadP.O.Box 34537 – 00100Nairobi, Kenya Attention: Sam Karanja

TRANSACTION ADVISORS


“Acquisition” The proposed purchase of a hundred percent (100%) shares of the Bank by KCB Group Plc or an eligible competing offeror as described in this Circular;

“AGM” The Annual General Meeting of NBK held on 14th June 2019;

“Articles of Association” The Articles of Association of NBK;

“Banking Act” The Banking Act (Cap 488), as amended, of the Laws of Kenya;

“Board” or “Directors” The persons named on page 5 as Directors of NBK;

“CBK” The Central Bank of Kenya, established under the Central Bank of Kenya Act (Cap 491) of the Laws of Kenya;

“CMA” The Capital Markets Authority, established under The Capital Markets Act (Cap 485A) of the Laws of Kenya;

“Company” or “NBK” or “Bank” National Bank of Kenya Limited, a public limited liability company (Incorpo-rated in Kenya on 19/06/1968 under the repealed Companies Act (CAP.486) - Registration Number C.7763), listed on the NSE under the Main Market Segment;

“Competing Offer” Means a offer lodged for acquisition of NBK shares by an eligible Investor under the Capital Markets Act, whose effect would be to create competition against the Offer made by KCB;

“Competition Act” Means the Competition Act, Act No. 12 of 2010;

“Competition Authority” or “CAK” Means the Competition Authority of Kenya established under Section 7 of the Competition Act;

“Completion” The date on which KCB Group Plc or an eligible competing offeror completes the acquisition of the NBK shares;

“Completion Date” The date Completion takes place;

“Consideration” or “Purchase Consideration”

means the consideration payable to the Shareholders of NBK by KCB for acquisition of their ordinary shares, wh ich consideration is to be satisfied in one (1) fully paid up ordinary share of KCB for every ten (10) ordinary shares of NBK;

“Form of Acceptance” The Offer to be completed by each shareholder as evidence of acceptance or rejection of the KCB Offer, attached separately to this Circular.

“KCB” KCB Group Plc, a public limited liability company incorporated in Kenya under the Companies Act (No 17 of 2015) with Company Registration Number C9/88, listed on the NSE under the Main Market Segment and cross listed on the Uganda Securities Exchange, Dar es Salaam Stock Exchange and Rwanda Securities Exchange;

“KShs” or “Kshs” Kenya Shillings, the lawful currency of the Republic of Kenya;

“NSE” The Nairobi Securities Exchange Limited;

“Re-designated Shares” 1,135,000,000 issued non-cumulative preference to be re-designated as ordinary shares on the terms described in this Circular; and

“Re-designation of preference shares”

Means the reclassification of the non-cumulative preference shares to ordinary shares conditional upon completion of the KCB Take Over Offer or a Competing Offer.

DEFINITIONS

The following definitions apply throughout this Circular, unless the context requires otherwise:


Directors:Mr. M A Hassan - Chairman - Non-ExecutiveMr. W Musau - Chief ExecutiveCabinet Secretary, National Treasury - Non-ExecutiveDr. A Omerikwa - for Managing Trustee, National Social Security Fund - Non-ExecutiveMr. M J Obuya - Non-Executive Dr. F L Atwoli - Non-ExecutiveMs. L Mirehane - Independent Non-ExecutiveMr. J K Kering - Independent Non-ExecutiveMr. J M Nzomo - Independent Non-Executive

Company Secretary: Mr. H A Waswani

To all shareholders of National Bank of Kenya Limited 3rd July 2019

Dear Shareholder,

PROPOSED TAKE OVER OFFER BY KCB GROUP PLC

On 18th April 2019 the Company received a Notice of Intention from KCB Group Plc (“KCB”) to acquire a hundred percent (100%) of the ordinary share capital of the Bank after re-designation of the preference shares as ordinary shares on a one/one basis, with the purchase consideration being satisfied in one (1) share of KCB for every ten (10) shares of NBK i.e. via a share swap. On 6th May 2019, your Board received the Offeror’s Statement from KCB reiterat-ing the Offer details contained in the Notice of Intention. As required by law, and as a matter of public interest, NBK made the requisite public announcements.

It was a condition of the KCB Offer that the preference shares in the capital of the Company be converted into ordinary shares.

Consequently, your Board at its meeting of 16th May 2019 resolved to make recommendations to its shareholders at the AGM of 14th June 2019 that: (i) the preference shares in the capital of the Bank be re-designated as ordinary shares conditional upon completion of the Take Over Offer by KCB or a Competing Offer; and (ii) the shareholders of NBK be informed of the Offer made by KCB to the shareholders of NBK.

At the AGM of 14th June 2019 the shareholders of NBK conditionally approved the re-designation of the preference shares. On 19th June 2019, KCB proceeded to serve the Take-Over Offer on NBK, paving way for the final phase of the proposed Transaction.

As a consequence, we have prepared this Circular for purposes of providing you with information on: (i) terms of the Take-over Offer; and (ii) Directors recommendation to the shareholders on the Offer based upon the Independent Advisor’s opinion.

The Completion of the Acquisition is conditional to customary closing conditions that include procurement of share-holders’ approval as well as regulatory approvals from the Capital Markets Authority, Nairobi Securities Exchange, Central Bank of Kenya and Competition Authority of Kenya, which the Board expects will be obtained by end of August 2019.

PART 2 - LETTER FROM THE CHAIRMAN

National Bank of Kenya LimitedNational Bank Building, Harambee Avenue, P.O. Box 72866-00200, Nairobi, Kenya Telephone: +254 20 282 8000, +254 711 038957 Email: [email protected]


BACKGROUND AND VALUE PROPOSITION FOR THE PROPOSED TRANSACTIONS

Rationale for Offer by KCB Group Plc:

As had been highlighted in the Interim Circular, KCB Bank Kenya Limited is currently the largest bank in Kenya by total assets and profitability. KCB employs a business model that similar to NBK and as such there might be several synergies from a business combination. Thus a business combination may unlock immense value for the shareholders of both Banks. Furthermore KCB’s two most significant shareholders happen to be the two most significant shareholders at NBK. It is also the government policy to support mergers within the banking sector in order to create strong players who will support the realisation of Vision 2030 goals.

Therefore, the Board and Management of NBK are of the view that, subject to agreement of terms and shareholders and regulatory approvals, the successful completion of the proposed transaction would be of great benefit to all the customers and stakeholders of NBK and KCB in view of the following:

1. Both NBK and KCB Bank Kenya Limited are strong banks in the Kenyan market having the Government of Kenya as a shareholder.

2. Both banks have a long history in the Kenyan market with a strong track record of serving customers which has contributed greatly to the development of the country.

3. The successful completion of this transaction will augment the Government policy of sector consolidation whose aim is to create strong banks that will support the realization of the medium-long term development goals of the Vision 2030.

4. Under the proposed transaction NBK will continue to operate as a separate subsidiary of KCB for about two years and therefore service delivery to its customers will remain uninterrupted.

5. The combined balance sheets of the two banks will increase the capital capacity of both banks.

In summary, the salient terms of the Take-Over Offer from KCB are as follows:

(i) Offer Intention: to acquire a 100% of the Offer Shares.

(ii) Offer Price: 1 share of KCB for every 10 shares of NBK. The Take-Over Document has clarified that KCB has valued NBK at Kshs 5,601,842,341. This was calculated using the volume weighted average prices (“VWAP”) of NBK shares for the 180 days up to and including 16th April 2019, upon which a discount of 30% was imputed to arrive at an Offer price of Kshs 3.801 per share. Details of the valuation are given under section 2.6 and Appendix 3 of the Take-Over Document.

(iii) Take-Over Offer will be considered to be successful upon receipt of acceptances from shareholders with at least 75% of the Offer Shares.

(iv) Revision of Offer Price: section 3.5 of the Take-Over Document makes provision for revision of the KCB Offer.

(v) Offer Period: the Offer period given in the Take-Over Document (section 3.1) which is currently being reviewed.

(vi) Conditions of the Offer: section 2.4 of the Take-Over Document has outlined the Conditions to the Offer. One of these conditions is that the NBK Shareholders should approve the de-listing of NBK from the NSE.

This would require an EGM and because none is planned, KCB will be required to waive this condition.

(vii) KCB’s intentions on NBK’s business: section 2.9 of the Take-Over Document confirms the following:

1. NBK will operate a subsidiary of KCB for an initial period of two years.2. During the initial two years, the staffing of NBK will not be affected; and3. After the two years, the businesses of NBK and KCB Bank Kenya will be integrated. 4. Section 2.9.2 further states that during the integration period, KCB will among other things conduct a review

of the organizational structure in a offer to improve the management and operations of NBK from an efficien-cy as well as product view point. It goes further to say that the reorganization will lead to an overall reduction of the workforce and optimisation of the distribution network.


Part 5 of this Circular sets out further information on the Take-Over Offer from KCB.

RE-DESIGNATION OF PREFERENCE SHARES

The Shareholders of NBK approved the conditional re-designation of preference shares into ordinary shares at the AGM of 14th June 2019.

As a result of the re-designation of the preference shares, following Completion, the issued ordinary share capital of NBK will increase by 1,135,000,000 from 338,781,200 to 1,473,781,200 ordinary shares and the shareholding of the Company will be dependent on the number of acceptances received by KCB.

If KCB receives acceptances in respect of one hundred per cent (100%) of the share capital of the Company, the shareholders of the Company will acquire, on a pro rata basis, a total of one hundred and forty seven million, three hundred and eighty three thousand, nine hundred and sixty eight (147,383,968) ordinary shares in the share capital of KCB, equivalent to approximately 4.59% of the share capital of KCB.

If Completion does not occur the shareholding of the Company will not change.

Part 6 of this Circular shows the impact of the implementation of the restructuring i.e. the re-designation of Preference Shares as Ordinary Shares based on a ratio of one to one including the Proforma Shareholders Funds at Completion of the Take-Over Offer or a Competing Offer.

APPROVALS FOR THE RE-DESIGNATION OF PREFERENCE SHARES

Regulatory approvals are being sought from the relevant regulatory authorities (including CMA, CBK, NSE and Competition Authority of Kenya (if applicable)).

The conditional approval by the Shareholders of NBK was procured during the AGM. APPROVALS FOR TAKE-OVER OFFER

At the AGM, the shareholders were advised that each one of them will be getting an Offer from KCB. The shareholders will be required to complete the Offer by signing the Form of Acceptance. Based on the Take-Over Offer, KCB will consider the Offer to be successful upon receipt of acceptances amounting to 75% of NBK’s share capital.

As stated above, several regulatory approvals are required and in accordance with the CMA Regulations any import-ant information that could have an impact on share prices must be published within 24 hours of any decision or any important information being obtained by NBK.

ADDITIONAL INFORMATION

Included in Parts 3 - 8 of this Circular is additional important information and disclosures regarding the transaction as follows:

Part 3 – Information on NBK including Board and Senior Management Part 4 – Information on the valuation of NBK by the Independent Advisor and the Board Recommendation Part 5 – Information on Take-Over Offer/Offeror’s Statement from KCB Part 6 – Pro-forma Financial Information and Shareholding Information Part 7 – Additional CMA Disclosures and General InformationPart 8 – Specimen Form of Acceptance


RECOMMENDATION BY BOARD

Based on the Independent Advisor’s Report, the NBK Board is aware that the Offer made by KCB falls below the expected valuation range. Specifically, this report has placed the fair value of NBK share at Kshs 6.10 resulting in an equity valuation for a hundred percent shareholding in NBK of Kshs 9.0 billion (equivalent to a swap ratio of 6.23 shares of NBK for every 1 share of KCB). However, the Board is aware that so far, no competing offers have been re-ceived, which makes it difficult to comment on the best obtainable prices from the market. Furthermore, as advised to the shareholders previously although NBK remains a strong bank, it requires additional capital to meet regula-tory capital and grow its business, which capital can be provided by KCB. In the circumstances, and on prudence grounds, in the absence of a responsive Competing Offer, the Board recommends the Offer to the shareholders for consideration. The details of the recommended valuation range are given under Part 4 of this Circular.

The Directors of NBK have also considered whether the 180 calendar days volume weighted average prices of KCB share reported at Kshs 40.77 in the Take-Over Offer, reflects on an overall basis, a fair valuation of the value of KCB. In this respect, the directors have concluded that given: (i) the stock is actively traded in the market; and (ii) KCB is a market leader in the Kenyan banking sector, the 180 calendar days VWAP to 16th April 2019 is reasonable assessment of KCB’s share value and by inference its valuation.

I am therefore pleased to present this opportunity to you and in case you have any doubt as to what action to take, it is recommended that you seek independent professional advice from your stockbroker, investment advisor, accountant, banker, lawyer or other professional advisor. NBK will also run a help desk (Email: [email protected]) to assist with shareholder queries of administrative nature.

Further information on the Transaction will be relayed to the Shareholders through Public Announcements.

Yours truly,

Mohamed A. HassanChairman


Background

NBK is a public company listed on the Nairobi Securities Exchange (“NSE”) and licenced under the Banking Act Cap 488 (as amended) of the laws of Kenya to provide commercial banking services.

The Bank was incorporated on 19th June 1968 and officially opened its doors on 14th November 1968. It was formed by GoK as a wholly owned Government entity, with the objective of helping Kenyans get access to credit and con-trol their economy after independence. It remained a Government wholly entity until 1994, when the Government reduced its shareholding by 32% (40 Million Shares) to members of the public through a listing on the NSE. In May 1996 the GoK further reduced its shareholding by 40 million Shares to the public.

During its 34th AGM held on 25th April 2003 the Bank increased its share capital by Kshs 6 Billion from Kshs 3 Billion to Kshs 9 billion through the creation of 1,200,000,000 non-cumulative preference Shares of Kshs 5 each.

Its two key shareholders are the National Treasury of Kenya and the National Social Security Fund (NSSF). The NSSF holds 48.1% of the ordinary shares as well as 20.7% (253 million) of the non-cumulative preference shares in the Bank. The National Treasury holds 22.5% of the ordinary shares as well as 79.3% (900 million shares) of the Bank’s non-cumulative preference shares. The remaining 29.5% of the ordinary shares are held by the general public through the NSE.

Today the Bank is classified as a Tier 2 bank in Kenya and held the thirteenth ranking in FY2017 (FY2016: 11th ranking) with a Market Share Index of 2.37% (FY2016: 2.9%), and assets, deposits and shareholders’ funds market shares of 2.7%, 3.3% and 1.1% (FY2016: 3.1%, 3.7%, 1.9%), respectively.

The Bank enjoys significant support from customers and as at 31st December 2017 it had 597,649 depositors (FY2016: 520,095 depositors) making it the eighth (8th) largest bank in the Kenyan market in terms of depositors.

NBK offers a full range of banking products and services which include retail banking, business banking, Islamic banking, corporate & institutional banking, treasury, etc. Its conventional product offering includes financing, trade services, mortgages, account services, custody services, Islamic banking and cards services. It also provides bancas-surance, investor and Chinese offerings/business services. These services are provided to the market through its personal, business, corporate, Islamic market segments. The Bank’s network footprint comprises of approximately 83 branch outlets, 124 automated teller machines (ATMs) and 1,480 Agents, augmented by mobile and internet digital/electronic channels.

The Bank also has three wholly owned subsidiaries namely:

1. Natbank Trustee and Investment Services Limited which provides investment and custody services; 2. Kenya National Capital Corporation Limited which handles some of the old loan accounts; and 3. NBK Insurance Agency Limited which provides bancassurance services.

On 24th May 2013, the Bank rebranded and changed its logo and colours from predominately green to yellow. The new slogan is “Bank on Better.” This is a brand promise to customers, shareholders as well as stakeholder.

At present NBK employs about 1356 staff (permanent 1153; contract 203) serving about 650,000 customers through its branches and head office in Nairobi. Driven by innovation, NBK has a broad service offering mainly address-ing corporates and SMEs. Given its footprint, history and number of depositors, NBK presents a bank with growth potential in the Kenyan market.

Board and GovernanceNBK has practiced sound corporate governance over the years under the stewardship of its Board of Directors. The Board has ten members comprising of nine non-executive members and the Chief Executive. The Board oversees management on behalf of shareholders, formulates the business strategy, approves policies and procedures, over-seas risk management and monitors key operational and performance indicators to ensure that the business and operations perform in line with expectations. NBK is regulated by the CBK under the Baking Act Cap 488 of the laws of Kenya, while its subsidiaries engaged in custody and bancassurance services are regulated by the CMA and IRA, respectively.

PART 3 - INFORMATION ON NBK


Before admission to the Board, all directors are subjected to fit and proper pre-approval process by the CBK. The fit and proper approval process takes into account the experience, track record and integrity of each board member.

Similarly, NBK has policies and processes of recruiting the appropriate skill set of management. Before recruitment of senior management, such management are subjected to fit and proper pre-approval process by their respective regulators. The names for the incumbent board members and the senior management are given under Table 1 below

(their profiles are available on the website of NBK).

Table 1: Names of Directors, Company Secretary and Senior Management

Names of Directors Position

1 Mohamed Hassan Chairman Non-Executive

2 Wilfred Musau Managing Director and CEO

3 Cabinet Secretary, National Treasury Non-Executive

4 Dr. Anthony Omerikwa Non-Executive

5 Mark Obuya Non-Executive

6 Dr. Francis Atwoli Non-Executive

7 Jones Nzomo Non-Executive

8 Linnet Mirehane Non-Executive

9 Joseph Kering’ Non-Executive

Office of Company Secretary

10 Habil Waswani Company Secretary

Names of Senior Management Position

1 Wilfred Musau Managing Director and CEO

2 Reuben Koech Director, Corporate Banking

3 Peter Kioko Chief Finance Officer

4 Habil Waswani Company Secretary & Director, Legal Services

5 Cromwell Kedemi Director, Retail Banking

6 Bernadette Ngara Director, Marketing, Corporate Communication & Customer Experience

7 Musa Adan Director, Islamic Banking

8 Stephen Gathongo Director, Credit

9 Rodgers Mungumi Director, Human Resources

10 Paul Mureithi Director, Operations

11 Zablon Jowi Director, Internal Audit

12 Dominic Wandongo Acting Chief Risk Officer

13 Shadrack Kiamuko Acting Director, Information and Communication Technology


Table 2: NBK Income Statements FY2016, 2017 and 2018 (all figures in Kshs 000’)

FY2016 FY2017 FY2018

Interest Income 12,100,827 12,008,522 10,870,018

Interest expense (4,308,945) (3,237,573) (2,884,962)

Net interest income 7,791,882 8,770,949 7,985,056

Net fees and commission income 1,453,236 1,435,462 1,102,007

Net gains on foreign exchange dealings 363,863 526,963 601,114

Other operating income 1,039,938 369,127 165,976

Net operating income 10,648,919 11,102,501 9,854,153

Net income from financial instruments at FVTPL - 97,127 (5,312)

Impairment loss on loans and advances (2,415,001) (2,802,767) (2,142,224)

Other operating Expenses (8,154,027) (7,611,779) (7,791,518)

Profit /(loss) before tax 79,891 785,082 (84,901)

Income tax expense (8,938) (374,298) 91,909

Profit/(Loss) after tax 70,953 410,784 7,008

Other Comprehensive income net of tax (45,500) (87,328) 598,421

Total Comprehensive income for the year 25,453 323,456 605,429

Source: Annual Reports FY 2016, 2017 and 2018 as restated

Historical Financial information

NBK prepares its financial statements to 31st December each year in accordance with International Financial Report-ing Standards. The sections that follow set out extracts of the audited financial statements of the Bank, for the three financial periods to 31st December 2018, which were issued without qualification.

Summarised Consolidated Income Statements

Table 3: NBK Income Statements Analysis

FY2016 FY2017 FY2018

Interest income on loans and overdrafts Kshs 000’ 8,793,748 7,746,782 6,384,732

Other interest income Kshs 000’ 3,307,079 4,261,740 4,485,286

Growth in interest income on loans -1.6% -11.9% -17.6%

Growth in other interest income -0.2% 28.9% 5.2%

Net interest margin 64.4% 73.0% 73.5%

Non interest income/Net interest income 36.7% 26.6% 23.4%

Impairment loss on loans & advances to Interest income on loans & advances

27.5% 36.2% 33.6%

Other operating expenses to Net Operating Income 76.6% 68.6% 79.1%

Profit before tax / total income 0.75% 7.07% -0.86%

Net profit / total income 0.67% 3.70% 0.07%

Commentary on historical Income Statements:

Table 3 above provides a limited analysis of the performance of NBK from FY 2016 up to FY2018. In summary, the following inferences can be made:

• Interest income on loans and advances: this has dropped each year owing to two factors namely; the reduction of loans and advances to customers owing to low lending activity in view of capital requirements and effect of the interest rate cap. For example the FY2017/2016 income for NBK fell by 11.9% compared to a fall of 11.2% for the entire Kenyan banking sector.

• Other interest income: there was a drop of 0.2% in FY2016 over FY2015. Since then this income has increased year on year supported by increased investment in liquid assets or near cash equivalents.


Table 4: NBK Statements of Financial Position as at 31st Dec. 2016, 2017 and 2018 (all figures in Kshs 000’)

Assets FY2016 FY2017 FY2018

Cash and balances with Central Bank of Kenya 8,559,339 7,500,172 6,117,711

Financial assets [HTM] 27,708,283 20,813,253 18,178,199

Financial assets [AFS] 6,837,549 14,904,779 28,163,573

Deposits and balances due from financial institutions 1,311,975 2,460,142 2,068,220

Loans and advances to customers 55,019,784 52,361,043 47,778,777

Other assets 3,713,880 3,689,398 3,674,536

Non-current assets held for sale 590,944 590,944 438,569

Other investments [quoted and unquoted]-Note 19 237,007 334,134 366,822

Current Income Tax 506,976 486,345 459,476

Deferred tax asset 2,136,531 1,862,363 2,290,168

Property and equipment 4,111,684 3,710,949 3,998,833

Intangible Assets 1,352,178 1,159,618 1,314,221

TOTAL ASSETS 112,086,130 109,873,140 114,849,105

LIABILITIES

Customers deposits 93,870,288 94,275,768 98,865,959

Deposits and balances due to financial institutions 7,311,668 5,620,120 6,020,730

Other liabilities 3,993,724 2,743,344 2,989,562

TOTAL LIABILITIES 105,175,680 102,639,232 107,876,251

NET 6,910,450 7,233,908 6,972,854

EQUITY

Share capital 7,214,976 7,368,906 7,368,906

Revaluation reserve 680,430 670,676 1,261,906

Retained earnings (1,367,738) (3,525,502) (4,854,776)

Statutory credit risk reserve 428,282 2,852,654 3,333,324

Other reserves (45,500) (132,826) (136,506)

6,910,450 7,233,908 6,972,854

Total Liabilities and equity 112,086,130 109,873,140 114,849,105

Source: Annual Reports

• Net interest margin: despite the interest rate caps this has improved year on year due to improved management of the cost of deposits standing at 73% in FY2017 compared to 66% for the Kenyan banking sector - which depicts NBK’s vantage position when compared to the overall banking sector.

• Non-interest income to Net interest income: this has been falling year on year majorly attributed to almost no new lending activity. NBK ratio is in the region of 23% - 36% compared to market in the region of 41% to 46%.

• Impairment loss on loans and advances to Interest income on loans and advances: due to the legacy loans originating in FY2015, the bank continues to suffer a high loss ratio of over 30% when compared to the Kenyan banking sector average of around 14% in FY2016 and 16% in FY2017.

• Other operating expenses to total income: the ratio for NBK has been in the region of 70% compared to the Kenyan banking sector average of around 50% - depicts scope for cost intervention.

• Profit before tax: the high level of loan impairment losses and limited income growth avenues have impacted on NBK’s ability to post attractive PBT.

Summarised Historical Balance Sheets


Table 5 above summarises the historical key ratios regarding liquid assets, loans and advances, total assets, and

deposits of NBK in respect of financial years ended 31st December 2016, 2017 and 2018. The following inferences can

be made:

• Liquid Assets/Total Assets: the Bank’s liquid assets (and near cash) to total assets have grown year on year

from 40% in FY2016 to 42% in FY2017 and 47% in FY2018. The banking sector ratio for FY2016 and 2017 were

33.41% and 35.9% respectively.

• Net Advances/Total Assets: the Bank’s net advances to total assets have fallen year on year from 49% in

FY2016 to 48% in FY2017 and 42% in FY2018, attributed largely to low new lending activity, recoveries and

increased provisioning of the loan book. The banking sector ratio for FY2016 and 2017 were 59.1% and 50.3%

respectively.

• Net Advances/Customer Deposits: the Bank’s net advances to customer deposits have fallen year on year

from 59% in FY2016 to 56% in FY2017 and 48% in FY2018, attributed largely to low new lending activity, loan

recoveries and increased provisioning of the loan book.

• Growth in Total Assets: the Bank’s total assets have fell in FY2016/FY2015 and FY2017/FY2016 by 10.6%

and 2% respectively, attributed largely to low new lending activity owing to capital considerations, increased

provisioning of the loan book and loan recoveries. The growth in FY2018/FY2017 of 4.5% is attributed to

growth in deposits that supported growth in liquid or near cash assets.

• Growth in Net Advances: the Bank’s net advances have fallen year on year by about 19% in FY2016/2015,

5% in FY2017/2016 and about 9% in FY2018/2017 attributed to low new lending activity owing to capital

considerations, increased provisioning of the loan book and loan recoveries.

• Growth in Customer Deposits: the Bank’s customer deposits fell by 15% in FY2016/2015 owing to

unfavourable publicity but stabilised in FY2017 and started growing in FY2018 when a growth of 5% was

recorded.

Commentary Historical Balance Sheets:

Table 5: Limited Balance Sheet Analysis FY2016-2018

Key ratios FY2016 FY2017 FY2018

Liquid Assets/Total Assets 40% 42% 47%

Net Advances/Total Assets 49% 48% 42%

Net Advances/Customer Deposits 59% 56% 48%

Growth in Total Assets -10.6% -2.0% 4.5%

Growth in Net Advances -18.9% -4.8% -8.8%

Growth in Customer Deposits -15% 0% 5%

Yield on net loans and advances to customers 14% 14% 13%

Source: Pacifis Analysis


Table 6: Equity Fair Valuation

Valuation Method (all figures in Kshs) Valuation Weight Weighted Value

DDM 7,973,156,292 40% 3,189,262,517

NAV multiples 9,756,431,544 30% 2,926,929,463

Trading Prices 9,598,736,956 30% 2,879,621,087

Fair value 8,995,813,067

Proforma number of shares issued 1,473,781,200

Price per share (Fair Value) 6.10

Price per share High 6.62

Price per share Low 5.41

PART 4 – EXTRACT FROM INDEPENDENT ADVISOR’S REPORT

The Board appointed Standard Investment Bank as an Independent Advisor, to provide the market value of NBK, as a going concern on as is basis (assuming that the Regulators will continue providing the support with all critical licences), representing the price at which the Bank would change hands between a willing buyer and a willing seller and both having full/reasonable knowledge of the relevant facts of NBK and market conditions. The Advisor con-ducted the valuation utilising the following methodologies: the Dividend Discount (“DCF/DDM”) Method, the Net Assets (“NAV”) Multiples Method, and Historical Trading Prices as summarised here below.

Dividend Discount Method (”DDM”): The DDM valuation approach returned a share fair value of Kshs 5.41, with a high of Kshs 9.27 and a low of Kshs 2.38. The assumptions used include a terminal Book Value multiple of 1.2x and a target cost of equity of 14.5%.

Net Assets Value (“NAV”) Multiples Method:The Price to Book Value Method returned a share value of Kshs 6.62.

Historical Share Trading Prices Method: The historical share trading prices analysis returned a share value of Kshs 5.01 on which a premium of 30% was loaded resulting in a share value of Kshs 6.51.

CONCLUSIONSUtilising a combination of the DDM, Net Assets Multiples and Trading Prices, the Fair Value of the Bank has been

determined as provided under Table 6 below.

These values are subject to the assumptions used. Utilising a combination of the above valuation methods, the Fair Value is calculated at Kshs 9.0 billion representing a share value of Kshs 6.10 with a low and high share value of Kshs 5.41 and 6.62 respectively.

Ultimately, fair value is the price at which property would change hands between a willing buyer and a willing seller, and both having full/reasonable knowledge of the relevant facts and market conditions.

A transaction is considered to be responsive if it falls within the low and high bands of valuation. Furthermore, from an Investor’s point of view the income approaches and more importantly the DCF are considered to be the most responsive valuation methods because they reflect what the Investor will derive from the business.

In the case of the KCB Take-Over Offer, the Offer price is about Kshs 3.801 per share which is significantly below the share fair value of Kshs 6.1 calculated above (equivalent to a swap ratio of 6.23 shares of NBK for every 1 share of KCB). However, the Board is aware that so far no competing offers have been received, which makes it difficult to comment on the best obtainable price from the market. Furthermore, as advised to shareholders previously al-though NBK remains a strong bank, it requires more capital to meet the regulatory capital and grow its business, which capital can be provided by KCB. In the circumstances, and on prudence grounds, the Board recommends the Offer to the shareholders.


As stated in the Chairman’s Letter, the Consideration for NBK shares is to be satisfied by issue of new shares of KCB Group Plc to the shareholders of NBK post re-designation of the preference shares as ordinary shares. Under the Of-fer the target number of new shares to be allotted to NBK shareholders are calculated at one (1) KCB Share for every ten (10) NBK Shares. Given that NBK is likely to have 1,473,781,200 ordinary shares at the Completion Date, then the new shares to be issued by KCB Group at the ratio of 1:10 are calculated at 147,378,120 ordinary shares, which would represent 4.59% of the share capital of KCB. Rounding up the fractional shares results in an additional 5,848 shares to make a total of 147,383,968 shares to be allocated to the shareholders of NBK at KCB.

KCB Group Plc at present has 3,066,063,487 issued shares. Post-acquisition of NBK, these shares will increase as shown in Table 7 below.

Table 7: KCB Offer – NBK Shareholders envisioned shareholding at KCB

Scenario Preference Re-designation %age

Existing KCB Shares 3,066,063,487 95.41%

New Shares for NBK Shareholders (147,378,120 plus 5,848 fractional shares rounded up)

147,383,968 4.59%

Total 3,213,447,455 100.00%

PART 5 - INFORMATION ON OFFER BY KCB AND KCB’S SHARE PRICES

The Offer Price/Strike Price used by KCB represents the volume weighted average prices (“VWAP”) of NBK shares for the 180 days up to and including 16th April 2019, upon which a discount of about 30% was imputed. The 180 days VWAP was calculated at approx. Kshs 5.44 per share and applying about 30% discount results in an Offer price of Kshs 3.801 per share. Details of the valuation are given under section 2.6 and Appendix 3 of the Take-Over Document.

KCB has advised that its corresponding VWAP of KCB shares for the 180 days up to and including 16th April 2019, was calculated at Kshs 40.77 per share.

Accordingly the Swap Ratio has been calculated by dividing the Kshs 40.77 VWAP per KCB share by the Kshs 3.8 VWAP per NBK share and rounded up to 1 KCB share for every 10 NBK shares.

Table 8 below captures the Offer Price calculation based on information given under section 2.6 of the Take-Over Offer.

Table 8: Share Offer Price Calculation

VWAP 180 calendar days

NBK Valuation per Take Over Offer 5,601,842,341

No of NBK Shares in Issue 1,473,781,200

Price per share Offered 3.801

Source: Pacifis Analysis, NSE trade data


PART 6 - PRO-FORMA FINANCIAL AND SHAREHOLDING INFORMATION

As set out in the Chairman’s Letter, it is a term of the KCB Offer that the Preference Shares will be converted into

ordinary shares. NBK reports the preference share capital as part of the shareholders funds. For these reasons the

re-designation of the preference shares as ordinary shares will not impact on the shareholders funds as shown in

Table 9 below.

Table 9: Proforma capital position of NBK upon re-designation of preference as ordinary capital

Capital (all figures in Kshs 000) As stated as at 31

Dec 2018

Preference Shares

Restructuring

Proforma Capital as at

31 Dec 2018

Ordinary Share Capital 1,693,906 5,675,000 7,368,906

Preference Capital 5,675,000 (5,675,000) -

Share Capital 7,368,906 - 7,368,906

Revaluation reserve 1,261,906 - 1,261,906

Accumulated losses (4,854,776) - (4,854,776)

Statutory reserves 3,333,324 - 3,333,324

Other reserves (136,506) - (136,506)

Total Shareholders’ Funds 6,972,854 - 6,972,854

The effect on the existing ordinary share capital from the re-designation of the preference shares as ordinary equity

has been considered. Table 10 below summarises the total share capital of the Company following the re-designa-

tion of the preference shares on a one for one basis.

Table 10: Proforma impact on the existing ordinary shares from re-designation of preference shares

Description Ordinary Shares Issued %age shareholding

Existing Ordinary Shares 338,781,200 22.99%

New ordinary shares upon re-designation of preference shares 1,135,000,000 77.01%

Total ordinary shares upon re-designation of preference shares 1,473,781,200 100.00%


Table 11: Proforma Shareholding Information post-re-designation of preference shares (base 31 March 2019)

Name Existing No.

of Shares

%

Holding

New shares Proforma

No.

of shares

%

Holding

1 National Social Security Fund 162,802,746 48.05 235,000,000 397,802,746 26.99

2 The Cabinet Secretary, National Treasury 76,230,000 22.50 900,000,000 976,230,000 66.24

3 Kenya Reinsurance Corporation Limited 4,840,000 1.43 - 4,840,000 0.33

4 Best Investment Decisions Limited 2,350,271 0.69 - 2,350,271 0.16

5 Dizzyland Limited 1,946,000 0.57 - 1,946,000 0.13

6 Stanbic Nominees Limited A/C NR5551514 1,864,863 0.55 - 1,864,863 0.13

7 Equity Nominee Ltd A/C00084 1,256,343 0.37 - 1,256,343 0.09

8 NBK Client A/c 1 1,143,450 0.34 - 1,143,450 0.08

9 Eng. Ephraim Mwangi Maina 1,105,003 0.33 - 1,105,003 0.07

10 George Muhia Mwaura 1,028,240 0.30 - 1,028,240 0.07

SUB TOTAL 254,566,916 75.14 1,135,000,000 1,389,566,916 94.29

11 Others [48,977 shareholders] 84,214,284 24.86 - 84,214,284 5.71

TOTAL 338,781,200 100.00 1,135,000,000 1,473,781,200 100.00

Source: Register and Pacifis Analysis

The following additional comments are important in terms of understanding the full impact of the re-designation of the preference shares:

(i) Upon re-designation of the Preference Shares on the one/one basis following Completion and assuming that KCB receives acceptances only from the Cabinet Secretary to the National Treasury and the National Social Security Fund, the KCB’s aggregate shareholding in the Company will be 93.23%;

(ii) All the other shareholders will be left with a residual interest of 6.77%;

(iii) Top ten shareholders will have an aggregate shareholding of 94.29%; and

(iv) All other shareholders will have an aggregate shareholding of 5.71%.

If Completion does not occur the shareholding of the Company will not change.

Pro-forma shareholding information

The table 11 below illustrates the pro-forma impact of the re-designation of preference shares on NBK’s existing shareholders in terms of numbers of ordinary shares they hold and their respective shareholding percentages as at 31st December 2018 (most recent shareholding information available) based on the assumption that KCB receives acceptances only from the Cabinet Secretary to the National Treasury and the National Social Security Fund. How-ever, if KCB receives acceptances in respect of one hundred per cent (100%) of the share capital of the Company, the shareholders of the Company will acquire, on a pro rata basis, a total of one hundred and forty seven million, three hundred and eighty three thousand, nine hundred and sixty eight (147,383,968) ordinary shares in the share capital of KCB, equivalent to approximately 4.59% of the share capital of KCB, and the Company will be wholly owned by KCB.


1. Responsibility Statement1.1 The Directors, whose names appear on page 5 of this Circular accept responsibility for the information contained

herein. To the best of their knowledge and belief the Directors (who have taken all reasonable care to ensure that such is the case) are of the view that the information contained in this Circular is in accordance with the facts and does not omit anything likely to affect the import of such information.

2. NBK’s share capital2.1 As at the date of this Circular, the authorised share capital of NBK is Kenya Shillings thirteen billion (Kshs

13,000,000,000 divided into: (i) one billion four hundred million (1,400,000,000) ordinary shares of Kenya Shil-lings Five (Kshs 5) each, of which 338,781,200 ordinary shares are issued and are fully paid or credited as fully paid and listed on the Nairobi Securities Exchange; and (ii) one billion two hundred million (1,200,000,000) non-cumulative participating preference shares of Kenya Shillings Five (Kshs 5) each of which 1,135,000,000 preference shares are issued and are fully paid or credited as fully paid. All of the ordinary shares carry equal rights as to dividend, voting, ratable distribution in times of liquidation and other matters. All of the prefer-ence shares carry equal rights as to dividend, ratable distribution in times of liquidation (in priority to ordinary shares) and other matters but have no voting rights.

2.2 The Articles of Association describe all of the rights attached to the ordinary shares with respect to such matters as voting, dividends, liquidation proceeds and other matters. A copy of the Articles of Association, are available for inspection as noted in paragraph 6 of this Part 7.

2.3 At a meeting of the Board held on 16th May 2019, the Board resolved pursuant to Article 47 of the Articles of Association of NBK, to convene the AGM to consider among others: (i) the conditional approval of the re-desig-nation of the preference shares as ordinary shares on a one /one basis, at Completion of the acquisition of the NBK shares by KCB or in the event of a competing offer, at the Completion of the acquisition by such a compet-ing offer; and (ii) the conditional approval of the alteration of the Memorandum and Articles of the Company to re-designate the 1,200,000,000 authorised preference shares as ordinary shares such that the authorised ordinary shares will increase from 1,400,000,000 to 2,600,000,000 ordinary shares of Kenya Shillings five (Kshs 5.00) each.

2.4 The AGM of the Company held on 14th June 2019, approved: (i) the conditional re-designation of the prefer-ence shares as ordinary shares on a one /one basis, at Completion of the acquisition of the NBK shares by KCB or in the event of a competing offer, at the Completion of the acquisition by such a competing offer; and (ii) the conditional alteration of the Memorandum and Articles of the Company to re-designate the 1,200,000,000 authorised preference shares as ordinary shares such that the authorised ordinary shares will increase from 1,400,000,000 to 2,600,000,000 ordinary shares of Kenya Shillings five (Kshs 5.00) each.

Following the re-designation of the preference shares (noting that this is subject to completion of the Take Over Offer or a competing offer) the shareholding of the Company will be dependent on the number of acceptances received and accepted by KCB. However, if KCB receives acceptances in respect of one hundred per cent (100%) of the share capital of the Company, the Company will be wholly owned by KCB and the shareholders of the Company will acquire, on a pro rata basis, a total of one hundred and forty seven million, three hundred and eighty three thousand, nine hundred and sixty eight (147,383,968) ordinary shares in the share capital of KCB, equivalent to approximately 4.59% of the share capital of KCB.

The total number of shareholders as at 31st March 2019 was 48,987.

2.5 The re-designated shares shall rank pari passu with the existing ordinary shares, and shall have a par value of Kshs 5 each.

3. Director’s Interests3.1 As at 31st December 2018, the Directors had no direct and indirect beneficial equity interests in the ordinary

shares and preference shares of the Company other than in their capacity as corporate representatives as

follows:

PART 7 – ADDITIONAL DISCLOSURES AND GENERAL INFORMATION

Table 7: KCB Offer – NBK Shareholders envisioned shareholding at KCB

Scenario No. of Ordinary shares %age No. of Preference shares %age

Cabinet Secretary, National Treasury 76,230,000 22.5 900,000,000 79.3%

National Social Security Fund 162,802,746 48.1 235,000,000 20.7%

Total 239,032,746 70.6 1,135,000,000 100.0


3.2 At the date of this Circular there were no existing contracts between any of the Directors and NBK, other than employment contracts for those Directors who are employees of NBK in the ordinary course of business, and appointment letters for Non-Executive Directors as governed by the Board Remuneration and other Benefits Policy.

3.3 No options to purchase any securities of NBK have been granted to or exercised by any Director of NBK. 3.4 None of the Directors has or has had any direct or indirect beneficial interest in any property acquired by NBK

during the two years preceding the date of this Circular.

3.5 Except as disclosed in this Circular, no officer, director or major shareholder of NBK (nor a related company) has any material direct or indirect interest in the business of NBK.

3.6 At present, the Government of Kenya through the Permanent Secretary National Treasury (“GoK”) and National Social Security Fund (“NSSF”) hold 17.53% and 6.12%, respectively of KCB share capital. Assuming that these two shareholders will sell all their shares in NBK to KCB, their respective shareholdings in KCB will increase by 3.04% and 1.24% respectively to 20.57% for GoK and 7.36% for NSSF.

3.7 In the absence of a responsive Competing Offer, both the GoK and NSSF intend to accept the Offer from KCB.

4. ConsentsOraro & Company Advocates and Miller & Company Advocates (Joint Legal Advisors), Standard Investment Bank and Pacifis Advisory Ltd (Joint Transaction Advisor), PricewaterhouseCoopers (Auditors) have given and not withdrawn their respective consents to the issue of this Circular with the inclusion herein of their reports and/or names and the references thereto, in the form and context in which they appear respectively.

5. Compliance and Disclosure - The Capital Markets Act5.1 The Offeror’s Statement dated 6th May 2019 by KCB as well as the Take-Over Offer by KCB dated 19 June 2019

put the Consideration for the entire issued ordinary share capital of the Bank and entire issued preference cap-ital of the Bank on a converted basis to ordinary shares on a one/one basis at 147,383,968 ordinary shares of KCB which translates to a valuation of Kshs 5,601.8 million as shown under Part 5 of this Circular. Note that under the KCB Offer, there are no representations, warranties and indemnities to be provided in respect of the business, assets and liabilities of NBK. Copies of the Offeror’s Statement as well as the Take-Over Offer are avail-able for inspection (refer to Section 6 below of Part 7 of this Circular “Documents Available for Inspection”).

5.2 As at the date of issuance of this Circular, none of the Advisors namely; Standard Investment Bank and Pacifis Advisory Limited the firms that carried out the Transaction Advisory work, Oraro & Company Advocates and Miller and Company Advocates (Joint Legal Advisor) including their directors and employees, had any material relationship with NBK other than the normal banking relationship in case of SIB and legal services in case of Oraro & Company Advocates and Miller and Company Advocates.

5.3 Save as disclosed herein there are no related party transactions.

6. Documents Available for InspectionCopies of the documents available for inspection by shareholders are listed here below. These documents (with the exception of the KCB Group Plc Financial Statements which should be obtained from KCB’s website (www.kc-bgroup.com) will be made available free of charge to the Shareholders of NBK, at NBK’s offices at National Bank Building, Harambee Avenue, P.O. Box 72866-00200, Nairobi, Kenya between 9.00 a.m. and 5.00 p.m. Monday to Friday (except public holidays and bank holidays in Kenya) from the date hereof until 31st July 2019:

(a) NBK’s audited financial statements for the three financial years ended 31st December 2016, 2017, and 2018(b) Resolution of the Board Meeting of 16th May 2019(c) Resolution of the NBK’s AGM of 14th June 2019(d) NBK’s Memorandum and Articles of Association(e) Written consent to variation of Class Rights attached to the non-cumulative participating preference shares(f) the approval of the CMA relating to this Circular


(g) the approval of the Central Bank of Kenya relating to the Transactions (if available)(h) the approval of the Competition Authority of Kenya relating to the Transactions (if available)(i) the Offeror’s Statement from KCB dated 6th May 2019(j) Take-Over Offer by KCB dated 19th June 2019

(k) Audited Financial Statements of KCB 2016, 2017 and 2018

PART 8 – FORM OF OFFER ACCEPTANCE(See attached)

[email protected] National Bank of Kenya National_Bank Nationalbank_ke

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www.nationalbank.co.ke

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