# HF Group: Q3 Results and Rights Issue

An episode of [The Mwango Capital Podcast](https://invisiblenetwork.ai/podcast/1583367792), 7 Dec 2024, 49 min.

Audio: https://api.substack.com/feed/podcast/152694211/59ae9a8b558773df286e468121831912.mp3

In this episode recorded on 02.12.2024 and hosted by Ramah Nyang, we are joined by Robert Kibaara - CEO of HF Group as we dive into HF Group's Q3 2024 results and their rights issue. Subscribe to get notified when we make a new post. Key Quotes “We have heavily digitized our business… We have 54 journeys and we embarked on enabling customers to be able to consume services of the bank through the digital channels, pretty much as if they would come to the bank. And now I can say 80% of our transactions, as I said earlier, are through digital channels and our banking app has been voted the best banking app in Kenya. Now I can tell you this digitization work has really pulled down our costs by removing manual processes, both in the back office and in the customer-impacting channels. So this will remain a key pillar to our transformation.” “Branches have an optical value. And I think people feel the confidence of knowing that if I have an issue, my branch is not far away. So that's the first reason. The second reason is branches have become conversation centers. So people use branches less for transactions and more for conversations, especially business customers who like to come, and have a conversation with the relationship managers or relationship managers go to them. And thirdly, branches are also advisory centers where you can be able to advise clients. And then also finally scale. Sometimes people want to see that the company they are banking with also has many branches.” “Keeping an eye on the cost, focusing on the target sectors that are fast-growing, less risky, and less susceptible to macroeconomic forces, we believe that we can be able to sustain this growth.” “You should be asking me because I'm one of the smaller investors of the group as a person. Why have I taken up my rights and why have I invested in the company? In fact, I've applied for more shares than my rights. And why is that? I'll say a few things. Number one, HF group the group itself and all its subsidiaries are profitable. And if you just think about the new capital, the new incremental money that is coming, it is coming to power the growth of the business. Now, today, the costs of the business, the establishment costs of the business, what we call overheads are all taken care of. So we are not going to double the technology of the company. We are not going to double the number of staff. So that entire cost is already taken care of. So the marginal or incremental capital that is coming in will power the growth of the business, and it's going to accelerate the growth of the business and the rewards to shareholders are going to be sooner.” “The reason why I would encourage somebody to invest in this business is just the fact that they can be able to grow with the business as it grows, and in my view, it's a very good opportunity.” Show Notes 00:00:00 Introduction 00:01:15 HF’s Journey, Diversification, Culture, and Skillset Transition 00:07:13 Revenue Mix, NPLs, Challenges, and Strategy 00:14:47 Affordable Housing 00:16:18 Rights Issue and Dividend Policy 00:21:39 Impact of Govt’s Affordable Housing on HF’s Mortgage Business 00:27:53 Legal Issues in Asset Recovery 00:29:59 Digitization and Branch Expansion 00:36:04 Liquidity Ratios 00:40:12 Insurance Business, Innovation, and Cost of Funds 00:44:32 Future Outlook Get full access to The Mwango Weekly at mwangocapital.substack.com/subscribe

## Transcript

[0:00] SPEAKER_00: Ladies and gentlemen, thank you very much for joining us this evening.
[0:03] SPEAKER_00: It's an interesting start to December,
[0:05] SPEAKER_00: the final month of what has been a very interesting year,
[0:08] SPEAKER_00: pretty much across the board from both a macroeconomic and microeconomic
[0:12] SPEAKER_00: perspective as well.
[0:13] SPEAKER_00: For the next hour, we're going to have an interesting conversation with Robert Kipara.
[0:17] SPEAKER_00: He's a group CEO of HF.
[0:19] SPEAKER_00: Some people who are probably my age will probably remember it as housing finance,
[0:22] SPEAKER_00: which for a very long period of time essentially built itself as an institution
[0:26] SPEAKER_00: that focused on the property market.
[0:29] SPEAKER_00: But as Robert will tell us a little later,
[0:30] SPEAKER_00: that has changed quite a bit,
[0:32] SPEAKER_00: especially over the last three years or so.
[0:34] SPEAKER_00: We're going to be talking about two specific things.
[0:36] SPEAKER_00: First, the third quarter results that came out fairly recently.
[0:40] SPEAKER_00: Those make me interesting reading.
[0:41] SPEAKER_00: And the rights issue that is still in progress at the moment.
[0:45] SPEAKER_00: The plan for the organization after approval,
[0:47] SPEAKER_00: of course,
[0:47] SPEAKER_00: from shareholders a couple of months ago was to raise a better part of around $4.6 billion.
[0:54] SPEAKER_00: Ken Shilling's interest capital selling around 115 billion ordinary new shares.
[0:58] SPEAKER_00: And there will be a green true option over there as well.
[1:01] SPEAKER_00: We'll see exactly whether or not that will be taken up and that money is going to
[1:04] SPEAKER_00: be plowed back into the business.
[1:06] SPEAKER_00: But exactly how that's going to happen,
[1:08] SPEAKER_00: where the money is going to go,
[1:09] SPEAKER_00: what's the investment case for putting cash into this right issue.
[1:12] SPEAKER_00: We'll explore that and plenty more over the course of the hour.
[1:15] SPEAKER_00: Robert, thanks for taking time for this conversation, but I want to start there, right?
[1:19] SPEAKER_00: For a lot of people my age and older, right?
[1:22] SPEAKER_00: When we think of housing finances in the name there,
[1:25] SPEAKER_00: when you think of HF,
[1:26] SPEAKER_00: we think of you as a mortgage institution,
[1:29] SPEAKER_00: not necessarily as the full service bank that you are at the moment.
[1:33] SPEAKER_00: How's that transition working out so far?
[1:35] SPEAKER_02: First of all, thank you very much.
[1:36] SPEAKER_02: I want to thank you and also for this invite and also all the people who have made to join today.
[1:43] SPEAKER_02: My name is Robert Kibara, as I've been introduced.
[1:46] SPEAKER_02: And the question you have asked then is how the transformation is going.
[1:50] SPEAKER_02: And I want to say it's actually going quite well.
[1:52] SPEAKER_02: It's going very well.
[1:53] SPEAKER_02: Just as you said earlier, we started off many years ago as a company that focused on real estate.
[1:59] SPEAKER_02: We had two companies that went by the name that you have just mentioned.
[2:02] SPEAKER_02: And its main purpose was to do mortgage financing.
[2:06] SPEAKER_02: Just mortgage financing, doing mortgages.
[2:08] SPEAKER_02: And then, of course, we have the property development company.
[2:10] SPEAKER_02: It's called HFDA.
[2:11] SPEAKER_02: It used to be called Kenya Building Society those days.
[2:15] SPEAKER_02: It's purposeful to build houses.
[2:16] SPEAKER_02: So one side of the business built houses, the property business.
[2:19] SPEAKER_02: The other side gave out mortgages.
[2:22] SPEAKER_02: That has changed quite a bit, especially over the last three years.
[2:25] SPEAKER_02: Like you said, we made a decision to transform the company.
[2:29] SPEAKER_02: Significantly,
[2:30] SPEAKER_02: if I can start with the bank has moved then from a single product bank that focused
[2:34] SPEAKER_02: on only a single sector,
[2:35] SPEAKER_02: which is real estate.
[2:37] SPEAKER_02: And now it's a full service bank serving various segments and sectors of the economy.
[2:43] SPEAKER_02: And I'll talk about that a little bit later.
[2:45] SPEAKER_02: The property company, HFDI.
[2:47] SPEAKER_02: has moved from a property development company or just a construction or property
[2:52] SPEAKER_02: development sort of company to a full home ownership solutions provider.
[2:57] SPEAKER_02: So we do now different services.
[3:00] SPEAKER_02: Actually, we stopped building houses.
[3:01] SPEAKER_02: We had built the largest number of houses in Kenya, 18,000 houses.
[3:05] SPEAKER_02: The bank had given about 60,000 mortgages over the years.
[3:09] SPEAKER_02: The bank still does mortgages a bit differently plus much, much more.
[3:14] SPEAKER_02: And then we have got the HFDI, the property business that doesn't do houses anymore.
[3:17] SPEAKER_02: And I'll talk about what it does now.
[3:19] SPEAKER_02: But what we are doing now is making as much, much more money than we would ever make making houses.
[3:25] SPEAKER_02: And we are still enabling people to own homes.
[3:27] SPEAKER_02: Then we have got an insurance business,
[3:28] SPEAKER_02: which has moved from a single product insurance intermediary that used to do mainly
[3:33] SPEAKER_02: mortgage insurance to a full house insurance solution.
[3:36] SPEAKER_02: So that has been progressing very well.
[3:38] SPEAKER_02: If I can just go back a little to the bank,
[3:40] SPEAKER_02: we have got now different businesses that are within the bank,
[3:43] SPEAKER_02: what we can call SBUs.
[3:45] SPEAKER_02: strategic business units.
[3:46] SPEAKER_02: So we have got banking for individuals, what we call personal banking.
[3:50] SPEAKER_02: We have got banking for businesses, standard businesses, what we call business banking.
[3:54] SPEAKER_02: We have banking for large businesses, what we call commercial banking.
[3:58] SPEAKER_02: We have banking for institutions, including government.
[4:02] SPEAKER_02: and institutions such as churches, religious institutions.
[4:05] SPEAKER_02: We have banking for diaspora customers, and that is non-resident Kenyans.
[4:09] SPEAKER_02: We have banking for high net worth customers, and that is what we call ultimate banking.
[4:14] SPEAKER_02: We have a custody business that was licensed a lot long ago.
[4:17] SPEAKER_02: That is doing very well.
[4:18] SPEAKER_02: We bank also financial institutions like circles and microfinance institutions.
[4:23] SPEAKER_02: So we have got about 10 different businesses and what we can call propositions.
[4:27] SPEAKER_02: And we have then taken an approach, what we call digital fast approach.
[4:30] SPEAKER_02: So we are actually using technology to revolutionize.
[4:35] SPEAKER_02: how banking is done in these businesses.
[4:37] SPEAKER_02: As a result of that,
[4:38] SPEAKER_02: as we'll see later,
[4:39] SPEAKER_02: the bank now is on its third year of profitability,
[4:43] SPEAKER_02: growing year on year,
[4:44] SPEAKER_02: month on month,
[4:44] SPEAKER_02: quota on quota.
[4:45] SPEAKER_02: And the reason why the bank is profitable is because all these businesses are now profitable.
[4:49] SPEAKER_02: So it's not just the mortgage business.
[4:51] SPEAKER_02: Now we are seeing a lot more revenues coming from various areas.
[4:54] SPEAKER_00: We'll get into the details of the property side in just a minute,
[4:57] SPEAKER_00: but I'm curious about sort of manpower switch that you had to undertake in order to
[5:01] SPEAKER_00: get this done because you're operating for all those years,
[5:03] SPEAKER_00: right?
[5:03] SPEAKER_00: With specialty, deep expertise, right?
[5:06] SPEAKER_00: In property development, mortgages, etc.
[5:08] SPEAKER_00: And then here you come along and say, actually, we need to diversify the business.
[5:12] SPEAKER_00: We need to get into all these other different banking lines and bank assurance.
[5:16] SPEAKER_00: How did you manage that culture and skillset transition?
[5:18] SPEAKER_00: Because I imagine that switch over three years, over 36 months, wasn't exactly an easy one.
[5:23] SPEAKER_02: It has been in the end of our life, especially because of what you've talked about, people and culture.
[5:27] SPEAKER_02: So we obviously needed to bring in expertise in various areas.
[5:31] SPEAKER_02: So if you look at,
[5:32] SPEAKER_02: for instance,
[5:33] SPEAKER_02: our executive team,
[5:34] SPEAKER_02: the divisional directors,
[5:36] SPEAKER_02: the team that has transformed the business is actually a different team from the
[5:39] SPEAKER_02: team that was there before because we were just doing mortgages.
[5:42] SPEAKER_02: So we have obviously maintained some of the capabilities we had before,
[5:45] SPEAKER_02: but we have brought in over these five years a whole new team.
[5:49] SPEAKER_02: What has worked very well for us is the executive team that came on board about
[5:53] SPEAKER_02: four or five years ago have stayed with us.
[5:56] SPEAKER_02: All experts in their own areas and have stayed with us.
[5:59] SPEAKER_02: Actually, the average tenure of our executives is 4.8 years, which is actually quite good.
[6:04] SPEAKER_02: We started this transformation about five years ago.
[6:06] SPEAKER_02: We have accelerated the last three years.
[6:09] SPEAKER_02: And the team has changed a lot.
[6:10] SPEAKER_02: And of course,
[6:11] SPEAKER_02: the support team below that,
[6:12] SPEAKER_02: there has been a lot of transformations,
[6:14] SPEAKER_02: relationship management teams,
[6:16] SPEAKER_02: technical pit teams to handle,
[6:17] SPEAKER_02: for instance,
[6:17] SPEAKER_02: credit,
[6:18] SPEAKER_02: people on the technology side to power the growth of the business from a technology perspective.
[6:22] SPEAKER_02: It's been a huge change.
[6:24] SPEAKER_02: We have moved actually from 400 staff
[6:26] SPEAKER_02: to about 630, mainly to support the businesses that we have.
[6:30] SPEAKER_02: Then there is culture and capabilities.
[6:32] SPEAKER_02: So one of our strategic pillars is culture and capabilities.
[6:35] SPEAKER_02: And we have had a huge retraining program,
[6:37] SPEAKER_02: huge thousands of hours of classroom time for us to bring people up to speed with
[6:42] SPEAKER_02: what's happening in different areas.
[6:44] SPEAKER_02: And then of course, the culture.
[6:45] SPEAKER_02: We've been working with a company called Hosted,
[6:48] SPEAKER_02: an international company to do what we call a culture immersion journey that has
[6:52] SPEAKER_02: transformed us from a government-ish sort of institution to a company that now has
[6:57] SPEAKER_02: become quite popular with many customers.
[7:00] SPEAKER_02: Over the last few recent times, we've brought in about 180,000 new customers.
[7:04] SPEAKER_02: So we have seen the popularity growing and it's just because of the culture of the way we serve people.
[7:09] SPEAKER_02: We've had to run a whole program of culture change.
[7:13] SPEAKER_00: Let's then extend to the question that I kept getting when I was talking about HF
[7:17] SPEAKER_00: in my social circles,
[7:19] SPEAKER_00: because yes,
[7:19] SPEAKER_00: you made these changes,
[7:20] SPEAKER_00: right?
[7:20] SPEAKER_00: It's a full service bank now, which is well and good.
[7:23] SPEAKER_00: And if you look at the results,
[7:24] SPEAKER_00: especially for the third quarter,
[7:25] SPEAKER_00: you can see that jump in net interest income on an annual basis.
[7:28] SPEAKER_00: That's gone up at least at group level to a better part of a billing and shillings
[7:32] SPEAKER_00: vis-a-vis 530 million in the nine months ending in September.
[7:35] SPEAKER_00: I guess the challenge that some of us will have is,
[7:38] SPEAKER_00: okay,
[7:38] SPEAKER_00: all these changes have been made,
[7:39] SPEAKER_00: but what then does that do for your revenue mix two,
[7:42] SPEAKER_00: three years down the line?
[7:44] SPEAKER_02: So we have actually been quite careful around the revenue mix because we were very
[7:48] SPEAKER_02: clear about two things.
[7:49] SPEAKER_02: Number one,
[7:50] SPEAKER_02: we needed to diversify the sources of income,
[7:52] SPEAKER_02: the sources of income themselves,
[7:54] SPEAKER_02: so that then we can get income that is not tied to one specific sector.
[7:58] SPEAKER_02: which is real estate and we are seeing now a lot of the income you're seeing for
[8:01] SPEAKER_02: instance now is coming more from the new businesses that we have created and in
[8:07] SPEAKER_02: fact we have also been very careful about the sectors that this revenue is coming
[8:10] SPEAKER_02: from so you'll see that for instance the growth has been coming mainly from sectors
[8:15] SPEAKER_02: such as education trade health agriculture we have a bit of manufacturing so we
[8:20] SPEAKER_02: have diversified
[8:22] SPEAKER_02: are the source of income.
[8:23] SPEAKER_02: That's number one.
[8:24] SPEAKER_02: But also, we used to rely a lot on just interest income, as you have said.
[8:28] SPEAKER_02: Now we have seen a lot more of that changing.
[8:31] SPEAKER_02: We have seen the share of fee income growing.
[8:34] SPEAKER_02: In fact,
[8:35] SPEAKER_02: now it's risen from about a low of 11% when we started the journey to 34% this last quarter,
[8:40] SPEAKER_02: and we want to get it to 40%.
[8:42] SPEAKER_02: So this income that you're seeing, the growth of interest income is quite sustainable.
[8:46] SPEAKER_02: We wanted that to happen,
[8:47] SPEAKER_02: both in terms of the sources of that income and how diverse that will be,
[8:51] SPEAKER_02: how diversified that is,
[8:53] SPEAKER_02: and also just not relying on only interest income growth and moving to other income sources.
[8:58] SPEAKER_00: Indeed.
[8:59] SPEAKER_00: Just a quick reminder to all of us,
[9:00] SPEAKER_00: in the event that you will have any questions,
[9:02] SPEAKER_00: any comments,
[9:02] SPEAKER_00: please respond to the pin on Mungo Capital's account.
[9:06] SPEAKER_00: Alternatively, send those questions in the DM either to my account or to Mungo Capital's account.
[9:11] SPEAKER_00: We'll get to them a little later on in the conversation.
[9:13] SPEAKER_00: Robert,
[9:13] SPEAKER_00: going back to the question around where the loan book is at the moment in revenue diversification,
[9:18] SPEAKER_00: because looking at the macroeconomic environments that Kenya is in at the moment,
[9:21] SPEAKER_00: one of the things that has been relatively of interest to note is the fact that
[9:24] SPEAKER_00: NPLs have been going up quite steadily,
[9:27] SPEAKER_00: especially in the last 10,
[9:28] SPEAKER_00: 15 years,
[9:29] SPEAKER_00: give or take.
[9:30] SPEAKER_00: We're now essentially at around 16.5% in aggregate across the sector.
[9:34] SPEAKER_00: And granted, you do need to diversify to have buffers on the business along the way.
[9:39] SPEAKER_00: But given that sort of adverse operating environment and a tax policy that keeps
[9:43] SPEAKER_00: changing from one year to the next,
[9:45] SPEAKER_00: there's really no stability on that front.
[9:47] SPEAKER_00: Will you be able to maintain NPLs at current levels or are you looking to
[9:50] SPEAKER_00: essentially gradually reduce them progressively?
[9:53] SPEAKER_02: That's a good question.
[9:53] SPEAKER_02: NPL have become a problem generally across the banking sector,
[9:57] SPEAKER_02: averaging over 16% and that's quite high across the entire sector.
[10:00] SPEAKER_02: What we have seen is actually a different story.
[10:02] SPEAKER_02: We purposed earlier on to make sure that we can build a new bank that is in sectors
[10:07] SPEAKER_02: of high growths that are also rewarding,
[10:10] SPEAKER_02: but are also quite less risky from an NPL perspective.
[10:13] SPEAKER_02: So what we've seen is that the last four years, we have booked loans of about 37 billion.
[10:18] SPEAKER_02: Of those loans now, the NPL ratio is 4%.
[10:22] SPEAKER_02: And even the loans that we booked,
[10:23] SPEAKER_02: say that have been with us for about 60 months now,
[10:26] SPEAKER_02: which is about five years,
[10:27] SPEAKER_02: are settling at about 4.02.
[10:29] SPEAKER_02: And what that tells you is that we are solving historical issues without creating new ones.
[10:34] SPEAKER_02: And it's possible in this market,
[10:35] SPEAKER_02: obviously we have been a bit picky because we didn't want to have a problem in our hands.
[10:40] SPEAKER_02: Are we able to sustain that?
[10:41] SPEAKER_02: Yes.
[10:41] SPEAKER_02: Because of primarily that we,
[10:43] SPEAKER_02: first of all,
[10:44] SPEAKER_02: analyze sectors,
[10:45] SPEAKER_02: do quite some research around the sectors,
[10:47] SPEAKER_02: then of course the segments of the market,
[10:49] SPEAKER_02: and then finally we create a co-credit policy that enables us to be able to bring
[10:53] SPEAKER_02: in lending safely.
[10:54] SPEAKER_02: And we really wanted to bring down this whole issue of NPLs.
[10:57] SPEAKER_02: The old book that we had,
[10:58] SPEAKER_02: which is basically the legacy book,
[11:00] SPEAKER_02: what we did about that is we continue to reduce that significantly,
[11:03] SPEAKER_02: but we also decided
[11:04] SPEAKER_02: That for us to do a sustainable business into the future,
[11:07] SPEAKER_02: we needed to take some steps to be able to ring fence that book.
[11:11] SPEAKER_02: So we have taken provisions of up to 75%, actually 75% of that book is covered by provisions.
[11:17] SPEAKER_02: And the book also has 100% security.
[11:21] SPEAKER_02: And as we recover security over time, then we will write back that provision.
[11:24] SPEAKER_02: So we made the decision that we will ring pens, the legacy book.
[11:28] SPEAKER_02: We will create a new book that is very well calculated in terms of how we build it up at much lower risk.
[11:34] SPEAKER_02: And that is working quite well.
[11:35] SPEAKER_02: So that's how we want to scale.
[11:37] SPEAKER_00: Correct me if I'm wrong, but the legacy book is mostly based on real estate assets, right?
[11:41] SPEAKER_00: Or was it mixed with real estate assets and other things?
[11:43] SPEAKER_00: It's just projects.
[11:44] SPEAKER_02: If you look at the NPL ratio for mortgages for owner-occupier,
[11:49] SPEAKER_02: even the old ones that we booked 10,
[11:51] SPEAKER_02: seven years ago,
[11:53] SPEAKER_02: the NPL ratio is less than 2% because people don't like losing their homes.
[11:56] SPEAKER_02: So we continue to do owner-occupier mortgages.
[11:59] SPEAKER_02: We have slowed down on is financing projects for sale.
[12:03] SPEAKER_02: If somebody comes and says they want to build some projects somewhere for sale
[12:06] SPEAKER_02: because we know how challenging that is from our own experience,
[12:10] SPEAKER_02: then that we haven't done.
[12:11] SPEAKER_00: Go into detail in that a bit more.
[12:13] SPEAKER_00: If I come to you for the sake of argument,
[12:14] SPEAKER_00: if I have,
[12:15] SPEAKER_00: say,
[12:15] SPEAKER_00: 50 acres in Kitengala and I want to put up an estate there,
[12:17] SPEAKER_00: and I come to you and say,
[12:18] SPEAKER_00: Robert,
[12:19] SPEAKER_00: I need capital to essentially put up an estate here.
[12:21] SPEAKER_00: Based on your history in dealing with these sort of projects, the off-tick tends to be a bit challenging.
[12:26] SPEAKER_00: And even where I am now,
[12:27] SPEAKER_00: I'm in the office in Kilimani and there are apartment blocks here that I've seen
[12:31] SPEAKER_00: standing empty for three,
[12:33] SPEAKER_00: four,
[12:34] SPEAKER_00: in some cases,
[12:34] SPEAKER_00: even five years or more.
[12:36] SPEAKER_00: What exactly is the problem there with the offtake?
[12:38] SPEAKER_00: Is it a pricing issue?
[12:39] SPEAKER_00: Is it that there just isn't demand for specific kinds of projects?
[12:44] SPEAKER_02: The market is much more responsive in projects that are a lot less expensive.
[12:47] SPEAKER_02: For instance, what we call projects that are truly affordable.
[12:50] SPEAKER_02: And as you go up higher, we are finding that there's a lot less demand.
[12:54] SPEAKER_02: And we've been there ourselves.
[12:55] SPEAKER_02: When we started this journey, we had 1,500 with keys and sold.
[13:01] SPEAKER_02: And so we sold those houses through COVID.
[13:04] SPEAKER_02: 1,500 of them.
[13:04] SPEAKER_02: We had huge debts.
[13:05] SPEAKER_02: We paid off.
[13:06] SPEAKER_02: And we are now down to 21 houses only from 1,500.
[13:10] SPEAKER_02: So we have been there.
[13:11] SPEAKER_02: We've seen what you're saying.
[13:12] SPEAKER_02: But also the other thing about it is how Kenyans build houses.
[13:16] SPEAKER_02: Kenyans build houses mainly through what we call incremental housing.
[13:20] SPEAKER_02: If you take estates like Utawala or Shokimau or Membley or these new estates that
[13:25] SPEAKER_02: have just come up the other day,
[13:27] SPEAKER_02: those houses are not being built through mortgages.
[13:30] SPEAKER_02: They have been built through what we call incremental housing.
[13:32] SPEAKER_02: People bought a plot.
[13:33] SPEAKER_02: They started building.
[13:34] SPEAKER_02: They probably borrowed money here and there and they set up their home.
[13:37] SPEAKER_02: And that's exactly what we are doing now on our property business.
[13:40] SPEAKER_02: We are working with land owners.
[13:42] SPEAKER_02: For instance, the client you have talked about was 50 acres.
[13:44] SPEAKER_02: We would advise them not to build houses themselves.
[13:47] SPEAKER_02: We would advise them that they bring the property to us.
[13:50] SPEAKER_02: We will master plan the property.
[13:52] SPEAKER_02: We will design the infrastructure.
[13:53] SPEAKER_02: We will supervise the construction of the infrastructure.
[13:55] SPEAKER_02: We will also do the titling.
[13:58] SPEAKER_02: We will subdivide.
[13:59] SPEAKER_02: We'll create nice controlled communities, a whole beautiful estate.
[14:03] SPEAKER_02: And then we will sell on behalf of the plots themselves.
[14:06] SPEAKER_02: And after that,
[14:07] SPEAKER_02: our bank would finance the people to build the houses themselves slowly,
[14:11] SPEAKER_02: incrementally the way they normally do.
[14:13] SPEAKER_02: So that model, we started it last year in our property development company.
[14:17] SPEAKER_02: And in our first year of operational loan, we made 600 million in revenue.
[14:20] SPEAKER_02: More than we would ever make building houses.
[14:23] SPEAKER_02: We have enabled people, clients who have large parcels of land to be able to offload the land.
[14:28] SPEAKER_02: And because we have a large sales force, we have credibility in this area.
[14:32] SPEAKER_02: And we are able to finance the buyers.
[14:33] SPEAKER_02: And we have got a very large database of clients who have ever bought properties with us.
[14:37] SPEAKER_02: That's how I would advise clients not to build houses themselves.
[14:40] SPEAKER_02: They'll put in their capital.
[14:41] SPEAKER_02: They are going to cost them a lot.
[14:43] SPEAKER_02: And eventually they are probably not going to make money.
[14:46] SPEAKER_00: Just before I jump to the rights issue,
[14:47] SPEAKER_00: from your experience,
[14:48] SPEAKER_00: what does an affordable house,
[14:50] SPEAKER_00: quote unquote,
[14:51] SPEAKER_00: look like in terms of if we say we're going to price this house,
[14:53] SPEAKER_00: let's say,
[14:53] SPEAKER_00: for the sake of argument,
[14:54] SPEAKER_00: 4 million Kenyan shillings,
[14:56] SPEAKER_00: right?
[14:56] SPEAKER_00: Because I know the median number in the average number, rather, among
[14:59] SPEAKER_00: The entire mortgage portfolio is closer to nine, in some cases, even 10 million shillings.
[15:03] SPEAKER_00: But what is actually an affordable,
[15:05] SPEAKER_00: quote unquote,
[15:06] SPEAKER_00: housing unit that will essentially know if you put this in the market,
[15:09] SPEAKER_00: you build this to a budget,
[15:10] SPEAKER_00: you price it at four or five million shillings,
[15:12] SPEAKER_00: it's going to go off the lot.
[15:14] SPEAKER_02: If you're looking for a number, that would be about 8 million.
[15:17] SPEAKER_02: And I'll tell you the reason.
[15:18] SPEAKER_02: If you built a 5 million house today,
[15:20] SPEAKER_02: that house is likely going to be about 30,
[15:22] SPEAKER_02: 40 kilometers from the center.
[15:25] SPEAKER_02: So people also do the math of fair rent and all that calculation and quality of life.
[15:30] SPEAKER_02: Like you are living very far away.
[15:32] SPEAKER_02: So we had to spend a lot on fuel or fair.
[15:35] SPEAKER_02: The reason why people rent is because you can get a house that is close to work.
[15:39] SPEAKER_02: and then you don't have to pay a lot of cost.
[15:41] SPEAKER_02: But if you have a house of an 8 million sort of house,
[15:43] SPEAKER_02: it's good to be in a location that is a good balance between living too far away
[15:47] SPEAKER_02: from work and also having some decent house that you can call your own.
[15:51] SPEAKER_02: But we have seen of course there are properties that have come at lower than that price.
[15:55] SPEAKER_02: There are those houses where they are affordable ones that are coming from government.
[15:58] SPEAKER_02: They are priced lower and they fly off the shelves.
[16:00] SPEAKER_02: If you do houses over 12, 13, 14, 15, 17 million, then you start seeing a demand is a lot lower.
[16:07] SPEAKER_00: Yeah,
[16:07] SPEAKER_00: which pretty much tracks with the sort of income data that we have as well,
[16:10] SPEAKER_00: because it's about the average gross monthly income for people in the formal sector.
[16:15] SPEAKER_00: So it's around 50, 60,000 shillings a month.
[16:18] SPEAKER_00: But let's get to the right issue, right?
[16:19] SPEAKER_00: You're putting 1.15 or so billion shares on the market,
[16:22] SPEAKER_00: price at about four shillings a share,
[16:24] SPEAKER_00: trying to raise 4.6 billion in total.
[16:27] SPEAKER_00: Where do we stand now in terms of the uptake of these new shares?
[16:31] SPEAKER_02: We took the decision at the start of this rights issue that we are going to have a
[16:34] SPEAKER_02: conversation with all the shareholders.
[16:35] SPEAKER_02: So we've been calling shareholders.
[16:37] SPEAKER_02: We've seen very positive uptick.
[16:40] SPEAKER_02: I was looking at numbers on Friday evening and from the conversations we've had
[16:43] SPEAKER_02: with the shareholders,
[16:44] SPEAKER_02: the commitment to invest was about 86%.
[16:46] SPEAKER_02: We think, of course, that Kenyans are last minute people.
[16:50] SPEAKER_02: We think that this week we can be able to push it across the line.
[16:53] SPEAKER_02: And actually,
[16:54] SPEAKER_02: even just today,
[16:55] SPEAKER_02: the sheer number of new applicants that we have seen is actually quite promising.
[16:58] SPEAKER_02: So I can say that we are going to have a good rights issue.
[17:01] SPEAKER_00: And I know that in the information memorandum,
[17:03] SPEAKER_00: you indicated that the principal shareholder,
[17:05] SPEAKER_00: Britam,
[17:05] SPEAKER_00: has committed to taking up all of its rights.
[17:08] SPEAKER_00: All the others, you said, were all supportive of the measure as well.
[17:11] SPEAKER_00: So can we safely say at this point,
[17:13] SPEAKER_00: pretty much all the main shareholders have agreed to exercise all their rights?
[17:16] SPEAKER_02: Yeah.
[17:16] SPEAKER_02: So most of the shareholders from the conversations we have had, of course, Britam has actually just...
[17:21] SPEAKER_02: gone ahead and their rights already as we speak.
[17:23] SPEAKER_02: We have other,
[17:25] SPEAKER_02: other major shareholders who had already said that they are not only supportive,
[17:27] SPEAKER_02: but they'll take up their rights.
[17:29] SPEAKER_02: The one that we are not totally sure is government, government of Kenya.
[17:32] SPEAKER_02: They have a small shareholding of 2.4%.
[17:34] SPEAKER_02: The processes of government investments are long.
[17:37] SPEAKER_02: So we don't anticipate that the government will come in, but it's a small shareholding.
[17:41] SPEAKER_02: But the rest of the major shareholders have all said in the past that they are
[17:44] SPEAKER_02: willing and looking forward to participate in the rights issue.
[17:46] SPEAKER_02: VTAM has already booked their rights as we speak.
[17:48] SPEAKER_02: And many other of the large shareholders,
[17:51] SPEAKER_02: I think I would say the top 10,
[17:52] SPEAKER_02: if you ask me about eight,
[17:54] SPEAKER_02: seven or eight,
[17:55] SPEAKER_02: I've already confirmed participation.
[17:57] SPEAKER_00: And unless I'm mistaken,
[17:58] SPEAKER_00: I think I remember seeing there was a cabinet resolution to actually sell down stakes,
[18:02] SPEAKER_00: these minority stakes in a bunch of firms.
[18:04] SPEAKER_00: And I believe I could have mistaken,
[18:06] SPEAKER_00: but because I'm going off memory here,
[18:07] SPEAKER_00: but I believe HF,
[18:08] SPEAKER_00: that 2.4% stake that you're referring to was also one of the ones I wanted to sell down.
[18:12] SPEAKER_00: One of the other questions that came up in talking about HF and the rights issue
[18:16] SPEAKER_00: was for the sake of argument,
[18:17] SPEAKER_00: if someone has 500,000 shillings and they're trying to look at where they can
[18:21] SPEAKER_00: essentially park this cash,
[18:23] SPEAKER_00: they could just as easily go into the T-bill markets,
[18:25] SPEAKER_00: even with rates coming down at the moment.
[18:27] SPEAKER_00: park their money in there for about a year,
[18:29] SPEAKER_00: buy the 364-day note,
[18:31] SPEAKER_00: get a real return of around 10%,
[18:33] SPEAKER_00: maybe 9%,
[18:34] SPEAKER_00: and get their money back without putting in a lot of due diligence into it in
[18:38] SPEAKER_00: December next year.
[18:39] SPEAKER_00: What's the argument you would make to that sort of person to say,
[18:42] SPEAKER_00: actually,
[18:43] SPEAKER_00: it might be a better investment for you to put cash into HF?
[18:47] SPEAKER_02: In fact,
[18:47] SPEAKER_02: you should ask me,
[18:48] SPEAKER_02: because I'm one of the smaller investors of the group as a person,
[18:52] SPEAKER_02: why have I taken up my rights?
[18:53] SPEAKER_02: And why have I invested in the company?
[18:55] SPEAKER_02: In fact, I applied for more shares of my rights and why is that?
[18:58] SPEAKER_02: I'll say a few things.
[18:59] SPEAKER_02: Number one, HF group, the group itself and all the subsidiaries are approachable.
[19:03] SPEAKER_02: And if you just think about the new capital,
[19:06] SPEAKER_02: the new incremental money that is coming,
[19:08] SPEAKER_02: it is coming to power the growth of the business.
[19:10] SPEAKER_02: Now,
[19:11] SPEAKER_02: today,
[19:11] SPEAKER_02: the costs of the business,
[19:13] SPEAKER_02: the establishment costs of the business,
[19:14] SPEAKER_02: what we call overheads are all taken care of.
[19:17] SPEAKER_02: So we are not going to double the technology of the company.
[19:19] SPEAKER_02: We are not going to double the number of staff.
[19:22] SPEAKER_02: So that entire cost is already taken care of.
[19:24] SPEAKER_02: So the marginal or incremental capital that is coming in will power the growth of the business.
[19:29] SPEAKER_02: And it's going to accelerate the growth of the business and the rewards to
[19:32] SPEAKER_02: shareholders are going to be sooner.
[19:34] SPEAKER_02: Also, if you look at our journey, we have been growing in profitability year on year.
[19:37] SPEAKER_02: If you just look at when we started, even just three years ago up to now, we've actually been growing.
[19:42] SPEAKER_02: So it's just a matter of when, not if, the rewards to shareholders would be a lot more pronounced.
[19:47] SPEAKER_02: Then if you look at the valuation of the company,
[19:49] SPEAKER_02: so if you look at the net book value of the company today,
[19:51] SPEAKER_02: net book value per share,
[19:52] SPEAKER_02: you find that net book value per share is about 21.
[19:55] SPEAKER_02: And what that means is that the current share price is grossly under values HF,
[19:59] SPEAKER_02: actually about 0.2 or 20%.
[20:03] SPEAKER_02: Which is pretty low.
[20:04] SPEAKER_02: And it's just a matter of time before the market actually realizes that there is
[20:08] SPEAKER_02: actually a gem in this company called HR.
[20:10] SPEAKER_02: The other thing is that it's going to happen with this rights issue is that in banking,
[20:14] SPEAKER_02: there is something called capacity.
[20:16] SPEAKER_02: Just like in manufacturing, there's something called capacity.
[20:18] SPEAKER_02: That a bank can be able to do a lot bigger ticket sizes,
[20:22] SPEAKER_02: a lot bigger business,
[20:23] SPEAKER_02: and there will honestly be business that you'll be able to do that is a lot more
[20:27] SPEAKER_02: than what we have done before.
[20:28] SPEAKER_02: So capacity in banking is also quite a big matter.
[20:30] SPEAKER_02: On that basis,
[20:31] SPEAKER_02: therefore,
[20:31] SPEAKER_02: and just given the growth that we have talked up,
[20:33] SPEAKER_02: I believe that this company is going to grow significantly.
[20:37] SPEAKER_02: I think we'll be one of the largest companies here, and you'll remember this conversation one day.
[20:41] SPEAKER_02: And therefore,
[20:42] SPEAKER_02: the possibility that the share price eventually will go up and follow the growth of
[20:46] SPEAKER_02: the company.
[20:46] SPEAKER_02: And also that this company is going to be able to reward its shareholders,
[20:50] SPEAKER_02: obviously,
[20:50] SPEAKER_02: with dividends sooner.
[20:51] SPEAKER_02: In fact,
[20:52] SPEAKER_02: we did a projection that shows that with this investment,
[20:54] SPEAKER_02: how much forward can we bring dividends?
[20:57] SPEAKER_02: And we actually saw that after 2025,
[20:59] SPEAKER_02: We should be able to get into good dividend space,
[21:02] SPEAKER_02: just given the trajectory and the projects that we have established.
[21:05] SPEAKER_02: So in my view,
[21:07] SPEAKER_02: the reason why I would encourage somebody to invest in this business is just the
[21:10] SPEAKER_02: fact that we can be able to grow with the business as it grows.
[21:14] SPEAKER_02: And in my view, it's a very good opportunism.
[21:16] SPEAKER_00: I know we haven't gotten there yet,
[21:17] SPEAKER_00: but what's the dividend policy for the firm going forward into fiscal 25,
[21:20] SPEAKER_00: fiscal 26?
[21:22] SPEAKER_02: So it's a good dividend policy today is to pay 40% of the profits to shareholders.
[21:27] SPEAKER_02: That obviously the policy that is subject to change,
[21:30] SPEAKER_02: but that's the current dividend policy that we have to pay 40% of profits to shareholders.
[21:35] SPEAKER_02: We make a billion, we pay $400 million.
[21:37] SPEAKER_02: We make $5 billion.
[21:38] SPEAKER_02: Of course you do the math.
[21:38] SPEAKER_00: All right.
[21:39] SPEAKER_00: What about the demand side of things?
[21:41] SPEAKER_00: Just looking at where the housing market is at the moment.
[21:43] SPEAKER_00: Someone would essentially look at the market and the environment in which you're
[21:46] SPEAKER_00: operating and say,
[21:46] SPEAKER_00: here we are in a situation where the state is trying to push very aggressively into
[21:50] SPEAKER_00: expanding the available supply of houses into the market through the affordable
[21:55] SPEAKER_00: housing program that they're running.
[21:56] SPEAKER_00: Now, whether or not they'll be able to execute that at speed, that's a separate discussion.
[21:59] SPEAKER_00: But let's assume for the sake of argument that the state manages to put this vast
[22:03] SPEAKER_00: volume of houses into the market as soon as it can.
[22:05] SPEAKER_00: From your perspective at HF,
[22:07] SPEAKER_00: I know you've said we're not getting into the business of developing large-scale
[22:10] SPEAKER_00: projects on the bank's books anymore,
[22:12] SPEAKER_00: but is that a competitive threat?
[22:14] SPEAKER_00: Is it a risk to the business, at least to the mortgage side of the business?
[22:18] SPEAKER_02: No, it's not.
[22:19] SPEAKER_02: In fact, we complement.
[22:20] SPEAKER_02: To us, it's been a very big opportunity what the government is doing.
[22:23] SPEAKER_02: So we figured,
[22:24] SPEAKER_02: first of all,
[22:24] SPEAKER_02: that we don't want to build the houses ourselves,
[22:26] SPEAKER_02: but we actually finance a lot of the players in that sector.
[22:30] SPEAKER_02: For instance, there are people who are contractors.
[22:33] SPEAKER_02: We do a lot of performance bonds, advance payment guarantees, and also working capital sort of financing.
[22:38] SPEAKER_02: We have people,
[22:39] SPEAKER_02: smaller businesses that supply to the affordable housing space,
[22:42] SPEAKER_02: the people who make doors and windows and the hinges and things like that.
[22:45] SPEAKER_02: We have also financing for the end user.
[22:48] SPEAKER_02: So we have funding from KMRC,
[22:49] SPEAKER_02: Kenya Mortgage Finance Company,
[22:51] SPEAKER_02: today that we are using to finance the end buyers of all these houses.
[22:55] SPEAKER_02: And in fact,
[22:56] SPEAKER_02: the government itself is mooting an idea where they can work with banks to see how
[23:00] SPEAKER_02: they can also support the buyer side,
[23:02] SPEAKER_02: which is basically the demand side of housing.
[23:04] SPEAKER_02: Then we also have in our property business,
[23:06] SPEAKER_02: we have got advisory services for companies that are coming into Kenya to do
[23:09] SPEAKER_02: affordable housing.
[23:10] SPEAKER_02: So we are seeing a huge business flow and we are actually realizing a value earlier.
[23:15] SPEAKER_02: So if you finance a contractor,
[23:17] SPEAKER_02: we start earning interest from day one rather than building a house and waiting for
[23:21] SPEAKER_02: the house to be sold so that you can make money.
[23:23] SPEAKER_02: So we are actually quite happy about what the government is doing.
[23:25] SPEAKER_02: We are making significant business opportunities for us.
[23:28] SPEAKER_02: But also, as I say, this is just now one of 10 revenue streams in the bank.
[23:33] SPEAKER_02: It's a good opportunity, but so are the other 10 nights.
[23:37] SPEAKER_02: that are driving the growth of the bank.
[23:38] SPEAKER_02: So the bank is now much more diversified.
[23:40] SPEAKER_02: If one sector has a problem,
[23:42] SPEAKER_02: it doesn't mean a problem for the bank because you can be able to offset that from
[23:46] SPEAKER_02: the other business.
[23:46] SPEAKER_00: Can you give us a sense of the group exposure to the affordable housing program or
[23:50] SPEAKER_00: government contracts in general?
[23:52] SPEAKER_00: Because if you look at,
[23:53] SPEAKER_00: say,
[23:53] SPEAKER_00: for example,
[23:54] SPEAKER_00: whether the net loan position was at the end of September,
[23:57] SPEAKER_00: that's roughly 39 or so billion Kenyan shillings.
[23:59] SPEAKER_00: What percentage of that would you say is directly linked to the state?
[24:04] SPEAKER_00: It's a very small number.
[24:05] SPEAKER_00: Directly to the state is a very small number.
[24:07] SPEAKER_00: It'd be less than 5%.
[24:08] SPEAKER_00: All right.
[24:09] SPEAKER_00: Fair enough.
[24:09] SPEAKER_00: Less than 5%.
[24:10] SPEAKER_00: On balance,
[24:11] SPEAKER_00: there's a fair bit of diversification in there built into the way that the business
[24:14] SPEAKER_00: is structured right now.
[24:16] SPEAKER_00: The target is to raise 4.6 billion shillings.
[24:18] SPEAKER_00: Let's assume for the sake of argument, right, because we already are well past the 85% mark.
[24:22] SPEAKER_00: Let's say you hit the 100% mark.
[24:24] SPEAKER_00: Maybe there's an oversubscription as well.
[24:26] SPEAKER_00: where's the money going to go into the business?
[24:28] SPEAKER_00: Because you say that the business as it is now, it's profitable, the operating costs are sorted.
[24:33] SPEAKER_00: And in terms of scaling the business up, that's not going to significantly ramp up the operating costs.
[24:37] SPEAKER_00: So there's this extra $5 billion that you may end up with by the end of December.
[24:41] SPEAKER_00: Where's it going to go?
[24:43] SPEAKER_00: This is how banking works.
[24:44] SPEAKER_00: When you bring in these funds,
[24:45] SPEAKER_02: this money will be invested in the bank itself because the other two subsidiaries
[24:49] SPEAKER_02: have sufficient capital.
[24:50] SPEAKER_02: This is the bank that we want to ramp up the capital levels.
[24:52] SPEAKER_02: And how banking works is,
[24:54] SPEAKER_02: if you have one shilling of core capital,
[24:56] SPEAKER_02: which is what this money is coming to be,
[24:58] SPEAKER_02: you can lend eight types depositors funds.
[25:01] SPEAKER_02: And the same shilling of core capital, you can collect
[25:04] SPEAKER_02: 12 and a half shillings of deposits.
[25:05] SPEAKER_02: That's basically summarizing the ratios very simply.
[25:08] SPEAKER_02: What that means then is this,
[25:10] SPEAKER_02: is that if we bring in 5 billion shillings or say 4 billion times 8,
[25:14] SPEAKER_02: we can be able to book loans of 30 billion and we can be able to collect deposits out.
[25:19] SPEAKER_02: It does multiply by 12.5.
[25:21] SPEAKER_02: That will be a large number.
[25:22] SPEAKER_02: So to answer your question directly then, where will this money go?
[25:25] SPEAKER_02: It is going straight to power the growth,
[25:28] SPEAKER_02: to create the multiplier that will power the growth of all these new businesses
[25:32] SPEAKER_02: that we have created.
[25:32] SPEAKER_02: Personal banking lending to individuals,
[25:34] SPEAKER_02: business banking lending to businesses,
[25:36] SPEAKER_02: diaspora banking lending to diaspora customers,
[25:38] SPEAKER_02: commercial banking lending to large businesses,
[25:40] SPEAKER_02: ultimate banking lending to high net worth clients.
[25:44] SPEAKER_02: And the amount that will go there is 85%.
[25:48] SPEAKER_02: 85% will just go to power those new businesses.
[25:51] SPEAKER_02: Then 15% of the money will come in also to enhance the digital propositions that we
[25:55] SPEAKER_02: have to make it easier,
[25:56] SPEAKER_02: faster,
[25:57] SPEAKER_02: better,
[25:57] SPEAKER_02: more efficient for customers to be able to consume services with us.
[26:01] SPEAKER_02: So we want to revamp the channels people use to access services to us and do
[26:06] SPEAKER_02: innovations that will basically digitize most of the operations we have to make it
[26:09] SPEAKER_02: a lot more efficient.
[26:11] SPEAKER_02: And that will show up in the costs.
[26:13] SPEAKER_02: that obviously the company will be carrying.
[26:15] SPEAKER_02: So long story short,
[26:16] SPEAKER_02: we'll invest in the bank primarily to power the growth of the new businesses we
[26:19] SPEAKER_02: have created.
[26:21] SPEAKER_00: So if we have this conversation,
[26:22] SPEAKER_00: say,
[26:22] SPEAKER_00: in late Jan,
[26:23] SPEAKER_00: early Feb,
[26:24] SPEAKER_00: when four-year numbers start to come out,
[26:26] SPEAKER_00: what changes should we expect to see in that core capital line?
[26:29] SPEAKER_00: Because for the bank, by end September, we had, what, 1.7 or so billion in core capital.
[26:34] SPEAKER_00: Is that double going to go up by a multiple?
[26:36] SPEAKER_02: Yeah, if that number, say, for instance, comes to 1.7 billion plus, say, about, say, 4.2,
[26:42] SPEAKER_02: then we'll be closer to about 7 billion of capital.
[26:45] SPEAKER_02: I think we are going to go higher than the 4 billion.
[26:49] SPEAKER_02: That's what I suspect.
[26:50] SPEAKER_02: Obviously, we have to see how that goes.
[26:52] SPEAKER_02: And that gets us closer to 7 billion.
[26:55] SPEAKER_02: And therefore, we can be able to book a significant number of new business.
[26:58] SPEAKER_02: Plus, the business is profitable.
[26:59] SPEAKER_02: So it's also creating its new capital every day, every month.
[27:03] SPEAKER_00: And that also gets you a step ahead in terms of complying with these new capital
[27:07] SPEAKER_00: requirements that are coming into effect from Treasury and the central bank as well,
[27:10] SPEAKER_00: doesn't it?
[27:11] SPEAKER_02: Yeah, it does.
[27:12] SPEAKER_00: Actually,
[27:12] SPEAKER_02: by the way,
[27:13] SPEAKER_02: once we get to that,
[27:14] SPEAKER_02: say,
[27:14] SPEAKER_02: 7 billion we are talking about,
[27:16] SPEAKER_02: we also have,
[27:17] SPEAKER_02: I mentioned to you that we have taken 75% provisions on the legacy book.
[27:23] SPEAKER_02: We just got a ruling,
[27:25] SPEAKER_02: a couple of rulings,
[27:25] SPEAKER_02: positive rulings,
[27:27] SPEAKER_02: one of them at the Supreme Court,
[27:28] SPEAKER_02: allowing us to recover some of the very large names that we had taken full
[27:31] SPEAKER_02: provisions for.
[27:32] SPEAKER_02: And we anticipate we are going to get
[27:34] SPEAKER_02: about a right back of another $3 billion once we complete the recovery of those assets.
[27:39] SPEAKER_02: Given that we have completed the legal process of that recovery,
[27:42] SPEAKER_02: one of them was actually,
[27:43] SPEAKER_02: as I said,
[27:43] SPEAKER_02: that the Supreme Court got a ruling and this facility is holding capital of about
[27:48] SPEAKER_02: $2 billion.
[27:48] SPEAKER_02: So we don't see a problem in getting to the $10 billion that is being anticipated.
[27:53] SPEAKER_00: Speaking of the legal issues in terms of asset recovery,
[27:56] SPEAKER_00: because the court system is fairly gummed up,
[27:58] SPEAKER_00: right?
[27:58] SPEAKER_00: The backlog of cases has been going up significantly year after year.
[28:02] SPEAKER_00: Better part of 100,000 cases is a backlog that comes to mind.
[28:05] SPEAKER_00: And what we've seen in the banking sector is that there are institutions that are saying,
[28:08] SPEAKER_00: look,
[28:09] SPEAKER_00: we can't always go to courts and try and kickstart the process of recovering the
[28:13] SPEAKER_00: asset because that essentially puts things back five,
[28:15] SPEAKER_00: six,
[28:15] SPEAKER_00: seven years.
[28:16] SPEAKER_00: Based on your experience, how are you guys navigating that problem?
[28:19] SPEAKER_00: Are you sitting down with clients saying,
[28:21] SPEAKER_00: look,
[28:21] SPEAKER_00: we're going to reprice this,
[28:22] SPEAKER_00: or we're going to try and figure out how to restructure the facilities that we have
[28:26] SPEAKER_00: with you?
[28:26] SPEAKER_00: Because putting the asset into the market might not also necessarily yield the full
[28:30] SPEAKER_00: value of that house or land.
[28:32] SPEAKER_02: I think that's a really good question.
[28:34] SPEAKER_02: In fact,
[28:34] SPEAKER_02: part of the reason why we have achieved this growth and recovered most of that
[28:38] SPEAKER_02: legacy book is because we took that approach.
[28:40] SPEAKER_02: I can say 80 to 90% of the recoveries that we make in cash terms is normally
[28:45] SPEAKER_02: achieved through just conversations with customers and saying,
[28:48] SPEAKER_02: look,
[28:49] SPEAKER_02: we are happy to help you sell.
[28:50] SPEAKER_02: We can sell together.
[28:51] SPEAKER_02: You can get back part of this,
[28:53] SPEAKER_02: your investment from this,
[28:54] SPEAKER_02: and then you can obviously be out of debt,
[28:56] SPEAKER_02: especially where business has not gone the way a client anticipated.
[28:59] SPEAKER_02: And we just have sober conversations around
[29:03] SPEAKER_02: How do we resolve this matter jointly and in a win sort of way?
[29:07] SPEAKER_02: And that has been quite good.
[29:08] SPEAKER_02: I must say that we have had very good outcomes.
[29:12] SPEAKER_02: In fact,
[29:12] SPEAKER_02: some of the properties that we've seen in the past that we have advertised have
[29:16] SPEAKER_02: been mainly jointly with our customers.
[29:19] SPEAKER_02: And in fact, we have even created sales teams in the past that help customers
[29:23] SPEAKER_02: to sell the properties, especially where a customer has built houses to sell.
[29:27] SPEAKER_02: They are not able to sell the houses or office space.
[29:30] SPEAKER_02: They are stuck with office space.
[29:31] SPEAKER_02: They are not able to sell.
[29:32] SPEAKER_02: We have a good sales team.
[29:34] SPEAKER_02: We sell on behalf and we support the customer to recover their money.
[29:37] SPEAKER_02: And they recover the money.
[29:38] SPEAKER_02: Of course, the money comes back to us.
[29:40] SPEAKER_02: So we have seen most of what we have achieved basically through that.
[29:43] SPEAKER_02: And we will continue to do the same.
[29:45] SPEAKER_02: We don't get happy when we are auctioning people.
[29:47] SPEAKER_00: No, I don't think anyone does.
[29:49] SPEAKER_00: But given the macroeconomic environment in which we're in,
[29:52] SPEAKER_00: there's a significant amount of assets and we see it every day.
[29:54] SPEAKER_00: You open a newspaper, there's five, six, seven pages of assets going up under the hammer.
[29:59] SPEAKER_00: On the digital side,
[30:00] SPEAKER_00: because 15% of the proceeds from the right issue,
[30:03] SPEAKER_00: like you said,
[30:03] SPEAKER_00: 15% of that is essentially going to go into enhancing the tech tools that the bank
[30:07] SPEAKER_00: has in hand at the moment.
[30:09] SPEAKER_00: How's that going to translate into a more interesting cost to income ratio?
[30:13] SPEAKER_00: Do you have a specific target that you're looking for with respect to these tech investments?
[30:17] SPEAKER_02: Yes, we are investing part of the money, as you say, through to the digitization of the business.
[30:22] SPEAKER_02: And so far, have you seen, I'll just give you an example.
[30:25] SPEAKER_02: So in 2018, we incurred about $3.1 billion in costs.
[30:29] SPEAKER_02: In 2023, five years later, we incurred the same cost.
[30:33] SPEAKER_02: And part of that difference, there's the fact that obviously there has been inflation over the years.
[30:37] SPEAKER_02: We have increased the number of staff.
[30:39] SPEAKER_02: We have refurbished branches.
[30:40] SPEAKER_02: We have invested heavily on technology and digitization.
[30:43] SPEAKER_02: So part of that growth
[30:46] SPEAKER_02: Part of that sort of reduction of cost has been because obviously we have taken
[30:50] SPEAKER_02: costs from non-productive areas to productive areas,
[30:52] SPEAKER_02: but also we have heavily digitized our business.
[30:55] SPEAKER_02: So we have customer journeys, what we call customer journeys.
[30:58] SPEAKER_02: For instance, if you order a card, that's a journey.
[31:01] SPEAKER_02: If you set up a standing order, that's a journey.
[31:03] SPEAKER_02: So we have 54 journeys and we are back on enabling customers to be able to consume services of the bank.
[31:10] SPEAKER_02: through the digital channels, pretty much as if they would come to the bank.
[31:14] SPEAKER_02: And now I can see 80% of our transactions, as I said earlier, through digital channels.
[31:19] SPEAKER_02: And our banking app has been voted the best banking app in Kenya.
[31:23] SPEAKER_02: Now I can tell you this digitization work has really pulled down our costs.
[31:28] SPEAKER_02: It has really pulled down our costs by removing manual processes,
[31:32] SPEAKER_02: both in the back office and in the customer impacting channels.
[31:37] SPEAKER_02: So this will remain key, a key pillar to our transformation.
[31:40] SPEAKER_02: We intend to continue to create efficiency through this and bring down the cost.
[31:45] SPEAKER_02: We think that we can be able to,
[31:46] SPEAKER_02: in the coming years,
[31:47] SPEAKER_02: bring down our cost income ratio to about 50% in line with everyone in the market,
[31:52] SPEAKER_02: largely driven by digitization.
[31:54] SPEAKER_02: and the work we are doing to transform both the core services of the bank,
[31:58] SPEAKER_02: like the core banking system,
[32:00] SPEAKER_02: and also the frontline systems,
[32:02] SPEAKER_02: such as the channels like online banking,
[32:04] SPEAKER_02: mobile banking,
[32:05] SPEAKER_02: international money transfers,
[32:06] SPEAKER_02: and just that whole data work,
[32:08] SPEAKER_02: which helps us to be able to do a lot more in the clients.
[32:12] SPEAKER_00: Slightly unrelated question because I occasionally see this debate showing up in
[32:15] SPEAKER_00: investment groups and financial analyst groups before I just get into questions
[32:19] SPEAKER_00: from our audience.
[32:20] SPEAKER_00: With respect to the fact that if I look at your transaction volumes and if I look
[32:23] SPEAKER_00: even among tier ones,
[32:25] SPEAKER_00: we often see this in presentations.
[32:27] SPEAKER_00: 80, 90% of our transactions are taking place either online or on mobile, ECDC.
[32:32] SPEAKER_00: And then the question always comes, we see these same institutions opening up.
[32:36] SPEAKER_00: bank branches in specific areas.
[32:38] SPEAKER_00: What's the value argument you'd make to shareholders who say,
[32:41] SPEAKER_00: look,
[32:41] SPEAKER_00: hang on,
[32:41] SPEAKER_00: if I can apply for a loan,
[32:43] SPEAKER_00: apply for a mortgage or handle a transaction online,
[32:45] SPEAKER_00: why do you need to expand and add an extra branch in location X,
[32:49] SPEAKER_00: Y,
[32:49] SPEAKER_00: Z?
[32:50] SPEAKER_00: Walk us through the calculus there.
[32:52] SPEAKER_00: It's very interesting.
[32:53] SPEAKER_02: And I think it's Michael Joseph who once said that Kenyans have a peculiar habit.
[32:58] SPEAKER_02: So I can tell you something about branches.
[33:00] SPEAKER_02: If you want to bank people in Kitalis,
[33:02] SPEAKER_02: for instance,
[33:03] SPEAKER_02: or take in the other town in Kenya,
[33:04] SPEAKER_02: it could be Bungoma,
[33:05] SPEAKER_02: it could be Kilipi.
[33:07] SPEAKER_02: If you want to bank customers there,
[33:09] SPEAKER_02: if you don't have a branch,
[33:10] SPEAKER_02: even if you want to use digital channels,
[33:12] SPEAKER_02: they are not going to open accounts with you.
[33:14] SPEAKER_02: But if you have a branch,
[33:15] SPEAKER_02: they will open accounts with you and start doing banking with you,
[33:18] SPEAKER_02: but they will not come to the bank.
[33:20] SPEAKER_02: So branches have an optical value.
[33:22] SPEAKER_02: And I think people feel the confidence of knowing that if I have an issue, my branch is not far away.
[33:27] SPEAKER_02: So that's the first reason.
[33:28] SPEAKER_02: The second reason is branches have become conversation centers.
[33:30] SPEAKER_02: So people use branches less for transactions and more for conversations,
[33:35] SPEAKER_02: especially business customers like to come and have a conversation with the
[33:38] SPEAKER_02: relationship managers or relationship managers go to them.
[33:42] SPEAKER_02: And thirdly, branches are also advisory centers where then you can be able to advise clients.
[33:47] SPEAKER_02: And then also finally scale.
[33:48] SPEAKER_02: Sometimes people want to see that the company they are banking with also has many branches.
[33:53] SPEAKER_02: I'll give you an example.
[33:54] SPEAKER_02: Recently, we had a branch in a place called Gill House and we relocated it to Harambe Avenue.
[33:59] SPEAKER_02: The branch at Gill House didn't look good at all.
[34:01] SPEAKER_02: We have built a really beautiful branch on Harambe Avenue.
[34:04] SPEAKER_02: And customers used to send messengers before to the old branch.
[34:07] SPEAKER_02: Now they are coming themselves because they want to come and have conversations in this nice space.
[34:12] SPEAKER_02: And obviously we are able to do much more banking there.
[34:14] SPEAKER_02: So there's a business case actually for branches.
[34:16] SPEAKER_02: That's the reason why you're seeing branches opening up.
[34:19] SPEAKER_02: But even the way the branch looks is different.
[34:21] SPEAKER_02: You'd have a long line of tellers.
[34:23] SPEAKER_02: Now tellers are less.
[34:24] SPEAKER_02: It's much more conversation centers.
[34:27] SPEAKER_00: So in short,
[34:27] SPEAKER_00: this is one of those interesting situations where it's not just a straightforward
[34:30] SPEAKER_00: matter of just keeping costs under control,
[34:32] SPEAKER_00: but it's also a question of what the customer experience is like as well.
[34:35] SPEAKER_00: I want to get to questions that have been coming in.
[34:37] SPEAKER_00: And I want to start with one here from Justin Wangi.
[34:42] SPEAKER_00: He's talking about this really loops back to the conversation we had around capital requirements.
[34:45] SPEAKER_00: And his question is this,
[34:47] SPEAKER_00: will the new capital requirements force HF to retain more capital and therefore
[34:51] SPEAKER_00: have a knock-on effect on that 40% dividend payout ratio that we spoke about earlier?
[34:55] SPEAKER_00: Not really, actually not really.
[34:57] SPEAKER_02: Let me explain.
[34:58] SPEAKER_02: So HF actually is not raising capital because of mainly the cash.
[35:01] SPEAKER_02: Today we are holding 16 billion in casual cash equivalent, a huge pile of cash.
[35:07] SPEAKER_02: How capital works is once you bring in the capital, it sits with you as capital.
[35:11] SPEAKER_02: So if you bring in 7 billion, it will remain 7 billion.
[35:14] SPEAKER_02: And then what happens is that then you start now generating the loans,
[35:18] SPEAKER_02: but that does not reduce the capital.
[35:20] SPEAKER_02: The capital remains, the capital is just a multiplier.
[35:22] SPEAKER_02: Obviously,
[35:23] SPEAKER_02: from a regulatory point of view,
[35:24] SPEAKER_02: you just multiply the loans by eight,
[35:26] SPEAKER_02: deposits 12 and a half,
[35:28] SPEAKER_02: as I said.
[35:29] SPEAKER_02: And as we do make profits,
[35:30] SPEAKER_02: these profits,
[35:31] SPEAKER_02: because we are already making profits over the last three years,
[35:34] SPEAKER_02: these profits then can be deployed to paying dividends.
[35:38] SPEAKER_02: Because the company is already capitalized.
[35:39] SPEAKER_02: We don't have to hold the profits we make because the capital ratios are okay.
[35:44] SPEAKER_02: Therefore, we can be able to pay dividends.
[35:45] SPEAKER_02: In fact,
[35:46] SPEAKER_02: that is the discussion we had some time with Britain and said,
[35:49] SPEAKER_02: how can we accelerate the journey to payment of dividends and held the dividends?
[35:54] SPEAKER_02: without having to bother about the issue of capital.
[35:56] SPEAKER_02: Why don't we,
[35:56] SPEAKER_02: capital is a business,
[35:58] SPEAKER_02: accelerate its growth,
[35:59] SPEAKER_02: accelerate its profitability,
[36:00] SPEAKER_02: and then we can be able to accelerate the payout of the dividends earlier rather
[36:04] SPEAKER_02: than later.
[36:04] SPEAKER_00: There's a second question that also has come in, looking at the buffers that you have, right?
[36:08] SPEAKER_00: On your liquidity ratios,
[36:09] SPEAKER_00: for example,
[36:10] SPEAKER_00: core capital to total deposit probabilities,
[36:12] SPEAKER_00: there's about 400 or so basis points above that.
[36:15] SPEAKER_00: as of September this year.
[36:17] SPEAKER_00: And if you look at similar comparative ratios,
[36:19] SPEAKER_00: capital rates to,
[36:20] SPEAKER_00: let's see,
[36:21] SPEAKER_00: total risk-weighted assets,
[36:23] SPEAKER_00: that's around 600 basis points above.
[36:26] SPEAKER_00: And the question essentially here is,
[36:27] SPEAKER_00: what are your thoughts on the draft guidelines from CBK on liquidity coverage ratios?
[36:32] SPEAKER_00: Would you like to answer that, Chikabe?
[36:34] SPEAKER_00: Just go ahead.
[36:35] SPEAKER_01: Please introduce yourself.
[36:36] SPEAKER_01: My name is Joseph Shikove.
[36:38] SPEAKER_01: I'm the Director of Treasury and Custody at HFC.
[36:41] SPEAKER_01: So in terms of liquidity,
[36:42] SPEAKER_01: so if you look at our liquidity ratios today,
[36:44] SPEAKER_01: they are well above the regulatory requirement of 20%.
[36:49] SPEAKER_01: Now with the new guidelines, so these ones are not yet in the prudential or statutory ratios.
[36:55] SPEAKER_01: We are still discussing them and for sure we know they are going to come.
[36:58] SPEAKER_01: But today, as we see it, the bank is compliant with them.
[37:01] SPEAKER_01: So one of them is,
[37:02] SPEAKER_01: of course,
[37:02] SPEAKER_01: the net stable funding ratio,
[37:04] SPEAKER_01: which today,
[37:06] SPEAKER_01: as we've computed,
[37:07] SPEAKER_01: we are already compliant with the same.
[37:09] SPEAKER_01: And the liquidity coverage ratio, which requires you to have 100%.
[37:13] SPEAKER_01: We are also complying with them.
[37:16] SPEAKER_01: And Robert had mentioned earlier,
[37:17] SPEAKER_01: if you look at our liquid assets,
[37:20] SPEAKER_01: basically sufficient enough to cover for any outstanding obligations or as they
[37:25] SPEAKER_01: call due.
[37:25] SPEAKER_01: Thank you.
[37:26] SPEAKER_01: Thank you, Jeff.
[37:27] SPEAKER_00: Thanks for that.
[37:27] SPEAKER_00: And of course,
[37:28] SPEAKER_00: just to remind our listeners in the event that you do have questions that you'd
[37:31] SPEAKER_00: like us to cover with Robert and his team,
[37:33] SPEAKER_00: you can send them off to the Mungo Capital account,
[37:35] SPEAKER_00: either respond to the pinned tweet on the account,
[37:38] SPEAKER_00: send it on DM either to them or to myself,
[37:40] SPEAKER_00: and we'll certainly get around to sharing them in the course of the conversation.
[37:43] SPEAKER_00: Robert,
[37:44] SPEAKER_00: looking at the sort of gross numbers that we looked at for pretty much many lines
[37:49] SPEAKER_00: in the business,
[37:49] SPEAKER_00: we're seeing a lot of double-digit numbers on a year-on-year basis,
[37:52] SPEAKER_00: especially with respect to 2023.
[37:54] SPEAKER_00: Total interest income, for example, is up by around 23%.
[37:57] SPEAKER_00: Non-fund income up by a similar amount.
[37:59] SPEAKER_00: Operating income was up 20%.
[38:01] SPEAKER_00: 2023 was an interesting year.
[38:04] SPEAKER_00: 2024 has been relatively challenging on a macroeconomic front.
[38:06] SPEAKER_00: Will you be able to maintain double-digit growth rates across those business lines into fiscal 2025?
[38:12] SPEAKER_02: We believe we can.
[38:13] SPEAKER_02: We believe we can.
[38:14] SPEAKER_02: There's obviously always risks.
[38:15] SPEAKER_02: It's uncertain, obviously, around the macros.
[38:18] SPEAKER_02: Something happening across the other side of the world can affect what we do.
[38:21] SPEAKER_02: But we believe there is a lot going for us.
[38:23] SPEAKER_02: For instance, we have seen that the economy has remained quite resilient.
[38:28] SPEAKER_02: largely down, currency is stable.
[38:30] SPEAKER_02: We've seen now actually interest rates are coming down.
[38:32] SPEAKER_02: So we believe that we can be able to sustain that.
[38:35] SPEAKER_02: I think the other thing is that we also focus on sectors of the market that are not
[38:40] SPEAKER_02: very susceptible to these things.
[38:42] SPEAKER_02: For instance, I'll just give you an example, education.
[38:45] SPEAKER_02: If your child is sent out of school for lack of fixed school fees, you're going to pay it.
[38:49] SPEAKER_02: That's one of the sectors we focus on.
[38:51] SPEAKER_02: Health, if somebody is unwell, they have to go to hospital.
[38:53] SPEAKER_02: Real estate value chain, if somebody is staying in a rented house, they have to be rent.
[38:58] SPEAKER_02: And we catch a value addition, people have to eat.
[39:01] SPEAKER_02: So we have also carefully chosen sectors that we focus on that are a lot less
[39:05] SPEAKER_02: sensitive to changes in the macroeconomic environment.
[39:09] SPEAKER_02: And that has helped.
[39:10] SPEAKER_02: The other thing I'd like to say is that we have continued this transformation.
[39:15] SPEAKER_02: Through COVID, we started this journey actually pre-COVID.
[39:19] SPEAKER_02: We have been able to grow and transform the business through COVID.
[39:22] SPEAKER_02: In fact, we achieved significant growth during that time.
[39:25] SPEAKER_02: We believe that we can be able to do this.
[39:27] SPEAKER_02: As we say, it's a difficult environment.
[39:30] SPEAKER_02: But also I think the other thing is just the propositions that we have built.
[39:32] SPEAKER_02: We have seen our customer numbers have been growing.
[39:35] SPEAKER_02: Over time, we have brought in about 179,000 customers as I said recently.
[39:38] SPEAKER_02: Transaction numbers have been growing.
[39:40] SPEAKER_02: So we believe that we can be able to sustain.
[39:43] SPEAKER_02: And the other thing I think that comes to mind is just that,
[39:46] SPEAKER_02: as I said earlier,
[39:47] SPEAKER_02: our reels for growth are already in place.
[39:49] SPEAKER_02: We have already cracked this holding of NPLs.
[39:52] SPEAKER_02: We are bringing in business for NPLs than the market by far.
[39:56] SPEAKER_02: And that will serve us very well.
[39:58] SPEAKER_02: We also are digitizing propositions.
[40:00] SPEAKER_02: Usually this comes at a much lower cost.
[40:02] SPEAKER_02: So keeping an eye on the cost,
[40:04] SPEAKER_02: focusing on the target sectors that are fast growing,
[40:07] SPEAKER_02: less risky and less stable to macroeconomic forces,
[40:10] SPEAKER_02: we believe that we can be able to sustain this growth.
[40:13] SPEAKER_00: The insurance business, and we haven't covered that in a lot of detail.
[40:16] SPEAKER_00: And granted, the Kenyan market, if you look at insurance penetration here, it's not exactly top of mind.
[40:21] SPEAKER_00: Arguably,
[40:22] SPEAKER_00: Kenyans,
[40:22] SPEAKER_00: if we are not compelled in some ways,
[40:24] SPEAKER_00: for example,
[40:24] SPEAKER_00: like without vehicles,
[40:25] SPEAKER_00: to actually buy insurance for that,
[40:26] SPEAKER_00: some Kenyans probably would not actually opt to do it.
[40:29] SPEAKER_00: So what's the gross potential there,
[40:31] SPEAKER_00: given the constrained income levels that we've discussed at all times over the last hour,
[40:35] SPEAKER_00: but also be that general consumer distrust of insurance?
[40:40] SPEAKER_00: Granted, you're not, as HF, you're not underwriting the risk yourselves.
[40:43] SPEAKER_00: But if you have a bank assurance unit that you're trying to grow and expand rapidly,
[40:47] SPEAKER_00: those attitudes towards insurance are going to be an inhibitor to growth,
[40:50] SPEAKER_00: aren't they?
[40:51] SPEAKER_02: Yeah.
[40:52] SPEAKER_02: As I said earlier,
[40:52] SPEAKER_02: when insurance business has transformed significantly,
[40:55] SPEAKER_02: we used to do just a single line of business in insurance.
[40:57] SPEAKER_02: Now we do a lot more.
[40:59] SPEAKER_02: One of the areas that had not benefited a lot from innovation is the whole insurance industry.
[41:04] SPEAKER_02: Sometimes ago I visited a company in China where I saw a business that is just
[41:08] SPEAKER_02: doing insurance very different.
[41:09] SPEAKER_02: Like for instance, I saw that they have infused the insurance into normal life.
[41:14] SPEAKER_02: Go to Java, get a cup of coffee.
[41:15] SPEAKER_02: And within that coffee, you have some insurance, small amount that goes to your insurance.
[41:19] SPEAKER_02: So what we are doing currently is that we are working with the insurtechs companies
[41:24] SPEAKER_02: that are doing innovation in insurance.
[41:26] SPEAKER_02: The same way we are innovating within the bank,
[41:28] SPEAKER_02: we are actually working on the insurance side to be able to drive business,
[41:32] SPEAKER_02: to generate business through our customers and others.
[41:35] SPEAKER_02: and drive that business to the insurance companies.
[41:37] SPEAKER_02: And we have seen even just from what we've done, our premiums have been growing.
[41:40] SPEAKER_02: We started off at just over 300 million.
[41:42] SPEAKER_02: Now we are going to touch 700, 800 million of gross written premiums this year.
[41:48] SPEAKER_02: So we believe that there is a big opportunity in insurance.
[41:51] SPEAKER_02: We want to be at the forefront of that innovation around insurance.
[41:54] SPEAKER_02: We have trained,
[41:55] SPEAKER_02: by the way,
[41:55] SPEAKER_02: our branch teams,
[41:57] SPEAKER_02: frontline staff to be able to speak about insurance as well as they speak about the bank.
[42:01] SPEAKER_02: And we have got teams across all of our branches who are speaking about insurance.
[42:04] SPEAKER_02: We
[42:04] SPEAKER_02: Because the customers who bank with us have cars,
[42:06] SPEAKER_02: have children,
[42:07] SPEAKER_02: have health needs,
[42:08] SPEAKER_02: have houses and property to protect.
[42:10] SPEAKER_02: So we can be able to deliver a lot of business on the insurance side.
[42:14] SPEAKER_02: And we don't take the risk.
[42:15] SPEAKER_02: We just forward that business to an insurance company and we get our margin.
[42:19] SPEAKER_00: To use that China example that you've given us,
[42:21] SPEAKER_00: what are you experimenting with in terms of layering insurance payments into
[42:26] SPEAKER_00: day-to-day activities?
[42:27] SPEAKER_00: Because I know if I get hit,
[42:28] SPEAKER_00: for the sake of argument,
[42:29] SPEAKER_00: my annual insurance premiums on the car comes in and they tell me,
[42:32] SPEAKER_00: you've got to hand us a check of
[42:34] SPEAKER_00: the better part of 85,000 shillings.
[42:35] SPEAKER_00: There's a bit of sticker shock, right?
[42:37] SPEAKER_00: When it comes to that specific amount of money that covers you for a whole year.
[42:41] SPEAKER_00: But in terms of layering it into daily transactions, how do we do it?
[42:44] SPEAKER_00: Do we schedule it as a specific payment over 12 months embedded into banking fees?
[42:51] SPEAKER_00: Or do we schedule it as mobile money payments?
[42:53] SPEAKER_00: What are you tinkering with?
[42:55] SPEAKER_02: I think this would be subject to regulatory approval, but let me give you an example.
[42:59] SPEAKER_02: For instance,
[42:59] SPEAKER_02: when you're consuming banking services,
[43:01] SPEAKER_02: as you go,
[43:02] SPEAKER_02: for instance,
[43:02] SPEAKER_02: you have applied for a loan facility,
[43:04] SPEAKER_02: there is already insurance that is baked into it.
[43:06] SPEAKER_02: I'll give an example.
[43:07] SPEAKER_02: For instance, if you are withdrawing cash from an ATM or moving money, what do we say that's
[43:11] SPEAKER_02: X shillings from that would go to financing insurance.
[43:14] SPEAKER_02: What if we say, for instance, that a savings account will come with a life insurance policy up to X?
[43:20] SPEAKER_02: What if we say that if you save for a child money every month,
[43:24] SPEAKER_02: then we can have some insurance component that will also ensure that the child go
[43:28] SPEAKER_02: to school when they achieve XH?
[43:30] SPEAKER_02: So the possibilities are limitless.
[43:32] SPEAKER_02: Think about...
[43:33] SPEAKER_02: For instance, an app like Little Cub app, you find they have got a lot of solutions there.
[43:37] SPEAKER_02: You can order coffee, you can order food, you can order carbs, whatever it is.
[43:41] SPEAKER_02: What if under a similar arrangement,
[43:43] SPEAKER_02: the bank had similar,
[43:44] SPEAKER_02: for instance,
[43:44] SPEAKER_02: you get into a banking app and you can be able to order coffee as well as banking,
[43:48] SPEAKER_02: can be able to order for your carb right there.
[43:50] SPEAKER_02: And what if you can be able to,
[43:51] SPEAKER_02: as you consume that coffee or carb services,
[43:54] SPEAKER_02: you can be able to have a small component of that money,
[43:58] SPEAKER_02: go to an insurance policy for your child or something like that.
[44:02] SPEAKER_02: So the opportunities are limitless.
[44:04] SPEAKER_02: What if,
[44:05] SPEAKER_02: for instance,
[44:05] SPEAKER_02: when you're driving,
[44:06] SPEAKER_02: if you drive less,
[44:07] SPEAKER_02: you get less cost of insurance if you drive more,
[44:10] SPEAKER_02: and you can use technology to determine how much you drive,
[44:13] SPEAKER_02: whether you drive more or less.
[44:14] SPEAKER_02: Today, we pay the same amount, all of us.
[44:17] SPEAKER_02: So I believe there is a big opportunity for innovation in the insurance sector.
[44:20] SPEAKER_02: Our insurance business is working with InsurTechs to be able to derive those.
[44:24] SPEAKER_02: There's obviously some I can't be able to talk about here in terms of the progress
[44:27] SPEAKER_02: we are making,
[44:28] SPEAKER_02: but this is an opportunity that we have seen as an opportunity for our group.
[44:32] SPEAKER_00: I've got one last question for you, Robert, just before we close.
[44:36] SPEAKER_00: With respect to the cost of funds,
[44:38] SPEAKER_00: because one of the interesting things looking at your numbers is that you've
[44:40] SPEAKER_00: managed to drop it by a better part of around 200,
[44:43] SPEAKER_00: 210 basis points between 2018 and 2022 from around 7.3% to 4.8%.
[44:50] SPEAKER_00: Will you be able to maintain that cost of funds at a relatively low level, sub 6% perhaps?
[44:56] SPEAKER_00: And what should we expect with respect to net interest margin for the business going into 2025?
[45:02] SPEAKER_02: We have worked on this journey at that time.
[45:04] SPEAKER_02: First of all, our borrowing was at a very high rate, 7.1% cost of funding was quite high.
[45:09] SPEAKER_02: And what we did is that we have over time substituted some of the expensive first
[45:14] SPEAKER_02: borrowings or deposits with savings and current accounts type business.
[45:18] SPEAKER_02: And also just finance our business from much less expensive sources.
[45:21] SPEAKER_02: Obviously,
[45:22] SPEAKER_02: the last one year,
[45:23] SPEAKER_02: two years,
[45:23] SPEAKER_02: actually 2020,
[45:24] SPEAKER_02: 2024,
[45:25] SPEAKER_02: we have seen a bit of an increase in funding costs due to higher interest rates.
[45:28] SPEAKER_02: But we believe we can be able to keep this down.
[45:30] SPEAKER_02: We just need to make sure that we have float money, what is called float money.
[45:35] SPEAKER_02: When you bring in,
[45:35] SPEAKER_02: for instance,
[45:37] SPEAKER_02: customers who are operating their businesses on a day-to-day basis and keep their
[45:40] SPEAKER_02: monies in current accounts,
[45:42] SPEAKER_02: then you always have a float amount of money that then brings down your total cost
[45:47] SPEAKER_02: of funding significantly.
[45:48] SPEAKER_02: So that's possible.
[45:49] SPEAKER_02: We think that we can be able to keep it quickly.
[45:52] SPEAKER_02: We are getting a lot of funding from our property business supporting the bank.
[45:56] SPEAKER_02: So most of the people,
[45:57] SPEAKER_02: for instance,
[45:57] SPEAKER_02: the landowners we work with on what we call landowner wealth management solutions,
[46:01] SPEAKER_02: they bank with us,
[46:01] SPEAKER_02: they keep their money with us.
[46:03] SPEAKER_02: We also have been involved a lot in banking government that has helped as well.
[46:08] SPEAKER_02: Government institutions are providing,
[46:10] SPEAKER_02: for instance,
[46:10] SPEAKER_02: mortgages for government employees on a funded basis.
[46:13] SPEAKER_02: So there are multiple ways that we are able to finance and lower our cost of
[46:17] SPEAKER_02: funding and be able to give that benefit to our customers.
[46:21] SPEAKER_02: So we have preferred our net interest margin largely at the levels of 5.4, 5.5 levels by September.
[46:29] SPEAKER_02: And we think that we can be able to grow that to about 6% or so,
[46:33] SPEAKER_02: the difference between the deposit side and the loan side.
[46:37] SPEAKER_00: All right,
[46:38] SPEAKER_00: then,
[46:38] SPEAKER_00: Robert,
[46:38] SPEAKER_00: your closing thoughts as we wrap up the conversation,
[46:40] SPEAKER_00: because the right issue closes on the 9th of December.
[46:43] SPEAKER_00: You're already 85% of the way there to that 4.6 billion shilling target.
[46:49] SPEAKER_00: Hopefully, there might be a green shoe option that gets exercised as well along the way.
[46:53] SPEAKER_00: When we're having this conversation,
[46:54] SPEAKER_00: say,
[46:55] SPEAKER_00: second week of December or on the 24th,
[46:57] SPEAKER_00: actually,
[46:57] SPEAKER_00: when these new shares start trading.
[46:58] SPEAKER_02: What do you hope to see?
[46:59] SPEAKER_02: We are encouraging our shareholders to invest in the company.
[47:02] SPEAKER_02: This is a good franchise.
[47:04] SPEAKER_02: The business the shareholders invested in some years back is very different from what it is now.
[47:08] SPEAKER_02: This is a very diversified business.
[47:10] SPEAKER_02: It's very sustainable into the future as we see it today.
[47:13] SPEAKER_02: And we believe it's a good opportunity for them.
[47:16] SPEAKER_02: The flip side is the shareholders who stay out do get diluted, which is not a good thing.
[47:20] SPEAKER_02: Especially the fact that a lot of people have held this share for a long time.
[47:23] SPEAKER_02: And when now the company is picking up, it will be sad to see all our shareholders participate in this.
[47:28] SPEAKER_02: Personally, I think that this is a huge opportunity for us.
[47:31] SPEAKER_02: This company is going to become a big company.
[47:33] SPEAKER_02: And we have gotten the steps right so far.
[47:36] SPEAKER_02: Even through difficult times when rate cuts or rates were capped,
[47:39] SPEAKER_02: when there was COVID,
[47:40] SPEAKER_02: we have survived through that and right.
[47:43] SPEAKER_02: And we see a lot of opportunity into the future.
[47:45] SPEAKER_02: Just encouraging our shareholders to participate.
[47:47] SPEAKER_02: That's the best we can do, obviously, to encourage.
[47:49] SPEAKER_02: Our mission is to be a top 10 banking group by being the most dependable and loved
[47:54] SPEAKER_02: financial institutions.
[47:55] SPEAKER_02: So in some years to come, this company will be among the top 10 banking companies in Kenya.
[48:01] SPEAKER_00: If you're going to get into the top 10s, are you looking at acquisitions somewhere along the way?
[48:05] SPEAKER_00: You can't talk about that now, but I can tell you, you'll remember this conversation.
[48:08] SPEAKER_00: All right.
[48:09] SPEAKER_00: We'll leave it there for the time being.
[48:10] SPEAKER_00: Robert Kibara, Group Chief Executive Officer at Housing Finance, HF.
[48:15] SPEAKER_00: Thank you very much for your time.
[48:16] SPEAKER_00: And of course,
[48:17] SPEAKER_00: I'd like to just remind our audience,
[48:18] SPEAKER_00: everything we've been discussing about that the numbers that underpin this rights issue,
[48:23] SPEAKER_00: you can find that on HF's website.
[48:25] SPEAKER_00: The Information Memorandum is there.
[48:27] SPEAKER_00: It does make for very interesting reading,
[48:28] SPEAKER_00: certainly worth a read later on as you think about investing in this particular
[48:33] SPEAKER_00: rights issue.
[48:34] SPEAKER_00: That's it for me.
[48:35] SPEAKER_00: Thank you very much, everyone, for your time and attention.
[48:37] SPEAKER_00: Thank you, Robert, for your time.
[48:38] SPEAKER_00: Best of luck with the rights issue.
[48:40] SPEAKER_00: Looking forward to seeing the final numbers when the offer closes on the 9th of December.
[48:44] SPEAKER_00: Thank you.
[48:44] SPEAKER_00: Thank you very much.

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