Battle over capital
BoN vs Trustco
The central bank says Trustco Bank is both factually and commercial insolvent, and as such is unable to pay its debts.
A fitness and probity assessment report compiled by the Bank of Namibia (BoN) last month, concluded that the “good character” of Trustco Group Holdings (TGH), sole shareholder of Trustco Bank (TBN), was “highly questionable and doubtful”.
The report is part of documents filed by the BoN in its application to the High Court of Namibia to liquidate Trustco Bank.
Among others, TGH has failed to fully recapitalise TBN as directed by the central bank.
“The Bank [BoN] is of the view that there is a good reason why Trustco Group has failed to comply with the Bank’s directive that it recapitalise Trustco Bank. As the sole shareholder of Trustco Bank, Trustco Group simply does not have the ability to recapitalise the bank,” BoN governor Johannes !Gawaxab said in his founding affidavit.
FITNESS REPORT
In this regard, he refers to the fitness and probity assessment done by the director of banking supervision at the BoN, Romeo Nel.
Nel’s report shows TGH reported losses amounting to N$988 million for the year ended 31 August 2021. The group’s basic and diluted loss per share was 55.55c and 55.38c respectively.
According to the report, TGH reported an adverse short-term liquidity position as current liabilities of the group exceeded current assets by N$664 million. Cash and cash equivalents amounted to N$23.5 million in the group’s 2021 financial period compared to N$144 million in 2020.
“Overall, there was no cash generated from operations of TGH, as net cash used in operations amounted to N$841 000,” Nel’s report read.
RECAPITALISATION
The saga between the BoN and TBN dates back to September 2020 when the central bank conducted an onsite examination of Trustco Bank.
“As a result of poor financial performance and poor risk management systems which casted doubt on Trustco Bank’s operations as a going concern, the Bank [BoN] was satisfied that Trustco Bank was unable to meet some of its obligations” in terms of the Banking Act. TBN was “likely” to conduct its business “in a manner that is detrimental to the public”, !Gawaxab said in his affidavit.
To address TBN’s “precarious financial position and the poor liquidity risk management”, the BoN required TGH to make a total capital injection of N$100 million – payable in tranches of N$33.3 million annually over a three-year period.
The first injection was due before 31 March 2021, the second before 31 March 2022 and the last before 31 March 2023.
On the face of it, TGH complied with the BoN’s directive of injecting N$33.3 million by March 2021.
However, according to !Gawaxab’s affidavit, “this tranche was almost immediately channelled back to Trustco Group through management fees and redemption of intra-group deposits, this creating the illusion that Trustco Bank had been recapitalised in accordance with the directive”.
The governor continued: “This flow of funds back to Trustco Group defeated the purpose of recapitalisation of Trustco Bank not complying with the prescribed minimum liquid asset requirement of N$13 million or 36% of total funding liabilities with the public, whichever was higher.”
SECOND TRANCHE
The second tranche of N$33.3 million was due on 31 March 2022, “but Trustco Group simply failed to comply with the directive and this amount remains outstanding to date”, !Gawaxab said.
TGH was informed of its non-compliance and instructed to comply with it on or before 14 April 2022. The BoN met with TGH management on 25 April to address the issue.
On 29 April, TGH managing director Quinton van Rooyen wrote to the BoN asking the central bank to reconsider the directive, adding this message, among others: “Trustco Group has capital of up to N$250 million available to capitalise Trustco Bank’s balance sheet by way of equity, not later than on 31 July 2022. This would require shareholder engagement which we have commenced with.”
In his affidavit, !Gawaxab said the BoN declined the request to reconsider the directive and rejected TGH alternative proposal aimed at resolving Trustco Bank’s liquidity and capital challenges.
ALTERNATIVE PROPOSAL
“The directive to inject capital in the form of cash was issued with the aim to address the Bank’s [Bon] concerns pertaining to both liquidity and challenges faced by Trustco Bank. Trustco Bank’s alternative proposal did not address these concerns,” he said.
!Gawaxab added: “In addition, the rate at which Trustco Bank’s capital was declining dictated that an immediate capital injection be made to prevent Trustco Bank from breaching the regulatory minimum capital requirement, hence the directive to inject capital remained current.”
Trustco kept insisting that it had complied with the BoN’s directive – that they paid the first tranche of N$33 million referred to earlier, plus monthly cash injections if N$2 million from March 2021 to June 2022.
Regarding the latter, !Gawaxab said it did not constitute a capital injection, “because this was a payment for the core banking system (trade receivables) which were sold off by Trustco Bank to Trustco Shared Services (TASS).”
LEGAL SHIELD
TGH also told the BoN that it had approved a recapitalisation plan for TBN in the form of a minority stake of 20% in Legal Shield Holdings at the value of N$100 million. This, TGH claimed, would increase TBN’s capital adequacy ratio (CAR) from 24.2% in May 2022 to 90.9% in June 2022.
The equity transaction would allow TBN to benefit from a dividend stream and would reduce the bank’s losses month-on-month.
The BoN didn’t fall for this plan. The Banking Institutions Act prohibits banking institutions from having a direct interest in any activities relating to insurance, among others, unless approved by the BoN.
The BoN never received a written application in this regard from TGH. “Consequently, Trustco Bank was, by law, not allowed to acquire shareholding in Legal Shield Holdings considering that this is the holding company for the insurance segment of Trustco Group and its investments,” !Gawaxab said.
He added that Legal Shield record losses in the past two financial years – N$709 million in 2020 and N$601.9 million in 2021.
“This demonstrated that there was a high likelihood that Legal Shield Holdings would continue to make losses and Trustco Bank would not be able to generate any cashflow through the payment of dividends from the Legal Shield transaction. This transaction would thus not have any real value for Trustco Bank in the short term to medium term, due to the loss-making of Legal Shield Holdings,” !Gawaxab said.
GOING CONCERN
In July this year, TBN’s external auditors, Grand Namibia, informed the BoN that they had concerns regarding the bank’s ability to continue as a going concern.
In September, Grand Namibia informed the Public Accountants and Auditors Board (PAAB) that they believed “a reportable irregularity had taken place at Trustco Bank relating to the bank’s ability to comply with the Banking Act’s minimum capital requirements and its ability to continue as a going concern”.
The auditors warned PAAB that the irregularity might cause, or was likely to cause, “financial loss to the entity, shareholders, creditors or investors of the entity in their dealings with the entity”. They further stated that TBN’s management had failed to provide sufficient and appropriate evidence to show that the irregularity had been rectified.
Based on the facts presented, the Bank [BoN] became more than ever concerned that Trustco Bank did not have the necessary capital funds to operate as a going concern,” !Gawaxab said.
TAX
Meanwhile Nel made inquiries about TBN’s ability to service a loan of about N$10 million at the Development Bank of Namibia (DBN). It was confirmed that TBN had been in default since September 2021.
The BoN also found out that TBN owed nearly N$17.5 million to the Namibia Revenue Agency (NamRA), “for a tax relating to the sale of an intangible asset and Trustco Bank’s employees’ income tax (PAYE), withholding tax and value-added tax (VAT) as at 30 June 2022”.
According to !Gawaxab, TBN’s “conduct in failing to pay its taxes when due, and its further failure to service its DBN loan, demonstrated the bank’s heightened liquidity challenges”.
“In fact, Trustco Bank’s inability to honour its obligations as they fell due was rooted in its inability to meet the Bank’s [BoN] prescribed liquid asset ratio,” he said.
LOANS
The main source of income for a commercial bank is interest derived from loans and advances, which means it must have cash at its disposal, !Gawaxab said.
TBN’s auditors informed the BoN in August this year than the bank had ceased to extend credit during 2021 and that it only engaged on the collection of loans.
“This meant that the core banking activity for the [banking] licence was granted to Trustco Bank had ceased,” !Gawaxab said.
The indemnification of TBN by TGH is “a temporary solution as it speaks only to the existing obligations which Trustco Bank has failed to honour. In the absence of a capital injection in the form of cash, Trustco Bank remains unlikely to honour its debt obligations going forward”, he said.
According to !Gawaxab, TBN is “both factually and commercial insolvent, and as such is unable to pay its debts”.
The report is part of documents filed by the BoN in its application to the High Court of Namibia to liquidate Trustco Bank.
Among others, TGH has failed to fully recapitalise TBN as directed by the central bank.
“The Bank [BoN] is of the view that there is a good reason why Trustco Group has failed to comply with the Bank’s directive that it recapitalise Trustco Bank. As the sole shareholder of Trustco Bank, Trustco Group simply does not have the ability to recapitalise the bank,” BoN governor Johannes !Gawaxab said in his founding affidavit.
FITNESS REPORT
In this regard, he refers to the fitness and probity assessment done by the director of banking supervision at the BoN, Romeo Nel.
Nel’s report shows TGH reported losses amounting to N$988 million for the year ended 31 August 2021. The group’s basic and diluted loss per share was 55.55c and 55.38c respectively.
According to the report, TGH reported an adverse short-term liquidity position as current liabilities of the group exceeded current assets by N$664 million. Cash and cash equivalents amounted to N$23.5 million in the group’s 2021 financial period compared to N$144 million in 2020.
“Overall, there was no cash generated from operations of TGH, as net cash used in operations amounted to N$841 000,” Nel’s report read.
RECAPITALISATION
The saga between the BoN and TBN dates back to September 2020 when the central bank conducted an onsite examination of Trustco Bank.
“As a result of poor financial performance and poor risk management systems which casted doubt on Trustco Bank’s operations as a going concern, the Bank [BoN] was satisfied that Trustco Bank was unable to meet some of its obligations” in terms of the Banking Act. TBN was “likely” to conduct its business “in a manner that is detrimental to the public”, !Gawaxab said in his affidavit.
To address TBN’s “precarious financial position and the poor liquidity risk management”, the BoN required TGH to make a total capital injection of N$100 million – payable in tranches of N$33.3 million annually over a three-year period.
The first injection was due before 31 March 2021, the second before 31 March 2022 and the last before 31 March 2023.
On the face of it, TGH complied with the BoN’s directive of injecting N$33.3 million by March 2021.
However, according to !Gawaxab’s affidavit, “this tranche was almost immediately channelled back to Trustco Group through management fees and redemption of intra-group deposits, this creating the illusion that Trustco Bank had been recapitalised in accordance with the directive”.
The governor continued: “This flow of funds back to Trustco Group defeated the purpose of recapitalisation of Trustco Bank not complying with the prescribed minimum liquid asset requirement of N$13 million or 36% of total funding liabilities with the public, whichever was higher.”
SECOND TRANCHE
The second tranche of N$33.3 million was due on 31 March 2022, “but Trustco Group simply failed to comply with the directive and this amount remains outstanding to date”, !Gawaxab said.
TGH was informed of its non-compliance and instructed to comply with it on or before 14 April 2022. The BoN met with TGH management on 25 April to address the issue.
On 29 April, TGH managing director Quinton van Rooyen wrote to the BoN asking the central bank to reconsider the directive, adding this message, among others: “Trustco Group has capital of up to N$250 million available to capitalise Trustco Bank’s balance sheet by way of equity, not later than on 31 July 2022. This would require shareholder engagement which we have commenced with.”
In his affidavit, !Gawaxab said the BoN declined the request to reconsider the directive and rejected TGH alternative proposal aimed at resolving Trustco Bank’s liquidity and capital challenges.
ALTERNATIVE PROPOSAL
“The directive to inject capital in the form of cash was issued with the aim to address the Bank’s [Bon] concerns pertaining to both liquidity and challenges faced by Trustco Bank. Trustco Bank’s alternative proposal did not address these concerns,” he said.
!Gawaxab added: “In addition, the rate at which Trustco Bank’s capital was declining dictated that an immediate capital injection be made to prevent Trustco Bank from breaching the regulatory minimum capital requirement, hence the directive to inject capital remained current.”
Trustco kept insisting that it had complied with the BoN’s directive – that they paid the first tranche of N$33 million referred to earlier, plus monthly cash injections if N$2 million from March 2021 to June 2022.
Regarding the latter, !Gawaxab said it did not constitute a capital injection, “because this was a payment for the core banking system (trade receivables) which were sold off by Trustco Bank to Trustco Shared Services (TASS).”
LEGAL SHIELD
TGH also told the BoN that it had approved a recapitalisation plan for TBN in the form of a minority stake of 20% in Legal Shield Holdings at the value of N$100 million. This, TGH claimed, would increase TBN’s capital adequacy ratio (CAR) from 24.2% in May 2022 to 90.9% in June 2022.
The equity transaction would allow TBN to benefit from a dividend stream and would reduce the bank’s losses month-on-month.
The BoN didn’t fall for this plan. The Banking Institutions Act prohibits banking institutions from having a direct interest in any activities relating to insurance, among others, unless approved by the BoN.
The BoN never received a written application in this regard from TGH. “Consequently, Trustco Bank was, by law, not allowed to acquire shareholding in Legal Shield Holdings considering that this is the holding company for the insurance segment of Trustco Group and its investments,” !Gawaxab said.
He added that Legal Shield record losses in the past two financial years – N$709 million in 2020 and N$601.9 million in 2021.
“This demonstrated that there was a high likelihood that Legal Shield Holdings would continue to make losses and Trustco Bank would not be able to generate any cashflow through the payment of dividends from the Legal Shield transaction. This transaction would thus not have any real value for Trustco Bank in the short term to medium term, due to the loss-making of Legal Shield Holdings,” !Gawaxab said.
GOING CONCERN
In July this year, TBN’s external auditors, Grand Namibia, informed the BoN that they had concerns regarding the bank’s ability to continue as a going concern.
In September, Grand Namibia informed the Public Accountants and Auditors Board (PAAB) that they believed “a reportable irregularity had taken place at Trustco Bank relating to the bank’s ability to comply with the Banking Act’s minimum capital requirements and its ability to continue as a going concern”.
The auditors warned PAAB that the irregularity might cause, or was likely to cause, “financial loss to the entity, shareholders, creditors or investors of the entity in their dealings with the entity”. They further stated that TBN’s management had failed to provide sufficient and appropriate evidence to show that the irregularity had been rectified.
Based on the facts presented, the Bank [BoN] became more than ever concerned that Trustco Bank did not have the necessary capital funds to operate as a going concern,” !Gawaxab said.
TAX
Meanwhile Nel made inquiries about TBN’s ability to service a loan of about N$10 million at the Development Bank of Namibia (DBN). It was confirmed that TBN had been in default since September 2021.
The BoN also found out that TBN owed nearly N$17.5 million to the Namibia Revenue Agency (NamRA), “for a tax relating to the sale of an intangible asset and Trustco Bank’s employees’ income tax (PAYE), withholding tax and value-added tax (VAT) as at 30 June 2022”.
According to !Gawaxab, TBN’s “conduct in failing to pay its taxes when due, and its further failure to service its DBN loan, demonstrated the bank’s heightened liquidity challenges”.
“In fact, Trustco Bank’s inability to honour its obligations as they fell due was rooted in its inability to meet the Bank’s [BoN] prescribed liquid asset ratio,” he said.
LOANS
The main source of income for a commercial bank is interest derived from loans and advances, which means it must have cash at its disposal, !Gawaxab said.
TBN’s auditors informed the BoN in August this year than the bank had ceased to extend credit during 2021 and that it only engaged on the collection of loans.
“This meant that the core banking activity for the [banking] licence was granted to Trustco Bank had ceased,” !Gawaxab said.
The indemnification of TBN by TGH is “a temporary solution as it speaks only to the existing obligations which Trustco Bank has failed to honour. In the absence of a capital injection in the form of cash, Trustco Bank remains unlikely to honour its debt obligations going forward”, he said.
According to !Gawaxab, TBN is “both factually and commercial insolvent, and as such is unable to pay its debts”.
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