Impact of corporate restructuring on shareholder value: a case of National Bank of Kenya Limited
Oduor, Aggrey Joab
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The banking industry is one of the most profitable in Kenya However, due to liberalization, globalization, technological advancement and more enlightened customers, it has been faced with huge non-performing loans, high overhead costs, and difficult operating environment. Banks have had to restructure their business operations by downsizing, focusing on customers care, through tailored products and restructuring of non-performing loans in order to improve their financial performance and shareholder value. It is unclear whether restructuring of National Bank of Kenya Limited has resulted in improved financial performance given the difficult operating environmental. It is also uncertain whether there has been an enhancement of shareholder value after restructuring NBK. The objective of the research study was to determine if there was an improvement in financial performance of NBK after restructuring, to de1emine whether there was improvement in shareholder value of the restructured bank, to examine the changes as NBK restructured and to report the findings and make recommendations. All 25 branches of National Bank of Kenya Limited were sampled. The bank's officials responded and filled the questionnaires. From this data, it was observed that NBK restructured and made significant changes like reduction of employees, changed its organization structure, introduced new products and services, re- organized work tasks and process, introduced new ICT, which required employees to learn new skills, changed its remuneration policy, employer-employee relationship, refocused on customers, changed its s1ructure, policies, procedures and operations, changed its vision and mission among others. In order to determine the extent of improvement in financial performance and shareholder value, data on Net Cash Flows, Earnings Per Share, Return On Equity and Market Price Per Share was collected and analyzed to isolate trends in the variables. It was observed that after restructuring, most of these variables improved. This means that restructuring contributed to the improvement in financial performance and enhancement of shareholder value. In addition, it was observed that there exist a weak positive correlation between Net Cash Flows and Market Price Per Share. It was however noted that there exist a relatively strong positive correlation between Return On Equity and Market Price Per Share. On the other hand, it was observed that their exist a weak negatively correlation between Earnings Per Share and Market Price Per Share. This means that shareholders have a high affinity for current dividends and earnings over future dividends and earnings. Hence if a bank wants to increase its share holder value it has to pay regular dividends to its shareholders. In views of these findings, it was recommended that it is necessary for NBK to start paying regular dividends to shareholders in order to improve shareholder value. There is also need for the bank to refocus its attention to its customers so as to retain them through tailor made products. It was further recommended that NBK needs to attract a restructural CEO in order to help restructure it, but this can only be done if the government ownership is reduced. It was recommended that NBK needs to resolve its bad debt with assistances from the Treasury by transferring or selling its bad debts at steep discounts to an Assets Resolution Company. This will make the bank concentrate on its core functions. It was also recommended that NBK need to be restructured then sold off to Kenyans though the Nairobi Stock Exchange in order to make it competitive with little state influence.