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Nigerian Banks: Signs of Life

By Ghanaian Chronicle

After wowing the world with their recapitalisation exercise, Nigerian banks quickly fell into bad habits and a stock market bubble swiftly followed – but some of them are beginning to see the light. p> The oft-quoted veteran investor Warren Buffet once said: “It's only when the tide goes out that you learn who's been swimming naked.” In the Nigerian banking community, and even at the Central Bank of Nigeria (CBN), there should certainly be some embarrassment now.

Some hold the CBN governor, Charles Soludo, responsible for allowing a host of bad banking practices to go unchecked. Fortunately, a growing number of banks are beginning to equate more transparency with better returns.

Like a Bengal Tiger, he struck out last week, and in one fell swoop lashed out at the most audacious swoops in Nigerian financial circles last week, firing five of the top executives, Union Bank Afribank,Finbak and even Oceanic Bank where she ordered Mrs. Ibru out of her bank citing an urgent need to safeguard the financial collapse while injecting N400 billion in to those banks for margin losses that had gone bad.

Nigerian banks have had a rough ride. The Nigerian Stock Exchange (NSE) has lost over 65% of its value since March 2008 and an estimated N8trn ($54bn) has been wiped off bank stocks, which represent two-thirds of total market capitalisation. The CBN believes that the sector could face up to N1trn of bad loans and has talked of setting up an asset management company onto which banks can offload their toxic assets.

Something to hide
Some banks are badly exposed. Wema Bank has not presented audited accounts since 2007.

Unity Bank has not even released its 2007 accounts. For Latyr Diop of Afrinvest West Africa, the reasons are clear: “Most of the banks have over-leveraged their balance sheets during the boom cycle and are stuck with trillions of naira worth of bad debts without disclosing it to investors. Nigeria's minimum reporting standards only demand the quarterly publication of gross earnings, pre-tax profit and net profit, making it difficult for investors to estimate future trends.”

The overhaul of the banking system was an uncontested triumph of former President Olusegun Obasanjo's second term (2003-2007). New minimum capital requirements in 2005 caused a quickfire round of mergers and acquisitions, with 24 banks left standing out of 89. In 2007, with the economy booming alongside a buoyant oil price, and a sovereign credit-rating upgrade, the remaining banks found it easy to access capital markets. Several of the top-tier banks started to expand into the sub-region.

The bubble was perhaps inevitable. Lending was particularly strong to government and the oil and telecom sectors. Though telecoms seem to be holding up, the other two pose greater problems.

The fall in the price of oil has put several energy-related companies out of business, with repercussions for those banking them. Many banks rely on state governments for deposits, and they are now recalling funds to cope with the down turn. Soludo has said that 30 states have a combined deficit of N700bn ($5bn). Oceanic Bank is particularly affected.

But the greatest concern is corporate governance. Even before the peak of the oil boom in July 2008, investors were uneasy. Risk-management systems were not strong enough to handle newly-swollen balance sheets. Over $25bn of new money had been raised, with banking sector assets and liabilities growing almost 36% between December 2007 and November 2008. In May 2008, JP Morgan issued a report which warned that the top seven banks, with a combined market capital of over $40bn, might be overvalued by as much as 56%.

“When things were good, the CBN did not put in the right safety mechanisms and regulations,” says Jude Fejokwu, founder of Lagos-based Thaddeus Investment Advisors and Research. “In their quest to announce that their IPOs were oversubscribed by 180%, the banks lent money to their customers to buy their own shares. In other words they were creating their own fantasy.”

Margin lending – to stockbrokers and individuals to invest in the stock market, using shares as collateral – rose to unhealthy proportions. The problem was amplified by the huge amounts of leverage pushed by banks, who lent to stockbrokers at minimal interest rates. In the US, the maximum leverage permitted for margin lending is 50%. In Nigeria it is 200%. For most banks and brokerage firms the minimum investment was N10m. This meant in early 2008 you needed $80,000 to buy stocks, to which the bank added $160,000. Now the bubble has burst, clients are walking away from these loans.

Since the collapse of the NSE, those banks who were heavily involved in margin lending are exposed. Soludo claims there is no problem, and has allowed repayment of the loans to be deferred until the end of the year. His role in the crisis has yet to be fully investigated, but many have criticized the rash of decisions that have been emanating from the CBN and the denialism that preceded it.

Time to change mindsets
One continual problem is conflict of interest – Intercontinental Bank's Managing Director, Erastus Akingbola, fired by Soludo last week, is also the Chairman of the Audit Committee of his own bank – and another is corruption. In the US, United Bank for Africa (UBA) was fined $15m for flouting anti-money laundering regulations despite repeated warnings. The media in Nigeria receives so much revenue in bank advertising that there are few attempts to investigate the substance of official bank reports.

With the dust now settling, many in the industry are arguing for better governance standards. Ground zero for reform is disclosure. Nigerian banks make most of their profits in the final quarter, even though banking is not a seasonal activity like agriculture. In a pattern repeated across the industry, Intercontinental Bank made 92% of its profits after tax in the last quarter of its 2008 year. Prior to that, the record was held by Access Bank, which made 88% of its profit in the fourth quarter of its 2007 year. There is no common year-end for Nigerian banks, so they can borrow from each other to bolster balance sheets ahead of yearly reporting.

The CBN had tried to impose a common year-end in 2008, only to be rebuffed by the banks, revealing the unsound relationship between the regulator and the industry. One positive effect of the crisis is that executives are coming around to the idea and have said that they would implement a common accounting year-end starting 31 December 2009.

This is not fast enough for some, like First Bank's Chief Executive, Lamido Sanusi, who took over in January, and has been calling for greater transparency in Nigerian banking in order to rebuild investor trust in the sector. His decision to move to International Financial Reporting Standards (IFRS) means First Bank joins an elite group of banks like Access Bank, GTBank and Ecobank.

Not to be outdone, the CBN has told all banks to comply with the more stringent IFRS disclosure requirements by December 2010, while the Security and Exchange Commission has asked all First Tier companies listed on the NSE to be IFRS compliant by December 2011. Banks like Diamond Bank, in which private equity investor Actis bought a 19.1% stake for $134m in 2007, have already had a dose of better corporate governance. When in Lagos a few months ago, George Soro's hedge fund made it a point of visiting Diamond among others. There are still some bargains to be had in the Nigerian financial sector for steely-nerved investors who only pick the banks that can be trusted. Renaissance announced in early May that it expects the NSE to bottom out in June, and will be putting its money in Access Bank, Diamond Bank, GTBank and UBA.

Because of the stalled oil-driven Nigerian economy, there will not be much lending in 2009. The only sectors where banks can hope to lend are around the restructuring of the Nigerian energy sector and the private sector flows towards electricity generation.

Not over yet
The crisis will not precipitate a new round of mergers similar to 2005. But some banks are clearly distressed and are either being bought or are looking for help. Platinum Habib Bank purchased the troubled Spring Bank at the end of 2008. Wema Bank is talking to SW8 Investments, while Unity Bank and FinBank may not see the end of the year as distinct entities.

In markets arguably tighter regulated than Nigeria, risk-taking and avarice were taken to greater extremes, with more destructive outcomes, so moralizing finger-wagging is misplaced Measures taken to repair boom and bust cycles in the West – including US Federal Reserve Chairman Alan Greenspan's relaxing of monetary policy in 2001 – were part of the reason behind today's global crisis. So too, the Nigerian authorities may be sowing the seeds of future problems. The expanded discount window set up by the CBN has rightly been praised as having re-injected liquidity into the system at a critical moment. But it is not transparent – and nor is current inter-bank lending and money market activity of Nigeria's banks, especially in assets like Banker's Acceptances and Guaranteed Commercial Paper. The regulator, whoever that is to be, still has work to do.