The Nigerian Capital Market: Questions Today, Answers When?


There is a serious problem in our financial system that has caused pain to many and is still with us today.   Unfortunately not enough pain to lead to a change in behavior of the various parties involved who have collectively created this "big bad gorilla" called the end justifies the means.   The end being money.   The target is the investing public, the medium our financial markets; the majority of whom have plenty of "little"money but not the savviness to make investment decisions without third party assistance.    

  The various parties that have played a part in misleading investors and creating a "bubble" in our market through their actions or lack of it over the years are:  

  1. Investment Banks (Profession in focus: Sell-side investment analysts)  

  2. Brokerage Houses (Profession in focus: Stock brokers)  

  3. Auditors   (Profession in focus:   Accountants - entry level to partners)  

  4. Media   (Profession in focus: Journalists)  
  5. Regulators   (For many a time appointing companies and people to resolve financial market issues that the appointees played a role in creating and for not yearning to the cry of the common man that lost money through deceitful advice or affirmations of wrong doing.)    

  6. Commercial Banks (Entry-level Business Development staff all the way to the top for lending money to investors double the amount contributed by the borrower at double-digit interest rates and short tenors for stock market investments with reckless abandon.)    

  7. Corrupt individuals who used the stock market to integrate their stolen funds into the financial system to eliminate the paper trail and further heat up our fragile market.    

  8. Local and foreign fund managers for investing too much money too quickly into a fragile market over a day and trying to exit overnight literally.   This breeds chaos and the sheep investors bear the brunt of it.        

  The investment banks and their analysts are still mass producing research reports riddled with inconsistencies, intertwined conflicts of interest and without proper full disclosure while feeding off a commission system that is one of the most generous in the world.   Everyone looks the other way.   Why not?   Investment banking fees are at stake, generous brokerage commissions are at stake and you do not count in our system unless you are rich which breeds influence.   In our opinion, sell-side research reports should disclose if the company written on is held in their portfolio and/or that of their clients or is being actively sought by the company on behalf of itself or its clients.   Investment banks and brokerage firms should be made to desist from writing on companies in which a member of management or director of the investment bank/brokerage firm is on the board of the company in question.   Issuing houses and members of the selling group of an equity offer should be barred from preparing an equity research report on the company doing the offer.   All listed companies and other public companies not yet listed should be required by the regulators to contribute to a fund that will be used to pay for independent research reports that will accompany every equity offer to be transacted in Nigeria.   We need to start looking out for the common man who has more to lose relative to overall worth.   The system is currently structured in a way that benefits the privileged who have less to lose relative to overall worth and who are in the know already.   Public offers are priced exorbitantly with the full connivance of the lead member(s) of the selling group.   They get paid their fees and investors get roped into a stock that is only heading in one direction and not the desired one.   More than enough stocks are trading below one naira today and they were listed in the teens or high singles two - five years ago.      

  Stock brokers should only be allowed formally to execute trades and not proffer investment advice.   There is an inherent conflict of interest that cannot be done away with.   If you walk on the street naked in full view of the public, people we deem you insane.   You might actually be far from insane but most people will not bother to find out.   Offering advice on investments in which a commission is gong to be made through the same individual is inherently flawed.   A dark cloud envelopes stock brokers who proffer advice in which they derive commissions that increase as the amount invested increases.      

  Auditors should no longer be allowed to write "nothing was brought to our attention." Auditors' fees should be capped by industry and auditors should be banned from auditing companies in an industry after a company it audited   is suddenly revealed to have falsified figures after being certified as a true reflection of the financial state of the company at the point in time by the erring auditor.   Oceanic Bank had two extremely different FY 2008 results certified by the same auditor.   The auditor remains and is still getting paid lucrative fees.   One thing we can learn from this is the importance of regulatory requirements.   Companies must be audited; this makes it easier to commit transgressions like this and still be on cruise control.   An auditor's fees doubled in the last year of its relationship with a particular bank.   Now that is what we call: Payoff Time.    

Media:   Newspapers used to be carriers of the message of the masses.   The common man's microphone.   Now newspapers are the mouth of the highest bidder.   Every page in a newspaper has a price directly or indirectly.   The days of writing without fear or favour are gone.   The investment banks and brokerage houses have found the newspapers a useful ally to carry out their irrational exuberance hyperbolic statements especially as both parties speak the same language of money talks.   Everything else takes a walk including the voice of the masses which is proverbially said to be the voice of God.   Journalists should know that they share in the misleading of investors through their printing of material provided by a paying customer with selfish motives.   Will a newspaper prevent an investment bank/brokerage firm from using its pages to mislead investors when money is involved?    

Regulators: Immediately request all managing directors and owners of investment banks, stock brokerage firms and commercial banks to leave the boards of listed companies.   Stop trading (full suspension) on stocks of companies that have executive management on their audit committees.   Stop trading on stocks that have the same person as Managing Director and Chairman.   Banks should no longer be allowed to manage their own shareholder register through creation of their own registrar company.   This has been mentioned ten times over; a full page ad will come out in the news paper against it the next day and everyone goes to bed once again.   In addition, no banks should own registrar companies even under the guise of a holding company model.   Do not adjust the prices of stocks that have split until the additional shares are credited to the accounts of shareholders.   Minimum volume to move stock prices in any direction should be on an industry by industry basis.   A one size fits all approach benefits stock price manipulators.                 

Commercial Banks:   It is a pity that commercial banks did not know how margin loans work; they knew how to dish out the cash and forgot where the trigger was when the stock market went south.   The privilege of a 5% daily price movement floor could be of no help.   A moral hazard has been created with the emergence of AMCON inadvertently.   Despite these banks being their own worst enemy, a saviour has come to their rescue.   Included in the largess are margin loans given by banks to investors to buy their shares at the inflated prices they were.   They were happily aided by the "BUY"drunk sell-side analysts.   Banks should leave stockbrokers alone!   It is amazing how the system is allowing the banks to put the brokerage firms into double jeopardy.   Lost the equity in their margin accounts, lost the stocks they bought and still being pursued for the difference between the equity value and the original loan.   The commercial banks are holding everybody else fully accountable while largely excusing their own role in the mess we have today while playing the role of solver and active participant. Our stock market is looking to the banks and Dangote Cement for upward trajectory, the real sector is looking to the banks to keep them in business and the list goes on.   When a pivotal role is given to one who takes a lot and returns a little, the system is bound to falter badly.   Given recent developments, the pivotal role is acknowledged, the taking a lot and giving back a little (instead of multiplying) is not.       

Corrupt individuals : There is so much to say; therefore, we will not say much.   Corrupt money can only be integrated successfully into a corrupt system.   Corrupt companies (business practises, accounting shenanigans, fleecing of accounts) can only flourish under corrupt structures and systems.   Doing nothing is as bad as doing the wrong thing sometimes.   Until people at the top (in every sphere of life) start looking out for people they do not know and do not care to know, we will continue as a system to flatter to deceive.          

  Africa needs foreign direct investment a lot more than it needs foreign portfolio investment.   Kudos to China and India for taking the lead here.   More people are singing the praises of Africa presently to benefit from the continent portfolio wise (this would have been almost impossible without the foreign direct investment which benefits the companies the fund managers invest in) and not to invest in its resources.   Make sure you understand the people, the systems in play and the intangibles of African financial markets.   Just understanding the companies is far from enough backed by fancy models that can only give as good as they get.   One for the road: never bring hot money into a hot market.   Hot markets are selfish; they take a lot and give back little when all is said and done.   Let African stock markets feel your impact beyond the funds you have at your disposal.   Leaving behind best practises will be great.   Making money is good; making your presence felt (beyond the lure of business) in the development of African financial markets is great.                  

  Two years after the removal of eight bank managing directors, the stock prices of all sanctioned banks are at lifetime lows and declining further.   Even the two banks (Unity and Wema) that were only reprimanded and allowed to recapitalize are currently trading below N1.00 (One naira) as of June 13th, 2011.   Meanwhile results are being released by the sanctioned banks that for some are the best in their corporate history in reference to the bottom-line.   One worthy mention is Intercontinental Bank which made profit of fifty-three billion naira as of December 2010 on earnings of ninety-nine billion naira.   Why are results of the sanctioned banks drastically improving and their stock prices on a free fall?   Just three months after the first set of banks were sanctioned, Intercontinental Bank and Bank PHB made the top 20% of advancers for the week ended November 20th, 2009.   Twenty-two months later, both banks and others are at their lifetime lows and breaking new records on the downside everyday.   In the early days of the banking reform, the investing public was clearly optimistic about the banking reforms and the positive impact on the banks especially as it relates to their pummeled stock prices.   Now, we have the total opposite and the investing public is garnering more unrealized losses.   What has been the benefit to the investing public of the banking reforms?   What have the CBN and AMCON done through their actions thus far to benefit the investing public?   We all know how their actions have benefited and protected the banks.   Is the investing public not on the list of beneficiaries?   So far, the answer appears to be NO.    

  Why does AMCON believe it can recover the bad loans that the banks were unable to and could not successfully dispose of the collateral before deciding to sell the bad loans to AMCON?   AMCON is not above the law.   Then, what?       

Why are our financial markets overly intertwined?  

  The banks currently make up about 27% of our stock market (first-tier equities only), the banks are partly funding AMCON, AMCON exist to salvage the banks and stabilize our banking system.   Majority of bond market makers are banks; AMCON has issued bonds to the banks that are already being sold in the bond market in which the banks are the market makers.   The discount houses that make up the other bond market makers are majorly owned by the banks.   This is why the banks have supposedly become too big to fail.   A moral hazard that has serious implications has now been thrust forward, front and center in our marketplace: The banks can do as they please; AMCON will buy up all their bad loans in excess of 5% of gross loans.   We are too critical to the system to be taught a lesson and even when the system wants to through natural processes teach the banks a lesson, certain regulators and their creations intervene to nip it in the bud.   The investing public loses out and the bank directors who got caught up in the fast blowing wind.   The creators of their own mess (Banks) are retooled and oiled to continue where they left off under a different structure without a different mentality.   The classical prognosis for flattering to deceive.   Bank earnings are still declining (for the most part) in an environment where interest rates are still high and non-performing loans are said to be on a steep decline.   Go figure...    

  Why are majority of our listed stocks trading at true free float levels of less than 25% and we all stand arms akimbo?                 

  Why do some stocks suddenly rise or have large uncharacteristic traded volumes two - four days before their results are publicly released?    

  Why do a good number of companies (in excess of 20%) not release four quarterly results in a fiscal year to the exchange?   Every quarterly performance for every company matters to investors and reduces the amount of unknowns in our capital market.   An informed investor is on the way to becoming a savvy investor.    

  Why do some companies release forecasts for a quarter (and are allowed to) during the quarter in question?   This is not a forecast in our opinion.   When there is no method to the madness then inadvertently, madness becomes the method of the day anywhere in the world under any situation.       

  Why are a good number of Bank CEOs very politically connected and voluntarily so?   Does this bode well for our financial system in the long-run?   What is a Bank CEO doing at the presidential villa immediately after election results were announced?   This is why the legislative can receive ten billion naira (sixty-five million dollars) loan on self recognition and a small company cannot get a one million naira ($6,900) loan without providing collateral in many cases five times over.    

  Wrong priorities breed wrong systems, built on wrong principles that lead to wrong actions, that end up punishing the innocent and leaving the guilty largely unscathed if not rewarded.    

  Why do we keep on appointing advisers to resolve capital market related issues that have interests and business exposure to the same industry and/or company being advised?   How real is real?   There are enough independent-minded people and companies (focused on the good of all and not their own selfish interests) who are willing and able to provide advice and technical knowledge.   Let us stop clogging the wheels of progress with divided agendas and dual roles of instigators and arbiters played by the same party.    

  Why do mutual fund companies not state the fund performance of their mutual funds, their top three holdings and the amount under management on a monthly or at the very least quarterly basis?   When you have the investing public's money, your performance should be in public view on a regular basis.   Asset allocation breakdown should also be provided to the public on a quarterly basis.        

  Why do we allow companies to release nine months of unaudited results?   Some of them then release an audited twelve month result (good or bad) totally opposite of the prior three quarters.   A cursory look will show that most of these companies were clearly beset by problems before the fourth quarter of their fiscal year.   Every quarterly result matters; besides, it is the quarterly results that make up the fiscal year result.   In this era where we have more companies results' telling us less, it is important that the quarterly results are audited so that our financial market will become more of a stock market and less of a market place.    

  Why are companies marked down for stock splits by the Nigerian Stock Exchange without the immediate crediting of the additional shares to the qualified shareholders' accounts?   The Securities and Exchange Commission needs to improve its stock split approval time lines.   In the meantime, stock prices should not be marked down until the shares have been approved for crediting and credited to qualified shareholders.   This should be a simultaneous process.       

  Why are ex-dividend dates and payment dates months apart in some cases instead of being immediate?   Who gets the interest accrued during the limbo period?   Definitely not the investor...    

  Why are we fretting so much about NBC's request to delist when there are many companies that took depositors' funds during private placements in 2007 and 2008 under the guise of listing and have not done so till date?   One worthy mention is Industrial and General Insurance (IGI).   Why is IGI and others being treated with kids' gloves?   Let us focus on listing those that have an obligation to list by their own utterances.   Many investors have funds trapped in these companies.   If they refuse to list within the next sixty days, they should be mandated to buy their shares back from interested investors at a predetermined price factoring in the period of tie up and the overall sector index performance over the period where applicable.    

  Why have pension fund contributors not been allowed five years on to transfer their accumulated assets to another Pension Fund Administrator (PFA) of their choice?   Pension contributors were supposed to be able to transfer assets within a year of listing and not more than twice in a year without special circumstance.   Five years on and pension contributors are still waiting for the first opportunity to transfer funds.   Many were misled at the beginning.   Unfortunately, five years on, the PFAs that misled pension contributors have benefited immensely from their initial deception because the transfer window has not been opened till now as it should have.   Who says deception does not pay?    

  Why are all the foreign owned banks in Nigeria not listed?   Stanbic was not listed before it bought over IBTC Chartered Bank through its parent company, Standard Chartered Bank is not listed and neither is Citibank.      

  Why is our country structured and operated in a way that deception, lies and corruption makes rich while truth and transparency makes poor?   Deep question with a superficial answer...       

  Yesterday is history, today is reality and tomorrow is the sincere unadulterated result of the effort you put in today.   Thereof, what kind of tomorrow should we expect?   A tomorrow dedicated to bags full of money or bags full of conscience and integrity?   The tape recorder has started playing; we cannot rewind and we cannot fast forward but we can ACT!             By Jude Fejokwu, Principal Analyst, Thaddeus Investment Advisors & Research Ltd.