Scare Over Sickly Banks

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Scare Over Sickly Banks
November 2, 2008 | posted by Nigerian Muse (Archives)

Nov 2, 2008

http://www.independentngonline.com/busi/lead/article01

Recent reports that most of the 24 banks that emerged in the post-consolidation era are hardly on solid health ground, is sending spirals of shock across the nation's financial landscape, demanding urgent stakeholders' intervention, reports Finance Editor,

Emele Onu
Public consciousness was last week stirred around the health status of Nigerian banks. Operating in a global financial environment where a significant number of the world's top players are losing grip, amid the pressures of global economic recession, there is a greater concern for the survival of the local institutions. The eight months downturn witnessed by the Nigerian financial market has further increased apprehension among investors on the health status of the banks that constitute about 70 per cent of the nation's stock market.

Banks are the cornerstones, the linchpin of the economy of any country. Their relevance to the growth and development of the private sector and public institutions cannot be overemphasised. Given that case, not a few Nigerians are perturbed by recent foul-tasting comments and reports on the health conditions of the deposit money financial institutions.

A local tabloid carried a screaming headline last Monday in which it quoted one of the regulatory institutions as saying that contrary to the widespread impression that the 24 consolidated banks are healthy, only seven were in a financial position that could be classified as solid.

The report further attributed to the regulatory body as saying that 11 of the 24 banks were merely existing, gasping for breathe, meaning that they are not strongly-footed for the challenging role they assume to be playing for the nation's economy, just as it identified two banks as weak and needing rescue measures.

"The situation in most of the banks is that when the liabilities are properly accounted for, the over N1 trillion balance sheet claimed by some of them amounts to nothing in terms of net worth," an official of the regulatory body was quoted as saying.

Even though the said reports, as published by the national daily was later rebuffed as untrue by the regulatory authority, many observers of the industry and analysts believe the reports represented the true position of the industry as there is often no smoke without a whiff of fire.

Central Bank of Nigeria (CBN) and the Nigerian Deposit Insurance Corporation (NDIC) had at a point last year said about five of the 25 consolidated banks were operating with questionable net worth, suspected at significantly below the N25 billion benchmark set since December 2004.

Many of the consolidated banks were reported to have infringed on relevant regulations bordering on capital adequacy, liquidity, credit limits, corporate governance, full disclosure, among others, between January 2005 (the beginning of the post-consolidation era) and December 2007.

Suspected deterioration in the financial health of some of the banks makes stakeholders worry with despondency about the nature and state of the Nigerian banking industry.

Trailing Confusion Over Financial Health

With current developments, locally and internationally, there are palpable fears that the country has not seen the end of bank failures, even with the consolidation and purported big size and penetration of banks.

"The number of depositors has increased from 13 million in 2003 to 24 million in 2007. Total bank deposits have equally risen from N1.4 trillion in 2003 to N4.5 trillion in 2007, while bank credits have also soared from N1.9 trillion in 2003 to N4.6 trillion in 2007," said the CBN governor, Professor Chukwuma Soludo, at an event recently.

Recent revelations by 'The Banker' magazine also attest to the rising international profile of Nigerian banks. The Banker reported that Nigerian banks' total tier one capital had more than doubled to $11.29 billion in 2008 (from $5.38 billion in 2007), and that, consequently, Nigeria's share of sub-Saharan tier one capital had risen to 34 per cent, from 24 per cent in 2007. In contrast, it reported that South Africa's share dropped to 62 per cent, down from 71 per cent, over the same period.

Total assets and contingents as declared by the individual banks as at 2008 showed Zenith with N2.2 trillion, UBA N2.2 trillion, First Bank N2.1 trillion, Intercontinental N1.6 trillion, Access Bank N1.2 trillion, GTBank N1.1 trillion, Skye Bank N1 trillion, Diamond Bank N840 billion and Afribank N404 billion.

Prior to 1992, the minimum paid up capital requirement for banks in Nigeria was N12 million for merchant banks and N20 million for commercial banks. A review in 1992 moved the requirements to N40 million and N50 million respectively. That level lasted till 1997 when it was raised to N500 million for all categories of banks.

In 2000, the minimum capital was moved to N1 billion for new banks while existing banks were expected to meet that level by December 2002. The N25 billion minimum capitalisation took effect from January 2006.

The reasons often adduced for the increase in capital base include the need to protect banks against losses; enable them lend to various economic units as well as strengthen their ability to attract funds at lower cost.

With the increase in capital base and the concomitant rise in single obligor limits, banks are supposedly better placed to grant facilities to finance huge projects both locally and internationally.

Unfortunately, two years after consolidation, many analysts think there is yet no hope for the sustainability of the financial system and that the country is still far from realising the objectives of the recapitalisation exercise.

Allegations Of Malpractices And Bubble Capital

"The situation in most of the banks is that when the liabilities are properly accounted for, the over N1 trillion balance sheet claimed by some of them amounts to nothing in terms of net worth," quoted an official of one of the regulatory institutions recently.

Banks have been accused of cooking their books of accounts before submission to different regulatory bodies.

The Committee on Banking and Currency of the House of Representatives, noted recently that some banks, especially those belonging to the old generation, had in their coffers between N5 and N8 billion as dormant accounts.

Investigations by the House committee revealed that the banks use the money to look healthier rather than make efforts to reach the owners or the next of kin as expected under contract deeds and good practice standards.

A banker said on the basis of anonymity that "dormant accounts fatten banks' balance sheets. If they lose it, they lose size and strength, and more importantly good chunk of their earnings capacity."

Rather than make money available through credits to the private sector, some of the banks allegedly subject customers to excess charges in the form of commission on turnover, among others. Following customers' incessant complaints, the CBN sent a circular directing the various banks to adhere strictly to the Guide to Bank Charges, insisting also that all fees should not exceed two per cent per annum.

A Banking Sector Vulnerable To Distress

To ensure that banks maintain reasonable capital adequacy, the CBN issues the capital adequacy ratio and the single borrower (obligor) limit. When the rule is violated, a crash in the system is often imminent. Unfortunately, the unexpected is always the case.

Findings by the CBN and the NDIC earlier this year revealed that Wema Bank, for instance, required fresh injection of N23 billion to regain its full health. The market's apex regulator had stated that, "consequent upon the mismanagement of the bank (Wema Bank) by the management, the capital adequacy ratio dropped to an unacceptable negative ratio of 3.67 per cent, thus requiring capital injection of N23.06 billion.

The liquidity ratio of the bank was also below the required minimum of 40 per cent. As a result, the CBN's current account has been consistently overdrawn to the tune of N30 billion from January 2008. Likewise borrowing from banks and discount houses to finance the Wema Bank obligations stood at N21.4 billion as at the examination cut-off date of January 18, 2008."

After prolonged crises that almost nailed the bank, the then acting managing director, John Aboh, handed over to Mahmud Lai Alabi, who was named new chief executive by the CBN. That followed the sack of Adebisi Omoyeni.

It will also be recalled that in the letter that announced the removal of the 13 members of the board of Spring Bank last year, which was signed by Soludo, the apex bank acknowledged that Spring Bank was in a difficult situation with liquidity problems and gradual erosion of its shareholders' fund as concerned the prudential requirements stipulated by the CBN and pursuant to the provisions of the Banks and Other Financial Institutions Act (BOFIA) 1991 and the CBN Act 1991 as amended.

The bank's managing director and chief executive, Dr. Suleiman Ndanusa, told financial journalists recently that the board had achieved significant turnaround of the financial institution in terms of good management focus, structure of assets and liabilities as well as customer services delivery.

The management had announced the recovery of N18 billion loans and the restructuring of about N20 billion facilities, in a bid to improve the quality of its risk assets.

The management later listed three repositioning strategies to completely turnaround the business, namely, public offer, mergers or acquisition. It may have settled for the last option having seen synergy and strong inorganic growth by submitting to acquisition by Bank PHB.

The acquisition bid on Spring Bank by the Platinum Habib Bank (Bank PHB) attained a milestone recently when shareholders of the latter at an extraordinary general meeting passed a special resolution, okaying the acquisition.

As if the country will never have it robust in the banking sector, a total of 75 banks have collapsed in the Nigerian banking industry from the 1950s to the end of banking consolidation in December 2005, according to data from the NDIC.

From the statistics, 25 banks went under in the 1950s, while five collapsed between 1994 and 1995. The greatest liquidation occurred in 1998 when 26 banks were grounded. Five banks disappeared between 2000 and 2003 while the consolidation exercise of 2004 and 2005 recorded 14 casualties.

Executive director (operations) of the NDIC, Peter Umoh, linked the failures to economic depression, political crises, bad credit policy in the banks and interference from board members.

Umoh said bad loans and advances contributed 19.5 per cent to the failure cases; 16.7 per cent by fraudulent practices; 11.8 per cent due to undercapitalisation, while changes in government policies led to 10.8 per cent of the total bank collapse. Failures due to bad management, he stated, were responsible for 17.9 per cent, with 16.9 per cent due to inadequate supervision while reliance on foreign exchange earnings was attributable to 6.4 per cent of the cases.

Concern Over Efficiency

The opinion widely expressed by analysts is that Nigerian banks are yet to deploy the huge resources realised from consolidation efficiently.

The Banker magazine reported that Nigerian banks were struggling to maintain their rate of return on capital which it said dropped 21.9 per cent in 2007 to 18.6 per cent in 2008. Dr. Clement Ochaga, economist and market analyst, said one of the major challenges that Nigerian banks would continue to face was how they could convert their phenomenal growth into actual profits.

According to the 2007 Country Report and Analysis, which is an accurate and effective analysis cum documentation of all key sectors of the Nigerian economy, the president snf chief executive of Prudential Trust Company Limited, Nnamdi Anammah, noted that "efficiency in capital management is yet to improve in the Industry."

Experts said it would take some years for banks to cushion increasing cost from consolidation to permit improvement in efficiency ratios.

According to industry watchers, if Nigeria actually aspires towards a strong financial sector and banking-induced growth and development, it could not afford to have a weak link in the chain.

The CBN has repeatedly warned banks that see their consolidation and recapitalisation as akin to operating in the comfort zone to think otherwise.

The reason, according to the apex bank, was that the nation's banking industry was just beginning to impact on the local market and would have to struggle harder to show significant global presence.

"There is no room for complacency. The industry has taken off, no doubt, but only a few pillars have been put in place. This is still morning on a creation day," said Soludo.

Ironically, up till the three years, total credit by banks only account for 31 per cent of the country's Gross Domestic Product (GDP), whereas in South Africa it is about 100 per cent.

Analysts say with consolidation and the "mega" status of the existing banks, the failure of any operator would amount to great disaster to depositors, investors and the general economy. That calls for caution by every stakeholder.

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