Only victors write history; yet when the story, events, and narratives that defined the last decade of the Nigerian Capital Market is told, even the vanquished must admit that the key driver of the market demise was a leadership meltdown from those entrusted with the management of the economy and our financial markets.

History will however be kind to the current leadership if it uses this period as a turning-point; a learning opportunity for the golden era ahead.

The signs of a market ready to take the difficult decisions needed to herald the new dawn are available if only we can look beyond the prejudices and trust deficit that clouds the actions of principal actors in the market.

With regards to the complexities surrounding the intangibles driving this paradigm shift, it becomes apparent that change is no longer a choice. It is the only response left for a market, nay economy; in need of a philosophical shift that extends to its practices, processes, people and politics of managing such a change.

Having reported on this market extensively, I am almost certain that we can no longer talk about a lasting solution to the capital market in the present tense whilst engaging in a revisionist approach to history which presents the current interventions as problem in approach to the malaise. Indeed, we have not gone far enough with the reforms needed, and adopting a single-factor approach to the problem undermines the linkages that exist within our financial system. We need to clarify what this transition is and what the new normal would look like.

Be that as it may, we can at least acknowledge that our experience in promptly tackling the banking crises offers us hope that the challenge we face is surmountable. I shall attempt to deconstruct the narratives using four (4) market cycles to provide how we got here and where we can go from here.
 

The Anatomy of the Nigerian Capital Market 

The graphical illustration of the market dynamics above helps contextualize the changing realities and the premise upon which a recovery can be built. Yet, it would help if we go a step further to dimension the realities in order to establish that the capital market crisis that ensued was a financial services sector driven problem – regulators and operators; and we are not too far from a solution.

Pre-Banking Consolidation (2001 – 2004)

The Nigerian Capital Market during this period was characterized by a lack of depth, low turnover and low market capitalisation which picked up under the government reforms announced in 2004.

During the pre-consolidation phase, there was a steady positive outlook in the market with an average gain 26.09%; attaining 65.84% uptrend in 2003 while year 2005 closed as its worst performing year with 0.62% gain. 

 

Despite the low depth, the Nigerian bourse grew its capitalisation by 1.85trillion between the end of year 2001 to 2005, representing 287% growth through a combination of new listings, supplementary issues and price appreciation in the listed stocks.  

The Banking Consolidation Era (2004 -2007)

It would be appropriate to look at the four periods separately to appreciate the developments, viz:

1.       2004 – Flagging off the reforms without improvements in oversight;

2.       2005 – The ‘Gold Rush’ commences;

3.       2006 – Regulators, Road shows and Responsibility deficit; and

4.       2007 – Commercial trading/merchandising replaces investment advisory.

The year 2004 signposted the abdication of regulatory oversight that was to later impact the market; as evidenced by some fundamental examples, notable of which was the statement from the CBN that “all sins committed during consolidation will be forgiven”.  This was in reaction to concerns over some of the consolidation issues that ensued. We will explore this in detail later.

No sooner had the pen dried on the announcement of the banking reforms, chief of which was the ‘universal banking’ licence regime without a commensurate universal regulatory regime did two banks announce that they had concluded plans to approach the market to raise capital which was successful and opened a new vista for the market. Within a twelve month period, one of the banks got regulatory approval from SEC / NSE for a second public offer without a change in engagement rules. Two years later another bank did the same within a two year period. The race to the bottom was thus flagged off.

The Nigerian bourse was now being driven by reforms in a singular sector (banking - overcrowding the traditional players in the market with all attendant focus now shifted to growth and sales).

By 2005, the market was effectively driven by a surge in market floats – that saws previously ‘distressed’ banks getting approval to issue unsuccessful public offers all in a bid to position themselves for possible M&A’s. At the end of the consolidation era, a few banks did not have the minimum capital but were allowed to go on in business and also list on the exchange.

Furthermore, in the banks bid to complete the consolidation, a number of issues cropped up e.g. Spring Bank emerged as a crisis arrangement between the legacy banks which eventually crippled it; Bank PHB had issues with its public offer which dragged on; Wema Bank had its offer delayed for almost a year by the CBN who was overwhelmed by the share volume of work required to conduct share verification/fund sources etc - for which it was unprepared for. There were other issues which would indicate that the protagonist of the reform was itself less prepared, just as the SEC was unable to raise its game.

For example, it was not SEC but the CBN that issued directives to stop the deliberate misleading of the investing public on offers when banks started taking out paid adverts to make spurious claims of share price growth. The regulatory inertia that was to come could only have been better imagined.

By 2006, The performance of the market as shown above was now being driven by the surge in market floats in the financial services sector and the allure of quick profits, interest from foreign institutional investors, absence of or lowering of regulatory oversight, unattractive rates on deposits and of course excess demand on low float posture.

By 2006, the banks were consolidated and the market joined one of the banks - Intercontinental Bank Plc to celebrate its $1 billion market capitalisation landmark.

Not unknown to the market leadership – regulators and operators - Europe had issued a warning that the bull market run of the past three years is finally running out of steam. In a news report by Robert Miller and David Litterrick (Telegraph, May 06, 2006) and another by Anthony Bolton of Fidelity’s special situations Funds – one of the most trusted names when it comes to analysing what lies ahead for equities (WSJ) – both republished by Proshare. Indeed, many experts went forward to articulate the linkage of our markets to the US housing market and possible contagion effects.

Rather than heed this warning and consider contingency plans, the market retained its focus on more road shows that promoted public interest in the shares of the firms coming into the market. The question was more of what to do with the money available. The SEC/NSE tried to introduce some initiatives to address the growth in the retail end of the market such as E-bonus & E-dividend as a dematerialisation option, Trade Alerts to stop growing fraudulent practices from brokers, embark on work with regards to its trading platform, licensing of new brokers, and stepping up of its enlightenment and enforcement actions.

There were unfortunately no products to channel the funds to developmental bonds, introduction of options, puts and derivatives to take care of the possible downturn the market had been warned of; or a clear road map of where the market was going.

There was a crowding out effect from the entry of insurance firms, second tier firms and many firms without requisite financials and corporate governance structures who got SEC approvals for public offers.

At this stage and well into 2007, the banks, being owners of insurance firms, brokerage firms and issuing houses effectively took over the capital market and thus began the race to the bottom.

2007 witnessed the peak of investors’ confidence and the substitution of the responsibility for financial advisory from brokers to bankers. The control of the bankers over the bourse was so total that brokers who were not owned by banks had to seek alignment/leverage from their bankers to survive in the market. Thus, the complicity of the broker community with the banking sector was determined to be the norm.

This incestuous relationship gave birth to the deployment of margin loans by the banks (sometimes accompanied by a list of stocks to trade in) as an outlet for the massive cash in the banks vault. Soon enough, this was extended to depositors funds. Indeed, while some banks embarked on a Pan-African expansion drive, others merely focussed on playing the capital market.

The regulator (SEC & NSE) was a direct beneficiary of this boom in secondary market activities - earning revenues deriving from the liquidity provided by the margin loan cottage industry (without any guidelines from SEC to the brokers or one from CBN to the bankers). In effect, these were good times for the regulator who after making money from share offers and listings turned a blind eye to the source of the liquidity driving its stocks outside market fundamentals and warnings from experts and analysts.

Companies that were not turning in their financial reports for over two to four years (as no one bothered about the facts behind the figures sessions) also became ‘blue chip’ stocks and thus we entered into the new bubble.

As we moved towards the end of 2007, it was becoming apparent that while the bourse showed growth; the regulatory framework had cracked under the weight of increased banking sector activity, deadline pressures,  and a blindly trusting public eager for a piece of the action in the ensuing ‘gold rush’. The exposures of the banks had equally opened them to weaknesses arising from depositors actions and funds recall from foreign investors.

The Market CAP recorded growth of 159.67% to close at 13.29 trillion as against 5.12 trillion recorded in the previous year 2006. The year closed with a 74.73% gain to close at an all time high of 57.990.22 of a turnover of N2.1trillion against N470.25 billion witnessed in the previous year, representing 346.57% turnover growth. The top performers in the year during this period were:

Yet, a cursory review of the top performers in the capital market during the period to 2007 will indicate that except for Access Bank Plc, none of the eight banks featured in the yearly Top-10 exist today.

Market Crash (2008-2009)

The Nigerian Capital Market once thought to be immune from global developments, witnessed an historic trend reversal as its capitalisation plunged by 28.1% from all time high of 13.29trillion attained during the bubble period to close at N9.563 trillion by year-end. Similarly, the ASI shed 26,539.44 basis points to close at 31,450.78 as against the historic height of 57,990.22 recorded in the previous year. This represents a 45.8% loss for the year as majority of the equities shed weight considerably in the year.

By April 2008, the market entered a bearish season and we witnessed a plethora of interventions, inaction and ineptitude in handling the post crisis issues that ensued. The decline, evidenced by price depreciations in equities and delisting of 19 companies during the period has been attributed to a series of factors – all coming together to expose the underbelly of the market.

In 2009, the inevitable downtrend continued as market plunged further by -33.78%, losing another 10,623.61 basis points in the year as investor panic and regulatory inertia further depressed the key benchmark indices lower at 20,827.17.

The huge funds that were invested in Private Placements in 2007 and 2008 (an operation outside the regulators direct remit) remained locked-in, as issuers refused to list on the bourse for two reasons – first, the private equity investments was predicated on immediate selfish gains between willing givers and willing takers. Second, the game was up, as eroded confidence in the market meant that there was no upside to the transaction. So why would people still hold the regulators responsible?

The argument has been advanced that for some inexplicable reasons, the SEC/NSE looked on while these companies (either directly or through their financial advisers) effectively ‘duped’’ investors. There are ample evidence of violations of the private placement rules by these companies who not only advertised these private placements but included in the prospectus a statement that ‘they would seek approval for, and list on the bourse’ upon completion of the placement drive. A few of them did (most are out of the bourse today) while the late entrants got caught up.

In the eyes of the invested public, the case is made that regulatory negligence occurred here and they expect the regulators to establish liability for misapplication and misrepresentation against the financial advisors or/and companies, in the very least. The more these questions went unanswered over the years, the further the death knell of the retail market resonated. Trust in the SEC/NSE evaporated faster as it was an open secret that approved market operators went all out to canvass for private placement offers and sold this line of business based on an unmitigated ‘greed factor’.

By year-end 2009, market turnover shrunk by 71.2% while the daily average transaction equally fell from 775.65 million shares worth N9.55 billion in 2008 to 414.73 million shares valued at N2.8 billion in 2009. Also, the market CAP dropped by 26.5% at year-end due to a consistent decline in the equity prices, and the delisting of 11 equities and other income securities.

Post Market Crash (2010 – 2011, till date)

The recovery phase could not take off in 2010 owning to fundamental challenges in change management processes, management of the excluded, stakeholder buy-in and regulatory co-ordination that had to take place. Momentum was however planted to deliver a gain of 18.93% gain as market reacted to the attempt at reviving market confidence; just as the bottom-out posture of the market attracted active bargain trend.

The financial/banking sector reform by the CBN designed to resolve the crisis in the banking sector contributed to the bargain trend based on the confidence generated from the intervention by AMCON to absorb the non-performing loans of these banks.
 

Transactions involving AMCON however continue to elicit in some quarters; a combination of ignorance of the workings of the institution and an informal market information flow on what will appear as incongruence in application of rules. We however remain firm in our belief that the management of the institution is credible, reliable and purpose led.  
 

Post AMCON however, the volume traded declined by 9.25% to close at 93.33bn shares as against 102.85bn shares traded in the previous year. Market value closed higher by 16.3% as against 71.43% loss recorded in the previous year. Market CAP increased by 41.12% to close at N9.92trillion.

Market volatility however resumed in 2011, as investors lost appetite for investment in equities all together, while ASI plunged by 16.31%. Situations in developed economies continued to have overbearing effects on the bourse as foreign fund managers adjusted positions relative to developments to manage exposure and positions in their respective domiciles. Similarly, the local institutional investors remained on the sidelines, watching for improvements to the sophistication, liquidity, breadth and depth challenges confronting the market.

It can however be reasonably argued that if we accept the argument that responsibility for the crisis was that of the banking sector with the complicity of the brokers; the financial services regulatory team should by now, through creative or innovative ways; have on the table, a common position on how to resolve the outstanding concerns and remove the dark cloud hanging over the capital market.

So far in the year 2012, market has appreciated by 6.65% as April 26th 2012 while the market capitalisation has increased in value by N504.82 billion, representing 8.25% growth when compared with previous year’s close. This has been built on the back of endorsements from the international community for our banking reforms, the efforts of the capital market regulators and the consistency of the advocacy of analysts and experts on the imperative for change.

The Market Post 2012

What we can draw from developments in our financial market space is that the problem takes on further complexities and dimensions by the day – inspite of the best intentions of individual institutions and its leadership. Regulatory reforms have been put in place to address most of the gaps that allowed for the situation described above but we are still confronted by the unintended consequences arising therefrom.

The current situation calls for a resolution of the fallouts from the banking sector crisis and related activities in so far as it concerns the investment community. This fallout together with the ensuing money market developments have subdued enthusiasm for any early market recovery, thereby further alienating the Nigerian investor from taking part in what may currently be a sound investment climate for equities, going by company fundamentals and regulatory environment. It might even require a simple apology in some instances; while in others, it requires that someone pays for the impact of their actions.

Whichever outcomes emerge, it is hoped that what remains the overall goal of the current house probe on the capital market is the way forward and not a revisionist approach to the facts established. The house probe is expected to use its quasi-judicial platform to create a consensus and momentum springboard towards the ‘deepening’ of the equities market and ‘supporting’ the wealth creation initiatives of the Nigerian Stock Exchange /SEC in a manner that allows it reflect and complete the economic loop between key sectors in the economy and market segments on the bourse, beyond its traditional duties.

I firmly believe that we can use this crisis to recalibrate the economic de-linkages between our capital market and the critical sectors already identified by the country’s leading minds as critical to our economy - Agriculture, Energy, Telecoms & ICT, Power & Utilities, Hospitality, Travels and Tourism, Mining, and Oil & Gas.

Thank you.