- Injects N400b to stabilise the banks
- Impact – The fear of the unexpected is real, we could have a reverse intent
- A full report will be issued today, courtesy of Boason Omofaye, MBC NewsCorp
- Proshare will issue an impact assessment at its Town Hall Meeting tomorrow.
The News as it broke:
The Central Bank of Nigeria, this morning, at the Emergency Bankers’ Committee convened by the CBN in Lagos confirmed the rumour that has been making the rounds all week that the CEO and Executive Directors of the following five banks have been removed:
1. Erastus Akingbola (Intercontinental Bank Plc);
2. Okey Nwosu (Finbank Plc);
3. Sebastian Adigwe (Afribank Plc);
4. Mrs Cecelia Ibru (Oceanic Bank Plc); and
5. Bartholomew Ebong (Union Bank Plc).
The decision was reportedly taken to safeguard the financial sector from systemic collapse.
How? According to the interview granted ThisDay, The CBN Governor said that “following the audit exercise conducted by CBN’s examiners it was discovered that five of the banks had accumulated margin loans of N500 billion, among other loans, that had gone bad and eroded their shareholders’ funds.”
“Some of these banks are quite large institutions and they have been mismanaged, so we had to move in to send a strong signal that such recklessness on the part of bank executives will no longer be tolerated.”
The Central Bank of Nigeria had obtained the approval of the President to inject N400 billion into the affected banks to shore up their tier 2 capital to minimum acceptable levels.
Sanusi added that “the funds being injected by the CBN was just temporary and does not translate to the government taking a stake in the five banks, as the interim management will be given a period to recapitalise the affected institutions, following which the N400 billion will be paid back to the CBN.”
The New Board:
An interim management and board for the affected banks will be put in place to run the institutions until they are taken over by new management teams and owners.
No set date for this was given even as the affected banks are now meeting to handle the fall out of the news.
The Immediate Impact:
The timing, approach and ‘drama’ associated with this development gives us cause for concern.
We have been and remain a strong supporter of the Central bank Governor and we believe that far reaching steps need be taken at this time to protect our financial system.
We equally believe that the problems with our bank loans portfolio did not occur overnight and the CBN must admit its failure as a supervisory and enforcement institution.
The actions and steps undertaken by the Governor thus far, in the absence of any other details as to motive, scope and sustainability, have been widely acknowledged as necessary by market analysts and commentators.
Naturally, our decision would have been one stepped in the safety of the above premise to conclude that there is no immediate cause for worry. Unfortunately, we cannot reach that conclusion without doubt.
In anticipation of such fears, the CBN explained its desire and sincerity in seeing the prevention of a run on the banks through the injection of funds and the avoidance of panic in the system through its decision to guarantee interbank placements.
This is commendable yet we have our doubts.
Market analysts are of the following opinion:
1. That there are clearly governance issues our banks must contend with, some more than the others;
2. That chairmen of banks must take more than a passive interest in seeing that these corporate governance issues are embraced and issues on disclosure and risk management must be seen as front and centre issues;
3. That the problems with the banks are rather complicated and not as easy as public commentators have been made to believe;
4. That the loan crisis goes beyond that of margin loans which are the most recoverable of the lot at this time – the others relate to advances to the Petroleum, Real Estate and Aviation businesses;
5. That this facilities, especially margin loans are in the main, advances by banks to their subsidiaries or/and associated businesses and the banks needed to be looked at as one single entity and eliminate the scenario where ‘one arm of a body is owing the other’;
6. that this should indicate the need to aggregate the total exposure of the financial system to the capital market and take a decision based on information known to the CBN on how much of the margin loans will not be recoverable this year and how much can be absorbed by the banks;
7. That the action taken today appears to be one such step where the funds injected represents their understanding of what is needed to keep the businesses running as a going concern, backed by the guarantees given;
8. That there is a need for the CBN still to come clean on the state of health of the banks and eliminate the rumour industry it has created.
Despite its best intentions, not a few senior analysts in the market question the approach.
The fear is made that unintended consequences of this move could be seen as follows:
1. Massive sell off of the shares of the bank and a depression of the price (would now be attractive for a cheaper purchase price or open to merger/take-over moves from local or foreign banks).
2. Massive withdrawals from these banks to avoid being cut out as the country has a long history of ‘saying one thing and doing the other’ on matters such as banks collapse – imminent or imagined.
3. The ‘group’ sack option does not suggest strength on the path of the regulator but a rail road.
On point 3 above, the CBN had the option of appointing new ED’s or a designated one to take over from the CEO over a transition period of about 1-3 months with resident supervisors from the CBN in the banks to ensure that no act against its best interest were carried out. The CEO’s could then be asked to proceed on leave and the information managed in the media and market.
This we believe the CBN considered and in order to avoid the rumour impact of such an approach decided to ‘get it all out’ at once and manage the fallout.
The actions taken here are no different from those taken by developed countries, especially the USA in the case of GM Motors where the re-introduction of cash stimulus is tied to the trust in the management of the funds.
We will retain a watching brief on developments especially in the following areas of concern:
1. The gap of N100bn (or N20bn each the banks will have to cover for which is almost their recapitalised minimum).
2. The ability of the interim management to quickly move to refocus the business away from an over concentration on ‘recovery’ alone.
3. The enthronement of a world class risk management system and enhancement of credit management practices;
4. The management of the ‘debtors’ in such a way as not to create a collapse of credible businesses; and
5. The impact on the capital market.
Proshare Editorial Desk