September 27, 2011 19241 VIEWS
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Expected business combination deals by banks this week will largely define the success of the ongoing banking reforms and the prospects of the financial market recovery, reports Capital Market Editor, Taofik Salako

 

The ongoing banking reforms was built primarily on four cardinal principles including enhancement of the quality of banks; establishment of financial stability; creating a healthy financial sector evolution and ensuring that the financial sector contributes to real economy. Since the August 2009 public presentation of the “state of banks” address by the Central Bank of Nigeria (CBN), there have been radical changes in the contextual and regulatory frameworks of the Nigerian banking sector.


The current reform has been remarkably different in both its approach and perspectives. First, the emphasis under the new risk-based regulatory approach lies on quality credit risks management alongside adequate capital. Banks are not only now mandated to put in place mechanism to identify, measure, monitor and control risks; they are expected to report such mechanism for review of the shareholders, giving the majority of shareholders opportunity to assess the operational structures of their company rather than the extractive figures alone.


CBN had provided the best-practice guidance in the form of the Guidelines for Developing Risk Management Frameworks, upon which banks were required to develop their own specific guidelines. The institution of credit bureau system is also a part of measures to foster the development of a credit-focused banking management. Poor credit management, it should be recalled, was a major cause of the banking failures as most banks piled up non-performing loans amidst dwindling capital base.


A major perspective derived from the credit-risk regulatory approach is the reversal of modus operandi of the Nigerian banking system from universal banking to niche banking system. Against the one-size-fits-all universal banking, niche banking allows banks to specialize within the broad spectrum of whole and retail banking as well as geographical spread of operations. The extent of banking operations would determine the minimum capitalization. Banks are now to be categorised as regional banks, national banks and international banks based on identified capital base and areas of operations. Also, banks are required to concentrate fully on core banking rather than fiddling with non-banking financial services.


Also, the introduction of tenure system for bank chief executives and auditors represents a major shift in the Nigerian corporate governance system. Managing directors of banks can now only serve for a 10-year period while auditors are compulsorily replaceable after certain period. However, the tenure decision touched on the core of entrepreneurship and has opened a debate on the limit of public control on private businesses.


In addition, the unprecedented sack of managements of banks, the use of ‘naming and shaming’ to recover bad loans and the prosecution of sacked chief executives of banks have struck the roots of chronic debtors and executive recklessness, which have the most known causes of bank collapse in Nigeria.


The establishment of the Asset Management Corporation of Nigeria (AMCON), the bad-debt warehouse, has brought a new sense of relief and assurance to the banking sector. Amcon has so far invested N1.7 trillion in purchase of non-performing loans and rescuing banks that would have otherwise been liquidated due to terminal capital insolvency. AMCON impact in the stability of the banking sector is underscored by the facts that the corporation has investments in all banks including the non-intervened banks. The standby assurance of AMCON has complemented the avowed commitments of the CBN and the Nigerian Deposit Insurance Corporation (NDIC) to the safety of depositors, a general sense of security that has prevented run on the ailing banks.


Besides, several other policies including the harmonisation of the year-end of all banks to December 31, of every Gregorian calendar, the extension of the reform to the microfinance industry, ongoing efforts to develop alternative non-interest financial system, synchronization of the regulatory and economic roles of the CBN, new rules and regulations on electronic banking and customer service, code of corporate governance to address peculiarities of banks in addition to code of corporate governance for all quoted companies, ongoing effort towards full adoption of the International Financial Reporting Standards (IFRS) by all banks in Nigeria by the end of 2012 and several multi-billion interventionist initiatives aimed at facilitating credits to some key sectors including agriculture, aviation, power, and small businesses among others, indicate the comprehensiveness of the banking reform along the line of the four cardinal principles.


 

 

Enter the crucial stage

 

 

But more than any of the elements of the two-year old reform, the meetings of shareholders of banks this week to consider crucial business combinations hold significant influence on the colouration of the success or otherwise of the reform programme. After extensive special industry audits indicated over exposures by banks, huge non-performing assets, insider abuses, corporate governance lapses, and depleted capital base, the CBN had in August 2009 took over eight banks including Afribank Nigeria Plc, Intercontinental Bank Plc, Union Bank of Nigeria Plc, Oceanic International Bank Plc, Finbank Plc, Bank PHB Plc, Spring Bank Plc and Equitorial Trust Bank (ETB). Two other banks- Unity Bank and Wema Bank were placed on the watch list of the apex bank. The apex bank had resolved the issues surrounding the take-over of ETB with the core shareholders and subsequently returned the bank to its owners, leaving seven banks, all quoted on the Nigerian Stock Exchange (NSE), under the CBN-appointed managers. Under the CBN-appointed managers, the rescued banks had stabilised and fostered a self-defined recapitalisation plan that would lead to the exit of CBN-appointed managers. Three of the rescued banks- Afribank Nigeria Plc, Bank PHB and Spring Bank, that were adjudged incapable of recapitalising were nationalised in August. Although, the nationalisation wiped out about N30 billion investors’ monies as government took over the assets and liabilities, reverted the three banks to private limited liability companies and delisted them from the NSE, most pundits believed that the timeliness of the action by financial services regulators saved the system from a much more catastrophic contagious effect of delayed decision and inaction. Afribank, now known as Main Street Bank, had been valued at N8.69 billion while Bank PHB, now Keystone Bank, and Spring Bank, now Enterprise Bank, were valued at N11.49 billion and N9.51 billion respectively. However, the three banks altogether accounted for 1.4 per cent of total market capitalisation of the banking sector, which stood at more than N2 trillion.


The Securities and Exchange Commission (SEC) said the nationalisation of three incapable banks and steps being taken to ensure recapitalisation of other ailing banks through mergers and acquisitions were “significant steps towards the resolution of the banking crisis. Indeed, the Commission believes these actions will accelerate the recovery of the Nigerian capital market.” The NSE has also expressed similar opinion noting the need to look beyond the nationalisation to the bigger picture of resolution of the banking crisis.


“Despite the short term adverse reaction by the market, we view these steps, on the balance, as positive as it effectively draws a firm line on the recapitalization process for Nigeria’s troubled banks. We view the actions of the CBN as well thought-out and think it will stabilize the system over the long term, having avoided a looming systemic crisis that the relative illiquidity of these banks portended,” analysts at Afrinvest summed up the opinions of most investment advisers and market pundits.


While the financial services regulators had driven the process so far, shareholders are now saddled with the responsibilities of rounding off the recapitalisation in line with the commitments of the CBN that shareholders would have unfettered opportunity to exercise their rights in the modification of the shareholding structures of their banks. Starting with the meeting of shareholders of Intercontinental Bank and Access Bank tomorrow, the five rescued banks would this week place their schemes of mergers and acquisitions before their shareholders at their extra-ordinary general meetings (EGMs). Oceanic Bank is seeking business combination with Ecobank Transnational Incorporated, Intercontinental Bank has opted to combine with Access Bank, Finbank has chosen First City Monument Bank, ETB has signed on to Sterling Bank while Union Bank has chosen the African Capital Alliance (ACA) as new core investors.


 

 

The roads to the EGMs

 

 

The emergence of schemes of arrangement and court-ordered meetings for the consideration of the banks’ business combination followed a long windy process of search for new core investors, deliberations, signing of Memorandum of Understanding (MoU) and crucial signing of Technical Implementation Agreement (TIA), which then bound the parties in the business combination to consummation of the process. Each bank had engaged its financial advisers to ensure optimal value in the recapitalisation while the apex bank was advised by a team of local and international advisors including Deutsche Bank. Beside regular updates on the each stage of the recapitalisation process, the managements of the rescued banks have continuously engaged shareholders on the capital restructuring. While a cross section of initially bewildered shareholders had resorted to litigations, rescued bank managements and financial services regulators painstakingly followed through the legal processes, which culminated in decisions in favour of the apex bank and the recapitalisation process.


Many analysts have commended the transparency and fairness of the managements of the rescued banks and the CBN, which have seen the recapitalisation process going through all the normal stages of business combinations from staff and internal management review to board decision, financial advisory, memorandum of understanding, presentation of initial facts and details to shareholders and general public, much more detailed implementation agreements, production and consensus-building on scheme of mergers and acquisition, the filing of the scheme at the Federal High Court and subsequent order of the court for the EGM, publication of the EGM order including date, time and venue, the posting of schemes of mergers and acquisition to shareholders within the statutory 21-day timeline and up to the massive interactive sessions between banks’ managements and shareholders to elucidates on the highpoints of the schemes.


“The process has been very good because the CBN allowed the banks to work out their own strategies without imposing it on them. Some of them want to merge, while some want to bring in foreign investors. I think both strategies are welcomed and I strongly believe they are going to help our economy,” astute investment adviser and chief executive officer, Anchoria Investments and Securities Limited, Chief Olusola Dada noted.


 

 

Value propositions of the mergers and acquisitions

 

 

The core benefit that has continued to propel mergers and acquisitions as fastest corporate growth strategy lies in the creation of competitive advantages that leverage on the strengths of the combining entities while minimizing their weaknesses. The global economy has in recent time witnessed many voluntary business combinations from otherwise strong companies to further drive growth and returns. Many of these had reverberated in the Nigerian market including the business combination between Kraft Foods Inc and Cadbury UK, which turned Cadbury Nigeria into a subsidiary of Kraft Foods and the acquisition of BOC Group Plc by The Linde Group AG, which brought BOC Gases Nigeria Plc under the German-based multinational. BOC Holdings UK, a member of the BOC Group Plc, had owned 60 per cent equity stake in BOC Gases Nigeria Plc and the acquisition of the BOC Group Plc by the Linde Group made the latter the ultimate owners of the BOC Holdings’ 60 per cent majority stake in BOC Gases Nigeria. On the domestic scene, the merger of Stanbic Bank and IBTC Chartered Bank to form Stanbic IBTC Bank Plc signposted the road to voluntary mergers and acquisitions in the Nigerian banking industry. The recent acquisition of significant stake in Vono Products Plc by its main competitor-Vitafoam Nigeria Plc, also underlined the inherent values in mergers and acquisitions.


The business combinations by banks would specifically lead to injection of much-needed capital, improved liquidity and competitive positions, economy of scale and synergies, significant cost reduction, more robust banking platforms and product offerings, improved corporate governance and banking best practices, immediate reclamation of eroded shareholders’ values while kick-starting the gradual build-up of future shareholders’ values.


Managing Director of AMCON, Mr. Mustafa Chike-Obi has said the corporation would invest additional N800 billion in the five rescued banks undergoing process of business combination if the shareholders vote in favour of the business combinations at the forthcoming EGMs. The additional N800 billion would bring total capital injection of AMCON, which had earlier injected N700 billion to fully recapitalise three bridged banks, to N1.5 trillion. AMCON is expected to recapitalise the rescued banks from their negative shareholders’ funds to zero level in exchange for equities.


Also, new core investors are expected to capitalise the rescued banks above the minimum capital adequacy level. For instance, the ACA is expected to inject $500 million equity funds and $250 million Tier II capital into Union Bank while FCMB has guaranteed N15 billion to ensure Finbank meets 15 per cent capital adequacy ratio.


Registrar and Chief Executive Officer, Institute of Chartered Economists of Nigeria (ICEN), Mr.  Peter Ikpamejo outlined that the successful completion of the recapitalisation deals would engender increased competition and minimize systemic risks in the banking system.


Besides, many analysts hold that the recapitalisation of the banks and the final resolution of the banking issue would also have salutary effect on the performance of the financial markets including the stock market, where a newly reinvigorated banking sector is expected to lead gradual and stable recovery.


Analysts at several leading independent investment firms including FSDH, Vetiva Capital, Afrinvest, Sterling Capital, GTI Capital, BGL, Cowry Asset Management among others have said shareholders’ supports for the business combinations might spur further rally in banks’ share prices, and by extension other stocks.


“There are definite advantages that mergers and acquisitions readily confer on the surviving entity in terms of operating capacity, new capital injection, new management direction, new product offerings and expansion. The new regime will definitely create competitive disruption among Nigerian banks as they scramble for income opportunity. This is what brings new innovation to bear in terms of product development, customer service delivery and most importantly good return to shareholders,”  economic and investment advisor at Sterling Capital, Mr. Sewa Wusu stated in a preview of the banks’ mergers.


A retired banker, Mr. Alfred Akinremisi, said new core investors would impact positively on both the operations of the banks and dividends to shareholders. Akinremisi spent two decades between 1964 and 1984 working at Union Bank at a time that Barclays Bank was the owner and later core investor in the bank. “I know the benefit of a reputable core investor given our experience then under Barclays,” Akinremisi said recalling the glorious period of the Nigerian banking industry.


 

 

Access Bank and Intercontinental Bank: The making of a new top tier bank

 

 

Many specific post-combination scenario analyses have focused on the expected impact of the mergers and acquisitions in the structures and market shares of emerging banks. Beside the general benefits of the recapitalisation, analysts agreed that the congruence and competitive advantages of the merging entity would determine the degree of impact of the combined entity. Many scenarios have particularly pointed the business combination between a highly aggressive middle tier Access Bank and widely acknowledged retail banking and iconic customer-focused Intercontinental Bank as a large-impact business combination. The dominant structure of the Nigerian banking sector has remained largely unchanged in recent years with the four of First Bank of Nigeria, United Bank for Africa, Guaranty Trust Bank and Zenith Bank nearly half of all the key parameters of the banking industry including gross earnings, loans and advances, total deposits and total assets. However, analysts said the top-tier structure is set to change if the shareholders consent to the mergers and acquisitions.


“If current mergers and acquisitions sail through, we expect Access Bank and Intercontinental Bank to pool a combined market share of 9.8 per cent, placing them in the top tier league. We also expect Ecobank and Oceanic Bank’s post merger combined market share to stand at 9.3 per cent, while FCMB and FinBank’s combination should translate to a market share of 4.7 per cent. Our analysis further shows that if these deals are consummated, the number of top tier banks will increase by two, while the combined market share of the top five banks by total assets will rise to 57.6 per cent from the current 51.2 per cent,” analysts at Afrinvest concluded in a long review of the banking sector.


Shareholders also appeared enthusiastic about the merger. President, Association for the Advancement of Rights of Nigerian Shareholders (AARNS), Dr. Faruk Umar, said the combination of Access Bank and Intercontinental would create a unique bank with enough aggressive competitive instincts, nationwide branch network, technologies and product offerings.


 

 

Rule of thumb

 

 

The importance of the EGMs lies in the statutory requirements for any change in capital structure of any going concern in Nigeria. Under the Companies and Allied Matter Act (CAMA), section 539, sub-section 2, the scheme of merger and acquisition will only become effective and binding on existing shareholders if the scheme is ratified by not less than three quarter, i.e., 75 per cent of the number of the company’s shareholders present and voting, either in person or by proxy at the court-ordered meeting. This provision clearly highlights the danger of complacency and reticence on the part of majority of shareholders. A laid back attitude by several shareholders, who otherwise have voiced supports for the business combinations, might give a handful but equally aggressive opposing shareholders the opportunity to truncate the process. Voting during the EGM is by poll, rather than popular acclamation or show of hands, and every ordinary share carries a vote.


With the provision for voting by proxy, the law has adequately made room for participation of all shareholders in this crucial decision-making. Shareholders who may not make it to the EGM are only required to fill the proxy forms attached to the scheme documents earlier sent to them, indicating how they intend to vote and send such proxy forms to the company secretary, registrar or the board of the company. All instruments of proxy must be stamped by the Commissioner of Stamp Duties and deposited at the office of the registrar not later than 48 hours before the date of the meeting. Many of the banks have already put in placed online interactive platforms to guide shareholders on their rights.


But section 539 of CAMA also provides succour to the majority of shareholders against the antics of minority. According to the provision, majority vote in favour of the scheme binds all shareholders including the dissenting shareholders and as such, the company is not required to make any exit provision for shareholders who voted against the motion. Such dissenting shareholders may however opt to sell their shareholding through the secondary market.


A major shareholder of one of the rescued banks, Chief John Akinleye, whose could result in several millions of votes, said though he had suffered serious depletion in the value of his shareholdings, he would support the recapitalisation to salvage the remaining value.


 

 

The ominous warning

 

 

Even while nursing legitimate concerns that shareholders, especially minority shareholders, have been unfairly the whipping boys of the banking reforms, most shareholders know that supporting the business combination is the only option that holds out any gains for shareholders. In what appeared to be a definitive stand on immediate action on any failed business combination, Chike-Obi said AMCON has put additional N500 billion on standby to fully recapitalize and take full control of the five rescued banks in case shareholders vote against business combinations.  According to him, AMCON has an investment scenario of minimum of N1.5 trillion if the business combinations of all the rescued banks sail through and a worst case scenario of N2 trillion should the shareholders reject the mergers and acquisitions deals.


He said in order to deal with any unforeseen eventuality at any of the EGM, AMCON has increased the shelf value of its bond to N4.5 trillion to provide headroom for additional capital that might be needed. He noted that though financial services authorities have no premeditation of any failure, they would act in any failure to protect the interests of the majority of vulnerable people by protecting depositors and guaranteeing continuing operations of the banks, employees’ jobs and customer relationships.


While government can force a closure to the lingering issue as it has done with the nationalised banks and still derive similar or quicker benefits for all other stakeholders, the gains of the shareholders now and in the future lies in successful EGMs. Now, the onus lies on the shareholders to recreate values for themselves.


Source: The Nation/ Taofik Salako

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