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August 26, 2010 – Latest Updates

  
1.    Executive Summary
 
Oceanic Bank Nigeria International Plc’s Q2 2010 results for the period ended 30th June, 2010 alongside its Q1 2010 report for the period ended 31st March, 2010 have been reviewed and form the basis of our objective analysis in this report.
 
The analysis revealed that the bank is making considerable progress in navigating its way out of its peculiar and general challenges.
 
Whilst it is true that banks are back to reporting profits, going by the H1 2010 results released so far, a key concern with investors appears to be the question of perception merging with reality – i.e. that most banks actually recorded a decline in interest income and non-interest income; even though profits were bolstered by write-backs, an unsustainable activity. Similarly, Investors make the point that not a few banks suffered a YoY decline in risk assets, which underscores the attitude towards lending at this point in time. 
 
To unravel this, we made a conscious effort to properly contextualise the operating realities and environment under which these banks, especially the rescued ones have had to exist. Reviewing Oceanic Bank Plc’s H1 2010 performance thus, provided us with such an opportunity.
 
To create a reasonable linkage with the immediate past of the bank, we recall the bank’s December 2009 common year-end results (covering the usual 12months period following the bank’s earlier change from September year end to December year end in 2008) released in compliance with the Central Bank of Nigeria (CBN) uniform accounting year for banks in the country.
 
A cursory analysis of the results prior to the Q1 and Q2 results showed that the bank experienced a myriad of challenges, as showcased in the figures posted in the recently released results.
 
Digging in to the Realities
 
The negative profitability recorded in the re-stated 2008 and 2009 annual reports to December 31 could be attributed to the overblown loan loss provisions the bank had to make in recognition of the significant proportion of non-performing loans (NPL’s) it was carrying in its books. The bank had to make additional provisions for loan losses in the 2008 and 2009 financial years besides the N42bn and N315.115bn loan loss provisions made in the previous 2008 audited and third quarter report to September 30th, 2009 respectively.
 
The grave situation in the bank, prior to the intervention of the CBN was evident in the spike recorded in the banks non-performing loans in its 2009 financial year; up by 43% to close at N634bn from N443.3bn at the end of 2008, and the ‘unprecedented’ growth in non-performing loan ratio which grew to 72% from 51% of the previous year.
 
These figures, though unusual and should naturally constitute serious concern in the minds of the investing public, however serves as an indicator of the determination of the bank’s management and board to come clean - reclassify and provide for all loans correctly in line with CBN’s Prudential Guidelines and the International Standards now required of all banks operating in Nigeria - so as to purge the bank for a fresh start.
 
Turning the Corner?
 
For the 2009 financial year, the Group’s Gross Earnings inched up by 66% to close at N196.4bn from N118.3bn recorded in 2008, while Net Interest Income grew sharply from N7.5bn of the 2008 financial year to N101bn in 2009 December. This, according to the new management, is attributable to the release of previously suspended interest income on hitherto non-performing loans which have been restructured and are now performing.
 
The improvement now seen in the Q1 and Q2 performances is appropriately muted, yet - such improvements as recorded in the interest income components of the bank; which inched up by +61.23% and +13.33% in Q1 and Q2 respectively should and cannot be ignored.
 
Could this be an indication of an overall improvement in the bank’s credit management regime or/and a decline in its internal rate of loan default?
 
While awaiting the Q3 results to validate these inferences, it is discernable that any improvement in the bank’s cost efficiency under the new management would lend credence and integrity to the new management’s approach to profitability.
 
The cost efficiency measured by cost to income ratio is the gauge for this – and it has trended downward from 298.38% recorded as at December 31st 2008 to 145.32% at the close of 2009 financial year to December 31st, 2009 – going further down to 94.47% as at March 31st, 2010 and 87.18% as at 30th June 2010.
 
Other issues related to imperatives for a turn-around are addressed in section 2.
 
On the Technical Side…
 
Oceanic Bank Plc’s share price over a nineteen month period to August 27th, 2010 recorded a negative performance of -88.35% depreciation to close at N1.40 from N12.02 it closed at the end of January 2nd, 2009 trading session. This trend placed Oceanic Bank as one of the share prices with negative returns recorded in the sector using their January 2nd, 2009 price levels.
 
 
From January 04th, 2010 the bank’s share price still declined by -20.90%, retaining its place as one of the negative return stock in the sector.
 
Indeed, Oceanic Bank Plc share prices at the close of trading on the 26th August, 2010 traded below its 20 days, 50 days and 200 days moving averages. This shows that the bank’s share remains in the bearish territory.
 
 
With the cancellation of the 1 for 10 bonus earlier declared by the former management, a decision guided by the restatement of its 2008 financials; investors are left to grapple with the realities of non-commensurable returns on their investments, and for how long?
 
We try to provide some insight in our closing remarks in section 5.
 
 
The Analyst Insight
 
Oceanic Bank International Plc, as seen from the review carried out to gauge its operations and its going concern status would need to address three key imperatives:
  1. The continued professional management of the entity as done so far to sustain the recovery and repositioning objectives undertaken;  
  2. The deft management of the shareholders contribution to the NPL’s in addition to its larger debt recovery efforts to reduce its requirements from the AMCON and improve the shareholders funds; and
  3. The enhancement of value for shareholders through a recapitalisation programme that would necessitate an M&A arrangement in the absence of a core investor. This would be predicated on the management’s ability to navigate the negotiations and discussions without recourse to unending litigations.
 
It is trite knowledge that the new management has been able to present a case for the banks going concern, albeit with a guaranteed lifeline from the CBN.
 
However, the most significant step must be that taken by the new management to straighten the 2008 audited account earlier published by the sacked management; and should aid it in its desire to a true and fair view of the financial profile of the bank to date. But for the action taken, the result would have still remained an illusion of its realities.
 
Of huge concern must be the negative shareholders’ fund in the books of the bank which speaks volume of the unhealthy status of the bank. A reliance on interbank borrowings to finance operations is an unsustainable option. This can be reversed as more positive news is made available to the market on the three key points raised above.
 
It appears incumbent upon the bank to impress it on existing shareholders the reality of its situation, and the options open to them as long term investors.
 
 
Given the relief which the AMCON platform represents, and the outcomes from the management of discussions with shareholders involved in insider-related credits forming the bulk of its NPL’s; it is possible to inch closer to redemption than it is to fail.
 
Q3 and indeed Q4 2010 should be a veritable measurement of how well and how far the management has gone in moving the entity closer to a position where it’s going concern status will not elicit such fears – from investors and patrons alike.
 
We look forward to more positive news from the bank, which the market will have to price into its decision model. 
 
 
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