Q&A on Nationalisation of Banks by the CBN

Proshare

 

 

September 02, 2011 / You and the Economy
Interview with Managing Director of Proshare, Olufemi AWOYEMI FCA
 
 
Que 1: On June 2nd, 2011 the Central Bank issued a statement announcing September 30, 2011 as the deadline for the recapitalization of the eight banks it had rescued in 2009 that were still under-capitalized. However, in a surprise move the CBN had on Friday, August 5 revoked the operating licenses of three of the banks i.e. Afribank, Bank PHB and Spring Bank and handed them over to the Nigeria Deposit Insurance Corporation, NDIC. The NDIC adopted the Bridge Bank mechanism and renamed the banks. Thereafter, it sold them to the Asset Management Corporation of Nigeria, AMCON which is now managing the banks. It is obvious that the regulatory bodies involved in taking this action did not wait until the expiration of the September 30 deadline given by the CBN for the recapitalization of the rescued banks before acting. What is your take on this action?
 
This action as conceived and executed has been well considered by the market and it would appear that it had a feeling of inevitability to it, given the sequence of events leading up to and including the decision.
 
With the action however comes the necessary inquest, albeit on procedure, practice and the precedence setting legality; perhaps as part of the necessary discussion we need to have in better understanding what the on-going interventions mean and the way business will have to be conducted going forward.
 
The immediate gainers will be the regulators, depositors and the financial system while the losers are the owners, investors and tax payers. There rest will lie somewhere in between. Yet in re-appraising the action, the first thought would be to ask the question - What alternatives were there?
 
Given the news reports and interviews by the principal players on the subject, it would appear that some options were considered to address the principal issues:

1. the increasing likelihood of not meeting the Sept 30 deadline due to a myriad of ownership and long outstanding issues;

2. the impact of an unresolved banking sector which already continues to cast a shadow over the markets; and

3. the fast changing dynamics in the local and global economy and polity; making a quick resolution and imperative, not a choice.

 
The impetus to act was therefore not only urgent but considered necessary. The question you are really asking therefore is that ‘in what way could such an action be taken to meet the concerns above whilst causing minimal disruption to the financial system’.
 
Feedback so far would suggest that this question has been largely answered based on the market response/posture post-nationalisation. The reasoning as provided would indicate that technically, the first acquisition took place in December 2010 with the hope that shareholders/owners will respond to the prompt. AMCON as at the time of the takeover had 80 per cent of shares in Spring Bank, 46 per cent in Afribank and 15 per cent in Bank PHB. In the main, the nationalization represents substantial losses to tax payers as well.
 
It may however be important, from a knowledge perspective to revisit some issues arising from the action; to properly contextualize the learning points the action exemplifies, viz:
1.    The Management of the Banks – the existing management team’s performance comes under scrutiny giving the statement that the current situation in the three banks appears more serious than when the CBN took over in 2009? What happened and why?
 
2.    Role of NDIC and AMCON - it would appear that there exist the need to clarify the perception of a role/purpose dichotomy between the NDIC and AMCON. Some senior colleagues have opined that the Nigeria Deposit Insurance Corporation (NDIC) is actually the only government agency empowered by law (Sections 38 and 39 of the NDIC Act 2006) to do what AMCON is being asked to do – and that AMCON should face its primary objective of managing the non-performing assets of failed and failing banks; concluding that AMCON was originally created to purchases bad assets from the banks, not to manage banks. 
 
3.    Cost of Salvage Operation - To date, the CBN and AMCON have disbursed N1.299 trillion to salvage the eight banks it took over in 2009. This latest injection of N678.5 billion into the three nationalised banks is set to increase this cost and to some degree considered an avoidable investment.
 
4.    The Need to shore-up the Share Capital to achieve CAR – If we accept the argument that the NDIC is empowered to statutorily manage the banks as bridge banks, it is clear that they would not have needed any Share Capital as the it would only need to provide them temporary liquidity support until they are sold to new owners. According to Eghes Eyieyien, CEO of Pharez and a former NDIC examiner - NDIC would not have had to inject N678.5Billion into the banks as "Share Capital to achieve 15% Capital Adequacy Ratio" because the law says a bridge bank needs no Share Capital. All NDIC would have done is provide liquidity by way of 90-day "Accommodation Bills" which it is empowered by law to issue as "Financial Assistance" to the banks which is one of its fundamental functions.
 
So where does this leave us on the subject of banking M&A’s, nationalization and recapitalisation?  
 
The outcomes so far is that we are in the make or break phase and despite the misses and learning issues raised, we should look forward to a new chapter from October 2011. It is important that we move the discourse beyond this M&A phase into the more serious issue of recalibrating the financial system and economy.
 
Que 2: Some stakeholders argue that rather than intervene seven weeks ahead of a self – imposed deadline, the regulatory bodies should have even granted an extension when it was realized that the banks could not meet the September 30 recapitalization deadline. Do you think the regulatory bodies should have not only waited for the September 30 deadline to lapse but also have granted an extension? If yes or no, kindly explain why.
 
Why wait given the premise I have provided above?
 
I am not a legal adviser but it would appear reasonable to assume that a regulated entity or person has a duty to take all steps necessary to assure the regulator of its ability to meet the expectations given within a deadline.
 
The regulator, having the responsibility to make a judgment on this assurance can therefore take action – and as in this case, ahead of the deadline – because it merely represents a guide, a range, during which it would exercise a decision.
 
Recall that the CBN had announced that it would not be approving the Vine Capital bid for Afribank Plc and one which elicited reactions from the public. The Spring Bank process was in a stalemate and there seems to be no shifting of grounds from any side while for Bank PHB, there seems to be genuine concerns about the whole process. There are different explanations on how and why things came to such an impasse and I do have some insights into some of the background dynamics and I can say that there were no easy choices or options on these matters.
 
Today, those entrusted to make such decisions are the regulators and in the next few months, as developments in the local and global economy unravel, I am sure the rationale for such an intervention may become clearer for us all.
 
Que 3: Even as the NDIC acted in exercise of its mandate to protect the depositors’ of those banks, some analysts believe that the action taken was to the detriment of a segment of the stakeholders of the three banks – shareholders – who by the action lost their investments in the banks and that the regulatory bodies involved in taking that action should have considered another option which would take care of the interests of both depositors and shareholders. What is your reaction to this?
 
I would be happy to learn of this other option that should have been considered.
 
My take on this is that on such matters there are three principal stakeholders on the receiving end of an action such as this, viz:
1.    The Depositors – To be protected by the NDIC;
2.    The Investors – To be protected by the SEC; and
3.    The Financial Sector – To be protected by the CBN
 
In the eyes of the investment community, there is a well held belief that the SEC could have done more for the investors under this unique circumstance. The issue is raised that there ought to have been a technical suspension of the stock prices of all listed firms involved in the M&A’s. Secondly, the commission should have offered and encouraged an investor buy-out program to sensitize the investing public on why and how they can exercise an option to sell their shares or lose them in the case of an action by the licenser/regulator.
 
We may never know what would have worked best given the rhetoric that pervaded the market that investors had lost everything anyway; yet it represents a lost opportunity to address the perception that the investor always gets burned in such situations – all the more painful when it is realized that everyone of us involved in the capital market was culpable of creating and promoting the conditions that resulted in this bubble market.
 
On Friday, we saw the first expression of hope for investors which should have been encouraged by the regulators for all the rescued banks when we saw the release on the details of the Access Intercontinental business combination. Here the current shareholders do not lose 100% of their investment. At least Intercontinental Bank Plc shareholders will receive 1 share for every 10 they currently have instead of losing everything.
 
Que 4: As you are aware, shareholders have cried foul over the nationalization of the three banks and branded the government intervention illegal. They hinge their grievance on the fact that government is not a shareholder in the banks and that the deadline given to the banks to achieve full recapitalization was yet to lapse when they were nationalized. How do you see this grievance being expressed by shareholders?
 
This will be a natural reaction, and it is to be expected that they will challenge the action up to the point when reason, not logic, will prevail. The issue of legality can and should be tested in the courts if only to lay to rest and clarify the precedent setting nature of the action taken.
 
Que 5: Still on the reaction of some shareholders, one issue that has continued to generate interest since the CBN intervention in some banks in 2009 is the notion that the shareholders of those banks no longer have assets in or claim to the banks. This is given the fact that all those banks have negative capital well below zero and have been kept as going concerns only by the CBN intervention and its subsequent injection of Tier II capital in them. What is your take on this view?
 
The argument can be better uncluttered than presented. This is however an issue in which views remains divided.
 
The bourse has listing rules and according to the responsibility school of thought, it would appear a matter of common sense to deduce that where the going concern of any listed company was impaired, threatened or publicly exposed, the bourse should take steps to inform the market – operators, regulators, analysts and investors of this development and their decision therewith. In such a scenario, the CBN would have had to provide some guarantee of sorts to assure the NSE of the going-concern status of these entities – thus forming a basis of the claim of investors/shareholders in the first place.
 
However, the negative capital was due to a reclassification of losses to the equity section of the balance sheet. If these banks are run properly over a long period, it is plausible that the negative capital position would be been cured or corrected. Worldwide, there are lots of publicly traded companies with negative capital base that have not been delisted. This counters the initial school of thought above but does not preclude concerns from the consequence school of thought who insist that such an argument actually favours a return of the banks to old and new owners, and not a nationalization option.
 
The problem envisaged by analysts however about the CBN/AMCON infusion is that they never told shareholders what they intended to do with the cash infusion in the first place – a unique buy-in opportunity missed and perhaps was unclear to all concerned at the time. The question should have been – “Will the funds be converted to loans, preferred stock, or common stock?” The whole process, it would appear, was predicated upon a common interpretation that ought to have yielded the conclusions now drawn by the regulators. Alas, this was not the case. This simplistic interpretation of a very complex issue perhaps account for the questions which the regulators are dealing with for an action that appears to the unbiased to be inevitable.
 
The action would thus appear to be part of the learning curve the crisis offers us. Conclusively, it is the cost being paid for it and the need to engage the reasonable elements of the stakeholder groups on the no-win situation at hand that represents the real challenge in our post intervention outlook.  
 
Que 6: If the regulatory authorities had not taken the pre-emptive action of August 5 what do you think could have happened to those three banks and would the wait have had a devastating effect on the stability of the financial system?
 
Maybe not! At the heart of this development lies the unspoken truth that there was no way that these banks would end up back in the ownership of the previous owners who had been adjudged not to have superintended over these institutions properly.
 
It is my considered opinion that unlike in the Soludo led CBN which gave an 18 month forward notice which enabled the market plan and avoid some volatility, the CBN set for itself moving short targets and tenures which ended up creating the impression of a shifting of the goal post or haste in managing the crisis.
 
That is as easy a conclusion as only a benefit of hindsight can offer. The reality however is that the urgency of the now was more of a critical factor in dealing with the fast evolving and multi-facet issues emerging from the August 14, 2009 intervention. The CBN was therefore forced to keep up a balancing act which is now behind it.
 
With regards to the financial system, there are serious issues around the management of the economy and the monetary and fiscal policies of government and the key ones have nothing to do with the August 5, 2011 action – it exemplifying this is the question of why the naira is losing with a weakened US dollar. The answer here lies more with the fiscal policies of government which ensures the economy remains a net importer. Our real challenge must be on how to position the Nigerian financial system to maximize the opportunities arising from the dislocations occurring in the global financial system, through a recalibration of our own economy and financial priorities. That is the conversation we should be having now.
 
Que 7: It is argued by some analysts that the nationalization of the three banks has eroded the negotiating power of the five remaining rescued banks in their recapitalization bid. With the fate that befell the three nationalized banks now looming over the other five rescued banks, the bid process that the five banks are currently engaged in is said to have now been unduly tilted in favour of potential investors rather than the banks? What is your position on this?
 
I believe it is high time we stop sensationalizing finance and investment issues. This is not a political debate but one steeped in practice for which the non-financial media has to appreciate and apply self to. Analysts deals with data, facts and judgements and there is no evidence that the thinking within the analyst community is as described here.
 
If there is any concern, it has to be about the implication of statements credited to AMCON that its debt holdings equate to majority of shares in the banks, thus effectively presenting it as a quasi-owner of the banks – rescued or not. This might not have been the intention, but in explaining and justifying the take-over of the 3 banks, a number of things were said that did not resonate properly within the analyst community which creates room for concerns.  
 
Que 8: Some critics aver that the adoption of the nationalization option in resolving the recapitalization challenges faced by Bank PHB, Afribank and Spring Bank signals a return to the era in which government controlled the equity of some banks in the country which they say resulted in dire consequences, principal of which was the mismanagement of those banks and their eventual lapse into distress. What is your response to this notion and which option would you have preferred - liquidation or nationalization and why?
 
This conversation will meet only one need – an academic exposition of the management of distressed banks; it does little to advance the issues at hand.
 
Instead of nationalizing the banks, the possibility of liquidating the banks has been espoused. Well, liquidation would have caused panic in the system and resulted in a run on the nationalized banks which could have resulted in a run on other rescued banks.
 
The other option put out there was to liquidate the banks and guarantee depositors or a percentage of the customer deposits in the banks. This is also fraught with problems. Indeed, in the US; depositors are only guaranteed $250,000 of their deposit regardless of how much they have in the bank.
 
Lastly, the other alternative would have been to return the banks to their owners or give to the suitors that presented bids. The CBN has adjudged that it did not find any that met its criteria and this was an option off the table at the time of the decision.
 
Que 9: Nationalization of the banks is regarded in some quarters as capable of eroding the confidence of foreign investors in the Nigerian economy as it may be seen as an indication that regulatory bodies are prone to adopting the rather severe measure as a crisis resolution option in the country. This is considered capable of curtailing the flow of direct foreign investment into Nigeria. Considering the fact that even the US adopted nationalization as a resolution option to address the distress in its financial sector in the wake of the global financial meltdown of 2008/2009, we wonder what you have to say about this.
 
It is the considered opinion of leading experts that the regulators might have seriously botched the take-over of the three banks, early on due to the initial process adopted; if we have to use the foreign examples/standards provided by your question above. They have since recovered from the initial hiccups to deliver on the resolution objectives.
 
For example, the US government invested in Citibank after the 2008 financial crisis. At a point the US government was the largest shareholder of Citibank. This is similar to our situation through the instrument of AMCON.
 
Several analysts were screaming about the government nationalizing the bank. However, the US government never took over the bank because it would have negatively impacted investors’ confidence in the capital markets and the banking system.
 
The US government allowed management to go out and look for outside funds to stabilize the bank. The largest shareholder of Citibank during the crisis was Prince Al-Waleed bin Talal of Saudi Arabia. The prince put in an additional $10billion into the bank. The US government subsequently converted their investment to common shares and sold the shares at a profit as the US stock market stabilized. Citi bank subsequently did a reverse split (i.e., share reconstruction). The stock was at $4 dollars when the reverse split was implemented, it traded as high as $49 after the split and today trades at $34. The CBN and the SEC have people with experience and should put the benefit of such insight and experience to task.
 
Que 10: The injection of the sum of N678.5 Billion into the three nationalized banks has no doubt put them on the rebound. How do you see this measure?
 
How does it put them on a rebound? I recall reading a story that immediately after they got the money, at least two banks repaid the initial money collected from the CBN – not from internally generated funds it would seem. I believe this is not the way to interpret the cash injection by AMCON. The injection of funds into the banks does not put them in a better shape. It is basically putting more money into a sinking hole.  
 
Que 11: Prior to the intervention of August 5, 2011 the three banks that were nationalized were managed by interim executive management teams appointed by the CBN. Part of the mandate of the management teams was to recapitalize the banks within two years. Sadly, that mandate was not realized. How do you see the failed efforts of those management teams to attract investors to the banks?
 
The management team obviously had their work cut out for them from the onset; but in the final analysis, the outcomes we see would suggest that they fell short in delivering on their mandate and it could as well mean that their institutions had more peculiar problems/issues than the others. At the end of the day, we are all judged vis-à-vis the expectation and mandate given to us and their case will and should not be any different. If the CBN/AMCON felt that there performance was stellar enough, they should have been retained. The regulatory action would appear to represent a clear comment on their performance going forward.
 
Que 12: Following the intervention of August 5 the Chief Executives of the banks that lost their licenses were engaged as consultants to the same institutions, albeit operating under a different name. This is believed to be capable of causing confusion in the new banks. We wonder what you have to say about this.
 
There is no confusion likely from what you have described to me. I believe the misrepresentation occurred from the twin follow-up actions that saw these men and women represented or described as consultants to their previously managed banks, taken over and for which they were beneficiaries of severance packages – making it appear more like an oxymoron of sorts. If as part of their severance package, they were required to stay on for a month or two to properly handover the sensitive affairs of the bank, I am sure there would not have been an issue. Beyond that, I will situate the confusion as existing only in the minds of people, but I agree, it does not look tidy.
 
Que 13: The regulatory authorities have hinted that if the five remaining banks still working on their recapitalization process fail to beat the September 30 deadline they will also be given the treatment meted out to the three nationalized banks. How do you see that?
 
This would appear to be a sensitive development no doubt, and one for which I believe the intended recipient of the message were the shareholders of banks still holding out and thus not allowing the agreed deals to be consummated.
 
The communication, in its unbiased intent, would represent some consistency on the part of the CBN in applying the judgment criteria used on the three nationalised banks to be so applied on the other banks were they to be in a situation similar to those of the three banks. That is a naturally deductible inference, but one with severe consequences for the financial system and economy; and could have been better left unsaid.
 
It is my considered opinion however that the way and manner CEO’s such as Mahmoud Lai Alabi, John Aboh, Suzanne Iroche and Funke Osibodu have managed their different constituencies encourages one to believe that the AGM/EGM’s of these banks would be conducted and approval given for a fair business combination to the benefit of all.
 
Quite frankly, enlightened opinion is for a move towards a swift resolution of the current impasse in the financial sector reforms to enable it focus on the more serious challenges confronting the economy and the market.
 
Thank you.
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