Nigeria banks: Paradise regained

The love affair between easy money and Nigeria’s financial

institutions may have been short-lived, but a new approach has turned

the sector around.

Read what the governor has to say in our interview with Central Bank Governor Lamido Sanusi.

One year after the crash, Nigeria’s banking sector is unrecognisable. Where previously there were aggressive denials about the levels of bad debt in the system, there is now a new regime of transparency. Investigations resulted in criminal charges being levelled against six banking executives. International lending to the sector, which had vanished, has returned. The naira, which was trading at around 190 to the US dollar on the black market, has returned to 150. The Nigerian Stock Exchange (NSE), which lost 66% of its value in the bank-led crash, grew 30% in January 2010.

“Do what is right, not popular. Do what you do for others first and for yourself second.” Central Bank of Nigeria (CBN) Governor Sanusi Lamido Sanusi says he found comfort during his battle for reform of the banking sector in those words, which he attributes to Roman emperor Marcus Aurelius. After he sacked the CEOs of some of Nigeria’s biggest banks, Sanusi quickly became a lightning rod of negativity for bankers who had done well in the banking bubble, although respected bankers such as Atedo Peterside of Stanbic IBTC Bank robustly defended him.

Political leaders have been asking questions about Sanusi’s reforms: has he really strengthened Nigeria’s banks or weakened them further and opened them up to foreign predators? Eventually, the politicians accepted Sanusi’s remedies. In late March, the House of Representatives approved a bill to establish the state-owned Asset Management Company (AMC) and the Senate followed on 5 May. With $7bn under management, the AMC will take over the bad debts of 10 distressed banks, allowing them to raise more capital.

Restructuring

Renaissance Capital estimates that the 10 banks, with a combined negative equity of $8bn, will have to raise $14bn, $10bn to meet their capital shortfalls and $4bn to repay the CBN bailout. The banks are expected to raise $3bn of equity for restructuring and be totally weaned off CBN support by the end of the third quarter of 2010.

Renaissance argues that First Bank and UBA are “natural consolidators of systemically important but distressed banks”. As much as $2bn in funding may come from international banks and two South African banks, FirstRand and Standard Bank, have joined the hunt for stakes in Nigeria’s financial system.

The government’s offer of tax breaks for corporate and sub-national bonds, as well as lower transaction fees, should encourage investors. Reduced costs mean that corporate bonds are on par with attractive federal government bonds. This means banks and other companies, constrained by reduced lending since last year’s troubles, have a funding alternative. “It moves highly-rated companies away from their dependence on bank borrowing, and this compels the banks to look for risk in the middle market in manufacturing and small- and medium-sized enterprises (SMEs), which is where we want our bank lending to go”, Sanusi told The Africa Report.

Lending to the real sector has of course fallen, as it did in the US and Europe following the subprime collapse. This has led to renewed calls from all quarters in Nigeria for intervention. Sanusi is not so sure the CBN can help, noting that in 2008, agriculture accounted for 40% of GDP, while lending to the sector was less than 1% of total loans, and lending to SMEs was just 5% of total loans. “All the growth in credit had been to the capital market and for petroleum products, so some of the criticism is misplaced.”

Five Nigerian financial institutions – First Bank, UBA, Diamond Bank, Fidelity Bank and Crusader Insurance – have concluded plans to float N1.84trn ($12.2bn) worth of bonds. Access Bank, Zenith Bank, First City Monument Bank, UACN Property Development Company, National Cargo Handling Company, C&I Leasing and Thomas Wyatt Nigeria plan to follow suit with a total of over N500bn in bonds.

Standing Tall: GTBank and Zenith

Guaranty Trust Bank (GTBank) was one of the few banks to post strong earnings and turnover figures for last year. In its results for the 2009 financial year, released on 6 April 2010, it announced that turnover had grown to N162bn ($1.1bn), a 62% rise over its 2008 figures. However, net profits declined by 14%, to N23.7bn, compared with 2008.

Regarded as one of Nigeria’s leading financial institutions for its effective risk management and relatively-conservative lending strategies, GTBank has over N1trn in total assets and contingents and a track record to prove its reputation. However, some analysts in Lagos, such as Thaddeus Investment Advisors, raise questions about GTBank’s aggressive expansion of its subsidiaries. Thaddeus argues that they may become a drag on the profitability of the group.

GTBank’s $90m corporate bond issue should boost its liquidity and lending operations to local businesses. Yet it will face stiffer competition in a tougher market, so few financial analysts expect GTBank’s net earnings to grow substantially in the short term.

By contrast, Zenith Bank has been aggressively expansionist in Nigeria over the past five years, but it has had to adjust quickly to the harsh market and regulatory realities as the crisis took hold in mid-2009 and the credit bubble burst. The bank has established a reputation for technology-driven efficiency and its generally high-quality assets. Its strategy was to develop a strong corporate presence, bringing in substantial deposits relatively cheaply and lending to large secure institutions.

Zenith posted mixed results for the 2009 financial year in a financial statement on 31 March, despite making exceptional provisions for loan losses. It reported a 31% year-on-year rise in gross earnings to N277.3bn, but net profits fell by 60% to N20.6bn in the same period.

Most dramatic has been the turnaround in Zenith’s asset-liability structure. In 2008, just 4% of its deposits were in excess of one year, while 67% of loans were in excess of one year. Now the bank has 44.5% of deposits in excess of one year and 66% of loans with tenures in excess of one year.

Financial-sector regulators want to avoid a repeat of the market’s extreme volatility after the 2008-2009 downturn. The volume of bonds traded soared to N16.7trn in 2009, an increase of 65% on the N10.1trn traded in 2008. Investors were hedging against losses in the equity market, and federal bonds offered liquidity and security.

Many of the problems in the market are blamed on the ill-preparedness of the industry and regulators to monitor the banking sector’s explosive growth. Lax monetary policy had led to excess liquidity in the banking system. Deposits and credit grew fourfold between 2004 and 2009. Banking assets were growing at an average of 76% a year. The market capitalisation of the NSE increased by 5.3 times between 2004 and 2007. Bank capitalisation increased by nine times over the same period.

In response to the end of the days of easy money, the CBN has drawn up a blueprint for reforming the financial system. It has four main aims: to enhance the quality of banks, to establish financial stability, to enable healthy financial-sector evolution and to ensure the sector contributes to the real economy.

Finance Minister Olusegun Aganga has said that a fiscal deficit of 5% of GDP would be manageable. Aganga will have to balance pressures for massive pre-election spending and the maintenance of tough economic and financial reforms. As a technocrat – Aganga is not a member of the ruling People’s Democratic Party – he should be better placed to reject politicised spending requests.

Some fear the politicians are complacent about economic prospects with new forecasts of a rising world oil price. The government raised projections for the benchmark oil price to $67 per barrel this year and production is forecast to stay at 2.35m barrels per day. World Bank Managing Director Ngozi Okonjo-Iweala says Nigeria still faces enormous financial challenges: “If oil revenue assumptions are not met, more drawdowns from the Excess Crude Account would be required on the back of the already substantial depletion in 2009.” She also worries about the rising levels of local and international debt. Nigeria’s domestic debt stands at N3.2trn, while external debt is $4bn.

This article was first published in the June-July edition of The Africa Report.