Nigerian Banks: After the crackdown

When the going was good, it was very, very good. Banks in Nigeria were announcing terrific results: growth in the hundreds of percent, booming profits, regional expansion plans and over-subscribed public offerings on the capital markets. Awards for ‘Banker of the Year’ were being handed out, and glowing write-ups of Nigeria’s revitalised financial sector abounded in the local and international press (this magazine included).

Fresh from the successful consolidation exercise of 2005, when 89 Nigerian banks became 25, the rise of Nigeria’s new financial establishment coincided with the rise of global capital markets overflowing with cash. Desperate to find double-digit growth in a world of low interest rates, investors started piling into Nigerian bank stocks from 2006 onwards. The stock market bubble inflated, only to burst spectacularly in the wake of the collapse of international markets in the second half of 2008.

With growth outstripping the risk-management capabilities of several institutions, the inevitable happened. Non-performing loans crept up, exposing corporate governance issues in certain institutions. Suddenly the whole sector seemed vulnerable.

A change in leadership at the Central Bank of Nigeria (CBN) has led to a new approach. The previous governor, Charles Soludo, praised for the initial success of the banks’ consolidation, was now seen to have too close a relationship with the banks his institution was supposed to be regulating. His replacement, Lamido Sanusi, previously CEO of First Bank, has been pursuing a more rigorous role for the CBN.

FIRED

Erastus Akingbola, Intercontinental

bank?
First to suffer rumblings of disquiet ??

Okey Nwosu?, FinBank?
Showed

TAR interim results that claimed
healthy capital

adequacy

Sebastian ?Adigwe?, Afribank?
Sacked 500 staff in May??

Cecilia Ibru, Oceanic Bank
Family-run bank, likely to put up a

fight??

Bartholomew Ebong, Union Bank
One of the oldest banks, surprised

many

In mid-August, Sanusi took the decisive step of firing the management of five banks after an audit revealed they had an average of 40% non-performing loans and under-provision for loans amounting to more than N540bn ($3.5bn).

In order to stabilise the five banks, the CBN injected N420bn, though it immediately became clear that another N375bn extra might be needed to help to clean up their books. The names of the 200 top debtors have been sent to the Economic and Financial Crimes Commission and have been published in newspapers.

It will not all be plain sailing, for Sanusi has made powerful enemies. The immediate attacks are being made on ethnic grounds, with accusations flying about a ‘northern agenda’. More corrosive will be the close links between bankers and legislators in Abuja, who may be wheeled out to undermine the work the ‘new broom’, an admirer of the austere former Nigerian military leader Muhammadu Buhari, has set himself.

Much will depend on the extent to which President Umaru Yar’Adua backs Sanusi. Ominously, the President still owes political favours to the big beasts of the People’s Democratic Party, several of whom have been affected by the cull. Nevertheless, now that the new governor has made his point about being serious, the banks now need cash.

The challenge for the banks is two-fold. First, the CBN directive requires a common year-end for all the banks’ accounts, which denies them the possibility of covertly borrowing from one another to help bolster a fourth-quarter result, which previously had allowed for much rosier end-of-year results. Secondly, governor Sanusi has said that he expects banks to make full provision this year for any losses stemming from imprudent lending to stockbrokers, the toxicity of which was fully realised only when Nigeria’s stock market bubble burst.

Corporate concerns?

The recent shake-up has placed particular pressure on the sector, which, if maintained, will create the conditions for another round of consolidation. This might be seen as the painful next leg of an otherwise successful process begun in 2005, when the N25bn minimum capitalisation requirement induced a flurry of mergers. The immediate response from the banks has been to call in their loans. After the unfolding drama of the exposure to margin lending, the next concern has been loans to Nigeria’s corporate world.

The energy sector, where much of the lending has been concentrated, could be one source of difficulty for the banks. A single syndicated loan from 12 Nigerian banks last year to Zenon Oil illustrates the extent to which the energy barons and their bankers are now praying for the oil price to continue its climb: AccessBank lent $120m, First Bank $70m, FCMB £170m ($281m), GTB $200m, Intercontinental Bank $270m, Oceanic Bank $180m, PHB $90m, Skye Bank $100m, Stanbic $70m, UBA $300m, Union Bank $70m and Zenith Bank $300m. This total loan of over $2bn is at the larger end of the scale, but there was plenty at lesser magnitude when the good times seemed set to roll.

The IMF has expressed concern about the recent rapid growth of credit to the economy. Those banks that were most aggressive in their lending will be those most at risk, and they will be the first to try to get their money back. A bank that was owed money by a company that sells generators is said to be selling those generators itself to claw back the loan. Another bank has taken out an advertisement in the newspapers, asking the government to help them in their quest to be repaid.

If the end of the happy-go-lucky attitude of recent times has produced some serious setbacks, in the medium term it should play in favour of the industry as a whole. Consolidation will produce heavyweight banks able to leverage economies of scale and compete for blue-ticket financing tenders in the infrastructure and energy sectors, which otherwise would be snapped up by global investment banks that are swapping their suitcases for local offices.

Hazard regained?

The decisive action by Sanusi to axe five bank chiefs has firmly re-introduced the notion of moral hazard, and the new orthodoxy is taking root. Advertisements for risk-management talent have been placed across the financial media from Washington to Dubai. Greater professionalism should in turn engender more sustainable corporate ventures being launched within Nigeria, as banks demand better business plans from their corporate customers. The reputation of Nigerian banking may have taken more than a knock, but the more solid institutions can only benefit from the difficulties of those banks that were found to be massively over-exposed.

One of the key structural issues facing the banks is the tenor of their loan book. The founder of Thaddeus Investment, Jude Fejokwu, says: “In many cases, these banks don’t have the deposits to cover these long-term loans, which are often to the corporate sector. For a bank like Zenith to have almost 70% of its loans beyond one year, and their matching deposits over the same time frame is just 4%, that’s a big red flag right there. For PHB it is 43%, and for Oceanic 50%.” This can be compared to more conservative banks like IBTC Stanbic or Skye Bank – the latter has just 1% of its loans falling due in more than one year.

A critical factor in the success of the restructuring of Nigeria’s banking sector is the resolve to stick by the common year-end accounting. “As the pressure steps up in October and November, will this new governor capitulate like his predecessor?” asks Fejokwu.

“We anticipate further constriction in private-sector lending,” said investment company Afrinvest West Africa in a late-August report, “as banks intensify debt recovery efforts and embark on a more frantic migration of balance sheets to more liquid assets.” ?

However, over the longer term, Afrinvest predicts “significant upside potentials for the sector, once it rids itself of its pot of toxic assets”. Despite the restrictions on foreign ownership being dropped, the chance of a foreign bank entering the market to buy one of the distressed banks seems doubtful in the short term, until more stability and clarity have returned.