Restoring Confidence to the Banking System

A few months ago, i wrote an article pleading with the then Governor of the Central Bank of Nigeria (CBN) to allay our fears about the state of our banks. Alas Professor Soludo did not do much to calm my nerves. Since my plea, a new Governor, Sanusi Lamido has taken over the leadership of the CBN from Soludo whose term expired in May.

On 14th August, less than 3 months after taking over, Sanusi Lamido acted decisively to deal with the uncertainty hanging over the banks by sacking the Managing Directors of Afribank, Finbank, Intercontinental, Oceanic and Union Bank. In his view these 5 banks pose a serious threat to the financial system and the management of the banks have acted in a manner detrimental to the interest of their depositors and creditors. The CBN was forced to act to save depositors and restore confidence to the banking system.

In my view, this is a welcome development. In a time of crisis, there is often a need to show leadership and act decisively. For almost a year, the 5 banks have been suffering from illiquidity, surviving on the Expanded Discount Window and interbank borrowings. As the Governor said, three of the banks were very important to the banking system and something needed to be done before they lead to a collapse of the financial system.

The Governor’s actions required courage. For there are vested interests that would have done everything possible to stop this decisive action. However, the actions of the CBN are in order and are in the interest of depositors and long suffering investors. Some of the actions of the banks were shocking. Take Intercontinental bank for example. The bank loaned out more than thirty four billion Naira to three companies they themselves called “fringe” players in the downstream sector of Oil and Gas. It is shocking that such huge sums will be loaned out to three companies that have no significant record of success to speak of. Where was the risk management?

Then there are the billions loaned out to speculators on the Nigerian Stock Exchange (NSE) in the form of margin loans. The value of the securities have since collapsed by more than 70% in some cases. In the process trillions of Naira vanished.

The management of these banks have shown themselves not capable of managing the growth experienced by the banks. Within three years the five banks have frittered away more than three hundred billion Naira in fresh capital. The CBN did the right thing by sacking the managers. Something needed to be done to save what is left of the banks.

Depositors should remain calm. The CBN has injected over 400 billion Naira to save these banks in an unprecedented move backing its words that no bank will be allowed to fail.

It is my hope that these actions by the CBN will restore confidence to the system, reduce the cost of funds and lead to recovery of the economy in general.

Redemption

We are in the summer and it is meant to be quite but the NSE has been simmering in the last couple of trading days. The NSE All share Index has gone up for 8 straight days and is on the brink of a possible gain on day 9.

In the last 18 months i have come to realise that a lot of things are very possible on the NSE. The expectation is that with the common year end, the last qtr will be tight. But then the CBN cut the Monetary Policy Rate. Oil price has stabilized above $55 for some time reducing the federal deficit. In the last 1 week the Naira has fallen in the official market to N150.25 to the $ further reducing the deficit. So despite the collapse of power and security concerns, the economy is looking like it may finally get some life. Furthermore world markets are looking up with the Dow crossing 9,000.

Looking at the NSE Index it has now gone up for 8 trading days. It faltered on 30th July but did not go down and then it went up on 3rd August when it looked like it might be on its way down. The last time this sort of resistance happened was between 16th April and 24th. It had earlier happened between 1st to 7th April. It was thus in April that the Index resisted a fall and then burst up in May. It then went on that remarkable run that saw it come within whiskers of the year opening value.

However, a not very common occurrence is that the value of transactions went up gradually for 6 trading days starting on 24th July and reaching a climax on 31st July. Value fell today. Is that the sign of a reversal? Or are we about to see another remarkable run? Possibly. Will i be happy if the Index continues to go up carrying us towards another remarkable gain? Yes off course! It will offer me another opportunity to quietly take some gains. I have already realigned my portfolio to my satisfaction but i have learnt it pays to graciously accept unreasonable gains.

For those considering buying into the market, i will say exercise due care and do not get caught out in what might be a suckers rally. Ensure you have tight stops for any speculative buy.

Perhaps this is the chance for some smart banks to quietly and slowly get rid of the toxic assets in their books and in the process get much needed liquidity boost and offer beleaguered shareholders some redemption.

Beyond the Write Offs

It is no longer news that our banks will need to make provisions against losses from margin and downstream oil sector loans. ETI set the ball rolling by releasing a very disappointing full year result. This was followed by FBN writing off N26 billion to everyone’s surprise. However, not many were surprised when Oceanic bank set a record by writing off N42 billion in one swoop.

Since then Zenith, Oceanic and UBA have released their quarterly results and all 3 have written off billions. I expect all the other banks to follow suit with write offs in their quarterly announcements. I am glad the banks have decided to come clean after being helped along by the new CBN governor. As an insider the Governor was very aware of the extent of the problem at least in FBN.

While i welcome the write offs so that we can move forward, i believe the management of the banks need to show some accountability. It is not just enough to write off billions and pretend all is well. We as shareholders need to know what management has put in place to avoid a future recurrence of almost complete breakdown in risk management. We need to know whether the key parties in the debacle have been sanctioned appropriately. As a minimum no one should get a performance bonus after such disastrous results. For many years bank executives have been handsomely compensated on the back of good results. Now that the tide has changed we expect to see some restraint on executive compensation.

I therefore call on all shareholders to attend the Annual General Meeting and voice their concerns. We need to see some remorse from management for such wealth destruction. We also need to hear what they are doing to avoid recurrence. Hopefully the end of the era of praise singing at AGM’s is in sight.