Friday, October 08, 2010 / Thisday

On Saturday, it would be exactly one year after the current leadership at the Central Bank of Nigeria (CBN) made its first intervention in the banking sector, after which it launched a set of reforms. Emele Onu, in this report compares the objectives and the unfolding outcome of that intervention

For most endeavours, a period of one year is enough for reckoning. In business, a year is the standard for performance assessments. Financial reporting is done after 12 months, a period stakeholders expect the records of the company, focusing on the balance sheet, the income statement, the statement of cash flow, corporate policies and so on.Twelve months after the incumbent Governor of the CBN, Sanusi Lamido Sanusi intervened in the banking sector by invoking Sections 33 and 35 of the Banks and Other Financial Institutions Act 1991, as amended, a lot has happened and divergent views have been raised.

Severally, the CBN leadership has appeared in the court of public opinion and received judgments from across the spectrum – good work, bad work, moderate and outright disapproval. Perhaps, that reinforces the dictum that no two things are the same, and that they can only be similar. Human perception is seen as the worst victim, with the result that no two people have ever said exactly the same thing about an individual’s qualities.

In sampling people’s views about the interventions and the unfolding outcome, THISDAY posed questions to some people: how will Sanusi’s intervention in the banks be judged after one year, given the fact that some bread winners have lost jobs in the banks; entrepreneurs have gone to the banks for credit and were turned back; some people that live on contracts from the banks have had to stay without such contracts as banks retract their spending?

An analyst that pleaded anonymity responded: “You have touched on sensitive issues and that explains why I will not want to use a year to judge the present leadership at the CBN. If I do, there will be the temptation to score him low but for everybody that looks at the long-term, the man, Sanusi is the reformer we need and I think at the end of the day, the banking industry will be better off.”If a year is not enough for the anonymous commentator to begin to assess Sanusi, some other people believe it is a sufficient period to call him to reckoning.

An economist and financier, Godwin Ibekwe said: “If a facility exceeds one year, we already start talking of it in terms of long-term, so a year is enough to determine whether the CBN means well by its intervention in the banking sector.”What happened, what did the CBN see, what did it do and how has the various interventions impacted on the industry? Answers to these questions currently matter and will continue to stir public debate about the reforms for months and years to come.

CBN’s Intervention

According to the CBN Governor, barely a month after he assumed, as he later said during an interactive session with the media, he was alarmed by the fact that the total amount outstanding for banks at the Expanded Discount Window (EDW) was N256.571 billion, most of which was owed by five banks.Sanusi stated further that a review of the activity in the EDW showed that four banks had been almost permanently locked in as borrowers and were clearly unable to repay their obligations. A fifth bank, he added, had been a very frequent borrower when its profile ordinarily should have placed it among the net placers of funds in the market.

“Whereas the five banks were by no means the only ones to have benefited from the EDW, the persistence and frequency of their demand pointed to a deeper problem and the CBN identified them as probable source of financial instability, most likely suffering from deeper problems due to non-performing loans,” said Sanusi.To get to the root of the matter, the Governor ordered a joint examination of 10 banks by the CBN and the Nigerian Deposit Insurance Corporation (NDIC).

The 10 banks were Diamond Bank, First Bank, United Bank for Africa, Guaranty Trust bank and Sterling Bank, Afribank Plc, Intercontinental Bank Plc, Union Bank of Nigeria Plc, Oceanic International Bank Plc and Finbank Plc.By the result of the examination, which was made public on August 14, the CBN found five institutions in a ‘grave situation’ namely Afribank Plc, Intercontinental Bank Plc, Union Bank of Nigeria Plc, Oceanic International Bank Plc and Finbank Plc.

Sanusi said the Management were found to have also acted in a manner detrimental to the interest of their depositors and creditors. In exercise of the powers of his office as contained in Sections 33 and 35 of the Banks and Other Financial Institutions Act 1991, as amended, and after securing the consent of the Board of Directors of the CBN, Sanusi removed and replaced the executive management of the five banks. He injected N420 billion in the form of tier 2 capital to the five banks to enable them continue as going concern.

After the action on the five banks and the clean bill of health to the five other banks, the CBN commenced the audit of the remaining 14 banks namely: Bank PHB, Equitorial Trust Bank, Spring Bank, Wema Bank, Access Bank Plc, Citibank Nigeria Limited, Ecobank Nigeria Plc, Fidelity Bank Plc, First City Monument Bank Plc, Skye Bank Plc, Stanbic IBTC Bank Plc, Standard Chartered Bank Limited, Zenith Bank Plc and Unity Bank.The Special Examination primarily focused on assessing the health of the banks with particular focus on liquidity, capital adequacy and corporate governance.

After a review of the findings of the Special Examination report in respect of the 14 banks, the CBN announced on October 2 that nine banks had adequate capital and liquidity to support the level of their current operations and future growth. The nine banks were: Access Bank Plc, Citibank Nigeria Limited, Ecobank Nigeria Plc, Fidelity Bank Plc, First City Monument Bank Plc, Skye Bank Plc, Stanbic IBTC Bank Plc, Standard Chartered Bank Limited and Zenith Bank Plc.The 10th bank - which was Unity Bank was adjudged to have insufficient capital but not in grave situation because it had a healthy liquidity position. The remaining four banks were found to be in a ‘grave situation’ namely:Bank PHB Plc; Equitorial Trust Bank Plc; Spring Bank Plc; and Wema Bank Plc.

The CBN sacked and replaced the executive management of three banks: Bank PHB Plc, Equatorial Trust Bank Plc and Spring Bank Plc.The banking watchdog injected N200 billion as liquidity support and long-term loans in the banks adjudged in a grave situation to enable them continue normal business, while pursuing recapitalisation options. Also, it ordered Unity Bank and Wema Bank to recapitalise not later than June 30, 2010.

Clarifying the actions of the CBN, Sanusi explained that the intervention was informed by the need to save the banking system from total collapse. He said it was based on concern for the national economy as well as restoring confidence in the financial system. He stressed that weak risk management, serious liquidity shortages, sub-standard corporate governance, insolvency, among other serious problems were present in many of the banks.

"Had the capital and liquidity shortages persisted, the weak corporate governance that supported the abuse of the financial system continued unchecked, and the concentration of lending to weak business sectors continued unabated, the Nigerian financial sector would have been smothered and a systemic crisis of immense proportion would have ensued,” said Sanusi.The questions following the intervention have continued to be: What has the CBN been doing all long to return normalcy to the industry, especially after the banks stopped lending, sacked workers and their shares crashed at the stock market?

Banking Supervision

CBN’s main action after the intervention was to launch a full scale reform of the banking sector, which it anchored on four pillars - enhancing the quality of banks; establishing financial stability;enabling healthy financial sector evolution and ensuring that the financial sector contributes to real economy.” The Governor outlined the key strategies and initiatives to include: Establishment of Asset Management Corporation of Nigeria; mergers and acquisitions; categorisation of banks and formulation of licensing guidelines.The other strategies and initiatives, said the apex bank chief, include fixing the problems of the banks, tighter regulation, adoption of risk based supervision, effective consumer protection and reform of the CBN itself.

Sanusi also mentioned the adoption of hybrid monetary policy; new macro prudential rules; control of “hot” money; enthronement of directional economic policy and support of capital market development to work as an alternative to bank funding.The CBN has over the past one year issued numerous guidelines and directives to strengthen supervision in the banks as a key component of the reforms. The CBN has as part of the new measures at injecting effective and proactive supervision, subjected banks to keeping the code of corporate governance by invoking the 2006 governance code. It enforced the maximum tenor for bank directors and introduced the 10 year tenor for bank CEOs.

Besides implementing the common accounting year- end, the CBN announced the adoption of the International Financial Reporting Standards (IFRS) by all banks in Nigeria by end-2012, but subject to the approval of the Nigerian Accounting Standards Board (NASB). Full disclosure became a major issue for the banks as from July 13 when the CBN made the first pronouncement on the matter. The common- year- end to December 31, 2009 is believed to have been properly implemented.  The other measure at better banking supervision was the phasing out of universal banking. Sanusi insisted that banks having spread their tentacles in the past, neglected their areas of core competence to the detriment of the economy, which led the phasing out of that banking model. The new model is still in the process of implementation.

The CBN has also signed a strategic partnership memorandum of understanding (MoU) with the Bank Negara Malaysia (Central Bank of Malaysia) recently, to share expertise and exchange relevant information in the areas of Banking Supervision, Small and Medium Enterprises (SMEs), Microfinance, Islamic Finance, and Monetary Policy.The other areas are Development Finance Institutions, External Reserve Management, institutional arrangement for financial crisis management and resolution, Foreign Exchange Administration, Performance Management and Corporate Strategy, Leadership Development as well as Talent Management. 

The banking watchdog has also influenced new rules on margin lending as issued recently by the Financial Services Regulation Coordinating Committee (FSRCC).The Committee said: “Bank shares shall not be used in margin trading.” It said it took the decision to avert a repeat of the abuses and sharp practices that bedevilled margin trading in the run up to the capital market collapse.In a Prudential Guideline that became effective from July 1 this year, the CBN removed some of the restrictions it had earlier imposed on the credit operations of banks with a view to stimulate lending.

It also expunged some initial directives such as that the top 50 exposures of a bank should not be more than 50 per cent of the total loan portfolio and must be in at least 10 different sectors and industries; that the portfolio limit for a sector or industry rated BB and below should not exceed 10 per cent of the total loan portfolio of a bank.The other directives cancelled were: the portfolio limit of a bank for unrated sector or industry with exception of SME should not exceed 5 per cent of total portfolio; that a director or a significant shareholder should not borrow more than 1 per cent of a bank’s share capital except with the prior approval of the CBN and third that the maximum credit to all insiders should not exceed 10 per cent of bank’s share capital.

The CBN also within the year ordered an amount not below N100 million as the permissible minimum deposit in a merchant bank.The guideline also pegged the minimum paid-up share capital for merchant banks at N15 billion. The CBN is currently conducting a comprehensive review of the guidelines for the licensing of Specialised Institutions, which include Non-interest banks, Primary Mortgage Institutions, Microfinance banks, Development banks and Discount Houses.

Domestic Credit

After the CBN intervened in the sector, virtually all the banks shut their doors to borrowers.Although the apex bank is responding to the situation, it remains a major cause for worry.Explaining the situation, a treasurer with one of the banks said: “We are not yet in comfortable position on capital adequacy and liquidity ratios as to resume lending fully”.But the CBN has been responding to the challenges through its policy instruments. The monetary authority noted during its last monetary policy committee (MPC) meeting that its key policy challenges remain the negative growth in credit to the private sector, “and subsisting high lending rates in the face of declining inter-bank rates and relative liquidity surfeit in the banking system.” It added that it “will however, continue to monitor developments in the market to ensure that measures are taken to eliminate speculative demand and volatility in the market.”

The Monetary Policy Rate (MPR) has since July last year remained unchanged at 6 per cent, the lower corridor around the MPR was this year reduced by 100bps, resulting in a halving of the rate on the CBN’s Standing Deposit Facility, from 2 per cent to 1 per cent. In a bid to establish a relationship between the MPR and the prime and maximum lending rate of banks, the CBN directed banks to submit to its office their Risk-based Interest Rate Pricing Model on a monthly basis. It also directed that loan pricing would be stated as fixed spread above MPR, and shall be adjusted along with MPR movements.

The CBN has always desired to make the MPR an anchor for lending rates in the economy, and to make funds cheaper for borrowers. It extended the guarantee for all inter-bank transactions and foreign credit lines as well as pension funds’ placements with banks to June 30, 2011, in a bid to address the difficult credit market conditions. But faced with the possibility that bank lending might still remain slow given observed sub-trend growth in the sector; the erosion of the capital of the banks and the fact that there might be further write-down, the CBN has in the past one year been thinking of various other means to push credit to the real economy.

Intervention Funds   

Even where the banks are in a position to lend as indications are emerging at the money market today, some analysts believe that with interest rate on overdrafts in the 20 per cent region, most small and medium enterprises including big-time manufacturers will find it difficult to borrow and nurture their businesses.Data from the National Bureau of Statistics (NBS) shows that manufacturing sector contribution to the country’s Gross Domestic Product (GDP), which was 8.1 per cent in 1970 fell to 4.13 per cent in 2008, while capacity utilisation has been on the decline, from 70 per cent in 1975 to 48 per cent in 2008.

Putting the constraints to SME development in perspective, as related to funding, the CBN this year set up a N500 billion intervention fund to boost operational capacities in the manufacturing, Small and Medium Enterprises, the power and aviation sectors. Interest on the fund is pegged at 7 per cent. The sum of N130 billion out of the fund was recently paid to qualified manufacturers. The CBN said last week it was putting finishing touches to the guidelines for lending under the power sector intervention Fund. The guidelines are to guard lending by banks to investors and operators of power plants and others with related business activities in the sector.

Recapitalisation/ AMCON

Sanusi said last year that the final rescue for the banks would come when the institutions have recapitalised, pay- off the government and return to profitability.The CBN had mid- December last year asked potential bidders for the banks to register their interest to test the appetite for acquisitions. Also, last year, it appointed advisers to the banks and charged them with the responsibility of advising the managers of the banks and also packaging the organisations for recapitalisation.

The banking watchdog had announced it was targeting the end of September, this year for full resolution of all issues concerning the recapitalisation.The AMCON bill has been signed into law. The CBN and the banks, following a meeting of the Bankers’ Committee decided to fund the Corporation to the tune of N1.5 trillion, with banks contributing 0.3 per cent of their balance sheet to a sinking fund over the next 10 years.The selection process for the management of the corporation has commenced, and plans for AMCON to open its office before January next year.

Improved Banks Fundamentals

Banks, given their 2009 year- end reports and what were showcased so far by the 2010 reports, there are indications that they have started recuperating from the shocks of the intervention. They have realigned and refocused businesses towards resource optimisation, improved earnings and efficiency in line with their targets for the running year.

For instance, Union Bank, which ended the nine months to December 31, 2009 with a loss after tax of N281 billion, posted a group pre-tax profit of N3.55 billion for the first quarter ended March 31, 2010, a development market watchers said indicates better days ahead for shareholders and other stakeholders of the bank.The result also showed that Union Bank made gross earnings of N34.235 billion for the three months, as against N51.25 billion for the three months ended March 30, 2009. The post tax profit was N3.33 billion as against a loss of N97.88 billion in the corresponding period of 2009.

Union Bank for the half year, declared a profit before tax of N12.1 billion, which tripled the growth on its profit when compared to the first quarter of this year.

According to the result, other performance indicators of the Bank were equally impressive as gross earnings rose to N66.9 billion, representing 100 per cent increase over N34.235 billion that was recorded in the first quarter, 2010.Also, Sterling Bank recorded a pre-tax loss of N11.63 billion for the financial year to December, 31 2009 against a profit of N6.28billion in the preceding year.However, the bank posted a 137 per cent rise in pre-tax profit for its first quarter ended March 31, 2010 as it recorded N1.4 billion compared with N592 million in profit in the preceding year.

Sterling Bank declared pre- tax profit of N4.2 billion for the half year ended June 30, 2010, which shows commendable recovery from a loss of N6.9 billion in the corresponding period of 2009. The profit, according to the results, was made from gross earnings of N16.3 billion, down by 12 per cent from N18.5 billion in 2009.

However, there was a reduction of 33 per cent in the cost of funds from N8.8 billion to 5.9 billion. Also, Sterling Bank’s operating expenses decreased by eight per cent from N8.4 billion to N7.7 billion, while cost-to-income ratio fell from 87 per cent to 75 per cent - reflecting progress in the implementation of cost saving strategies and improved efficiency.Afribank recorded profit before tax for the first quarter of N2 billion and N25 billion in Gross Earnings in the first quarter, 2010. It returned to profitability in March 2010, compared with a loss of N39 billion in the corresponding period of last year. 

Intercontinental Bank Plc, has also posted a profit after tax of N1.8 billion for the first quarter ended March 31, 2010. The bank according the results obtained from the Nigeria Stock Exchange (NSE), has reported gross earnings of N19 billion for the first quarter to March 31, 2010 and a profit after tax of N1.8 billion. Bank PHB Plc has returned to profit in the first quarter ended March 31, 2010, with a profit before tax of N2.94 billion in Q1.

According to the results made available by the Nigerian Stock Exchange (NSE), gross earnings stood at N19.834 billion as against N42.8 billion in the corresponding period of 2009. Profit before tax was N2.94 billion compared with a loss of N3 billion in the corresponding period of 2009, while profit after tax stood at N2.7 billion compared with a loss of N1.3 billion in 2009.The bank also witnessed an improvement in the net asset position and in deposit base from N477.981 billion to N481.696 billion, which showed an improved customer confidence. The shares of the bank went up by six kobo to close at N1.39 per share while investors 13.883 million shares worth N18.471 million in 84 deals.

Guaranty Trust Bank (GTBank) for the eight months ended December 31, 2009, recorded increase in earnings by N61.945 billion or 61.57 per cent to N162.55 billion from N100.605 billion in the 12 months ended December 2008. Its Profit before tax for the period stood at N27.963 billion, representing a decline of about N7.366 billion or 20.84 per cent from the previous year’s N35.329 billion.The net profit dropped by N4.629 billion or 16.34 per cent to N23.686 billion, as against the N28.315 billion reported in 2008.

GTBank for the first quarter of 2010 achieved growth in earnings by 11.05 per cent to N26.75 billion from last year’s N24.088 billion, out of which PBT closed at N13.01 billion, up by 2.97 per cent from the previous N12.635 billion. Net profit increased by 2.97 per cent to N8.847 billion, as against N8.591 billion, a year earlier.

Drawbacks and Challenges

Notwithstanding all the actions put up by the banking watchdog over the past year, there have been drawbacks and challenges to the reforms as acknowledged by ardent observers of the industry.Starting with the moderation of the interest rate regime, the efforts of the CBN have met some stumbling blocks. Measures at making the MPR, the anchor for charges by banks have not been well achieved.

Credit to prime customers of banks is still attracting about 17 per cent interest, while normal lending is retained at about 19 per cent. That is notwithstanding the fact that MPR has remained unchanged at 6 per cent since July last year. Last week, the Nigerian Inter-bank Offer Rate (NIBOR) 7-Day closed at the 1 per cent region. The directive of the CBN to banks to submit their Risk-based Interest Rate Pricing Model on a monthly basis, has not helped the situation.The other challenge was pointed out by Afrinvest last week. The research firm argued that the reforms by the way it is implemented is throwing up banks with unduly large proportion for upside and downside risk potential, one of factors that could have plunged the industry to systemic crisis last year.

“Those banks that passed the initial audit benefited from the flight to safety of deposits, over those banks that were audited later,” it said, stressing that “four banks by its 2010 Nigerian Banking Sector Report - First Bank, Guaranty Trust Bank, United Bank for Africa and Zenith Bank, are dominating the industry on the strength of their average performances, measured by total assets, total loans, total deposits and shareholders’ funds.”

There is also the challenge of AMCON gathering the capacity to resolve all the non-performing loans of the banks. Some analysts have dismissed that as an impossibility, pointing that banks that are disadvantaged in the process might find it difficult to recapitalise.Renaissance Capital said in a report in the first quarter of this year that the rescued banks would need a minimum $14billion, about N2 trillion fresh capital to bounce back to business, raising fears that some of the affected banks might not to be able to raise such money.It said the fund is imperative for the banks to bring their collective capital adequacy ratios (CAR) to 10 per cent, which is the regulated minimum.

There is also the issue of shareholders’ support for the consummation of the recapitalisation process. Although the CBN has enhanced the participation of shareholders in the recapitalisation by bestowing on them the power to midwife the process and also take the final decision on who invests in the financial institutions, the shareholders are yet to withdraw suits in the court as a mark of their total agreement to the terms of the CBN.After the CBN bailed out rescued banks with N620billion and the local banks made to contribute to the funding of AMCON, the question arises as to who is better suited to buy over the banks – local or foreign interests. There are issues about fairness and national interest.

According to a market analyst, “Sanusi’s tenure will be assessed in history by the fate of the economy and what level of empowerment this has bestowed on or denied Nigerians with regard to ownership of the rescued banks and their takeover by other banks ex-post; how Nigerian businesses are being supported to grow the domestic economy; how many more jobs are being created, how poverty has been reduced and whether the new owners of the banks are actually engaging in mobilising rural deposit to reduce the size of the informal sector or just serving their already established multinational customers and their selfish interests?

There is an asset resolution company, which is the Asset Management Corporation (AMCON). The government has invested, and will still invest through AMCON, a significant amount of tax payers’ money to untie the challenges in these institutions. In picking the new owners among those that have indicated interest, some observers of the industry are calling on the CBN to express strong preferences for institutions that will compensate for the massive investment of public funds.

As one analyst puts it recently, “the dogged determination of Sanusi and his team to clean the Augean Stable remains commendable and should provide a template for other regulators to reassess their beats if Nigeria must attain economic greatness. The analyst stressed that “the exercise must not be allowed to disenfranchise Nigerian banks who will bear the brunt of the 0.3 per cent of total assets tax burden that are now hanging on the neck of banks or the Nigerian tax payers.” 

It is also been said that there are no enough legislations to prosecute the reforms. The CBN called on the government recently to enact new laws and create an environment that will improve the economy as well as offer more protection to banks against distress.The CBN Deputy Governor, Financial System Stability, Kingsley Moghalu, said that unless there is stricter legal framework and cross sector reforms, another asset bubble might be coming as banks are exposed to all sectors of the economy and segments of society.

The Deputy Governor called for a system of laws and regulatory framework for the financial sector akin to the Dodd-Frank Wall Street Reform and Consumer Act passed by the US Congress recently.He called for the re-enactment of the Banks and Other Financial Institutions Act (BOFIA) to strengthen the regulatory powers of the CBN over banks in order to engender financial stability and confidence in the banking system.Notwithstanding the challenges and the drawbacks, the general thinking is that the Sanusi- inspired reforms are well on course and will be of benefit to the industry and economy over the long-term.

Source:ThisDay