By Omoh Gabriel, Business Editor
LAGOS â€” NIGERIA Deposit Insurance Corporation, NDIC, has said that as at the end of 2008, the Financial condition of banks in the country were generally satisfactory.
This means that the banksâ€™ condition deteriorated between January and July 2009, necessitating the action by the Central Bank, CBN, on August 24, which led to the sacking of Managing Directors and Executive Directors of five banks.
The NDIC said that although about three banks were problematic as at December 2008, but that did not pose any threat to the financial soundness of the industry as they accounted for less than five per cent of the industry statistics.
The CBN Governor, Mallam Lamido Sanusi, while announcing the sack of Managing Directors of five banks on August 24 said the banksâ€™ officials were removed due to high level of non-performing loans in the five banks which was attributable to poor corporate governance practices, lax credit administration processes and the absence or non-adherence to the banksâ€™ credit risk management practices.
He said, â€œAs at June 4, 2009, when I assumed office as Governor of the CBN, the total amount outstanding at the Expanded Discount Window, EDW, was N256.571 billion most of which was owed by the five banks. A review of the activity in the EDW showed that four banks had been almost permanently locked-in as borrowers were clearly unable to repay their obligations.
A fifth bank 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.â€
But the NDIC in its 2008 annual report said â€œInsured banksâ€™ financial condition was generally satisfactory during the year under review in spite of the global financial meltdown and the turmoil in the domestic stock market. Out of the 24 banks in the industry as at the end of 2008, twenty-one were rated sound and/or satisfactory, two marginal and one was rated unsound just like the preceding year.
â€œThe market share of assets, credits and deposits of the unsound bank represented 0.84 per cent, 1.64 per cent and 1. 40 per cent of the industryâ€™s total respectively. The two marginal banksâ€™ total market share of assets, credits and deposits were 3.3 per cent, 3.75 per cent and 3.96 per cent of industry total respectively.
The three banks accounted for less than five per cent of industry statistics and posed no threat to the financial soundness of the industry.
According to the NDIC â€œDuring the period under review, industry shareholdersâ€™ funds increased by 62.91 per cent from N1.712 trillion in December 2007 to N2.789 trillion by the end of December, 2008. That significant increase was expected as the proceeds of some of the banks that accessed the capital market in 2007 were brought into their balance sheet in 2008.
â€œIn spite of the significant increase in shareholdersâ€™ funds, the average capital to risk-weighted asset ratio in the system only increased slightly from 20.94 per cent in 2007 to 21.91 per cent in 2008. That was due to an increase of 56.64 per cent in risk-weighted assets compared to a larger increase in total qualifying capital of about 63.91 per cent.
Two banks recorded capital adequacy ratio of less than 10 per cent. The position would be materially different if adjustment was made for banksâ€™ exposure to the capital marketâ€ it said.
According to the NDIC report â€œThe economy witnessed a significant growth in total credits extended by universal banks in 2008 just like in the preceding year. Like in the 2007, the major reasons for the growth could be adduced to increased shareholdersâ€™ funds, significant deposit growth through expanded branch network.
The total credit granted by insured banks increased by 58.33 per centÂ from N4.68 trillion to N7.41 trillion between December 2007 and December 2008.
â€œFollowing the same trend in the growth in credit, insured banksâ€™ non-performing credits increased by about 19.46 per cent over the one year period from N387.99 billion in December 2007 to N463.49 billion in December 2008.
The Corporation is conscious of the risks associated with credit boom and would closely monitor banksâ€™ credit portfolio in order to protect depositorsâ€™ interest. While total credit stood at N4.676 trillion in 2007, it rose to N7.411 trillion in 2008.
Non-performing credits, the NDIC said, had a record of N387.99 billion in 2007 rose to N463.49 billion in 2008. Shareholdersâ€™ funds which had a record of N1.712 trillion in 2007 rose also to N2.789 trillion in 2008. The NDIC report said that the ratio of non performing credit to total credit as at December 2007 was 8.3 per cent but declined to 6.25 per cent in 2008. Similarly, the ratio of non-performing credit to shareholdersâ€™ fund which stood at 22.66 per cent in 2007 dropped to 16.62 per cent in 2008.
The NDIC report stated: â€œNotwithstanding the significant growth in total credits and total deposit liabilities witnessed in the industry in 2008, earnings and profitability declined during the year. There were increases in both income and expenditure components with the former growing at a lower rate. Net Interest income rose by 6.98 per cent from N905.11 billion in 2007 to N968.33 billion in 2008.
The non-interest income, increased by 12.26 per cent from N585.09 billion to N656.81 billion during the same period. Recoveries from delinquent facilities showed an appreciable increase of 51.85 per cent from N22.937 billion to N34.830 billion over the same period.
Operating expenses rose by 18.14 per cent from N891.332 billion at the end of 2007 to N1.053 trillion at the end of 2008. Given the higher increase in expenses, relative to income, the industryâ€™s total profit before tax declined marginally by 2.6 per cent from N619.96 billion in 2007 to N603.88 billion as at end of 2008.
That position reflected on return on assets which declined from 5.92 per cent in 2007 to 3.94 percent in 2008. In the same vein, return on equity also decreased from 36.83 per cent to 22.12 per cent during the period under review
The NDIC stated that â€œthe industryâ€™s average liquidity ratio declined sharply from 64.83 per cent as at the end of 2007 to 44.17 per cent by the end of 2008. That was a decrease of 20.66 percentage points when compared with what obtained in 2007. Loans to deposit ratio was almost at par in both years.
Also, as in the preceding year, two insured banks did not meet the minimum liquidity ratio as at December 2008″, the NDIC report disclosed.