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Anxiety grips banks over proposed niche banking, begin sale of subsidiaries

By Babajide Komolafe
In apparent reflection of increasing  apathy to the Holding Company arrangement under the proposed new niche banking model, a number of banks have begun moves to sell off their subsidiaries.

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Financial Vanguard investigations revealed that the thinking of most bankers is that the Holding Company arrangement is very difficult and problematic to implement. It is believed this arrangement might lead to gross undercapitalisation in banks with huge investment in subsidiaries.

There is also concern over the ownership of the Holding Company vis-à-vis the existing shareholding arrangement in most banks.

They also pointed out that Holding company model have huge cost implication and impact on banks just like during  the consolidation exercise

The CBN in March announced the suspension of universal banking replacing it with a new banking model designed to make banks focus on their core banking business by operating as stand-alone businesses.

Under the new model, a bank that has subsidiaries could either sell off non-banking subsidiaries, or evolve into a holding company model where a non-operating holding company holds investment in the bank and in the non-core banking operation in a subsidiary arrangement.

Managing Director/Chief Executive, Ecobank Nigeria PLC, Mr Jibril Aku explained to journalists in Lagos last week that the new model will pose significant challenges for banks that have invested heavily in subsidiaries. “For some banks, by the time the assets of the subsidiaries are separated from their books and transferred to the holding company, they may not have enough capital to do banking business and would have to raise fresh capital.”
A chartered secretary in one of the leading accounting firm confirmed that evolving into holding company model will pose challenges to the capital of the banks with huge investment in subsidiaries.

“They will definitely have undercapitalisation problem,” he told Financial Vanguard, adding that “the holding company model will be tantamount to stripping the banks naked capital-wise.”

A top management staff in one of the leading banks disclosed to Financial Vanguard that the thinking in the bank is that the holding company model is very difficult to implement. He said one major issue of concern is the ownership of the holding company. He said while the thinking is that the company would be owned by the shareholders of the bank, how this will play out without generating tension and causing confusion is a major source of worry.

He disclosed that a year and half  ago, the bank had wanted to transform its group structure into that of a holding company, but its application was turned down by the same apex bank, which expressed doubts over the workability of the holding company  structure it is about to introduce. He said some of the areas of concern for the apex bank thn are also the ones causing apathy to the one being proposed.

A board secretary to one of the consolidated bank stated that there are grave implications to the holding company model especially in terms of cost of transiting to a holding company.  He said that operators are also confused about what the CBN mean by “Non-operating”  holding company, and the issue of who will regulate the holding company, as well as who will hold the shares of the company.

He said that banks wanting to evolve into a holding company will face huge expenses vis-a-vis taxes, stamp duties, process and procedures required for the formation of the comapny. He said that it would be similar to the experience of the banks that consolidated during the consolidation exercise. “The CBN promised to help banks defray the cost of consolidating but this did not happen.

The CBN did not discuss with the necessary agencies like Corporate Affairs Commission (CAC), Nigeria Accounting Standard Board (NASB) and the Federal Inland Revenue Services (FIRS), as a result these agencies insisted that the banks pay all the necessary taxes, fees, stamp duties etc which run into millions of naira for the banks.

We may be heading in that direction  because the holding company model dimension is beyond the CBN, the process leading to formation of such company cuts across many agencies and institutions, which would be difficult to bring under one umbralla to get a concession for banks that would reduce the cost implications”, he said.

Investigation revealed that some banks, in apparent bid to avoid the challenges of the holding company model, particularly the challenge of capitalisation, are already embracing the option of divesting from non-banking subsidiaries. It was gathered that some banks have divested from the insurance subsidiaries through management buyout.

Other banks, it was gathered are considering other alternative options of selling their subsidiaries in order to ensure maximum value benefit. It was gathered that, instead of management buyout, the shareholding of the banks in the subsidiaries might be cornered by powerful shareholders and top management officials.

According to sources, “The truth is that some people will make money from the disposal of the subsidiaries whether it is done through management buyout or cornered by shareholders.”

Despite these concerns and general apathy, and the fact that CBN is yet to come out with the final guidelines for the transition to the new banking model, First Bank of Nigeria Plc last week announced plans to  restructure  its operations to create  five groups under a holding company (HoldCo) that will be listed on the stock exchange.

Under the newly proposed structure of First Bank, all the Managing Directors of the five groups would be board members of the HoldCo and would therefore no longer report directly to the Group Managing Director but to the HoldCo, which is likely to be chaired by Oba Otudeko, who is currently the chairman of First Bank.

Going by the proposed configuration, which may ultimately lead to the redeployment of some of the managing directors of its subsidiaries, First Bank intends to collapse all its subsidiaries into five groups namely: FBN Emerging Businesses; Insurance Group;  Offshore Banking and First Bank of Nigeria Ltd, which will stand alone.

The Emerging Businesses group will house FBN Mortgages, FBN Microfinance Ltd and First Registrars Nigeria Ltd; the Insurance Group will comprise FBN insurance Brokers and a Life Assurance Company, which would be formed in conjunction with Sanlam – the biggest Assurance Company in South Africa .

The Offshore Banking, on the other hand, includes FBN UK ; South Africa Representative Office; The Paris Representative Office and FBN Beijing, while the fifth is First Bank Nigeria Ltd, which houses only its Bureau De Change subsidiary – FBN Bureau De Change.

First Bank’s Chief Strategy Officer, Mr. Onche Ugbabe, in an investor conference call confirmed the transition plan of the bank but refused to give details. He was quoted by Reuters to have said that the bank would likely be de-listed to be replaced on the Stock Exchange by the group holding company.

“The group holding company will be the listed entity and will be 100 per cent owner of the bank, as well as of the other subsidiaries,” Ugbabe told an investor conference call.

Some industry watchers, however, said that the bank’s plan is tantamount to jumping the gun except it already has information of details of the CBN guidelines on the new banking model. They said that if it turns out that the bank is acting on privileged information on the final outcome of the guidelines, it would be an indictment on the CBN and an abuse of office.

The CBN in the draft review of universal banking issued March 30th said that the suspension of universal banking was to forestall another banking crisis in the country. It stated, “Banks in Nigeria currently carry out a wide range of banking and non-banking services, which include insurance, investment advisory, asset management services, etc. by virtue of the universal banking licence regime.

The regime, however, has exposed banking business to greater risks that challenge the stability of the financial system. As part of CBN’s blueprint for reforming the Nigerian financial system, which includes the enhancement of the quality of banks, financial system stability and evolution of healthy financial sector, the CBN is implementing strategic imperatives to prevent a reoccurrence of the recent past events in the Nigerian banking industry.

CBN said its primary objectives for the current reform exercise include: Depositor/consumer protection by ring-fencing “banking” from non-banking business; Ensuring effective regulation of the entire business of “banks” while facilitating a business model that is supportive of their growth aspirations; Redefining the licensing model of banks and articulating rules/guidelines to guide bank operations going forward; Facilitating the enhancement of risk management at “Group Enterprise” level to enable management and shareholders fully understand and address risks from a holistic perspective.”


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