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Full Disclosure: Banks Bite the Bullet

By Lucky Fiakpa
The day of reckoning may well  be here for the banking industry as the full disclosure requirement of the Central Bank of Nigeria continues to deal severe blow on the profits of banks, Lucky Fiakpa writes

CBN building
CBN building

According to the financial statement released to the Nigerian Stock Exchange (NSE), the drop in its bottomline was occasioned by its provision for an exceptional item, associated with capital market-related loans, put at N18.5 billion.

In the result, its gross earnings grew by 31.71 per cent, from N126.5 billion in third quarter 2008 to N166.6 billion in 2009, profit before tax and exceptional items stood at N37.49 billion compared to N32.87 billion in 2008, profit before tax and after exceptional item stood at N18.94 billion, while its profit after tax stood at N10.62 billion from N24.76 billion recorded in 2008.

According to Ovia, “The reporting period under review, witnessed a number of challenges, such as falling crude oil prices, weakening of the Naira and sharp drop in share prices on the Nigerian Stock market. These resulted in the slow growth of the Nigerian economy during the period”.

Zenith Bank is not the only one to have suffered from the current challenges facing the Nigerian banking industry.
A fortnight ago, Oceanic Bank International Plc declared a profit before tax of N53.2 billion for the year ended December 31, 2008. In the results, the bank’s gross earnings increased significantly by a whopping 151 per cent to N188.22 billion as against the preceding year’s N74.9 billion.

The Group Managing Director of the bank, Dr. Cecilia Ibru, said the high turnover and profitability are the manifestation of strategies put in place by the management to take the bank to a greater height. But in keeping with the CBN’s directive of transparency and full disclosure, of the N53.2 billion profit, bank was compelled to make a provision of N41.9 billion from the profit, thus leaving only N11.3 billion as profit after tax.

The bank, Ibru said, did this in the interest of the shareholders and disclosed that the management has put in place structures to recover the loans for which the provision was made. Part of this is the strengthening of its risk management.

According to the bank’s chief executive, “the bank has made concerted efforts to reinforce its risk management capabilities, including the recruitment of skilled risk management practitioners to bolster our team, and increased focus on training, a reduction in concentration risks. Through the remainder of this year, the bank intends to maximize the recoverability of loans and has expanded its remedial and recovery units to that end.”

However, to reward its shareholders, the bank intends to give a bonus of one new share for every 10 shares held during its annual general meeting. This, Ibru said, “was in line with the bank’s policy of bonding with its shareholders and co-creating value with them”.

She then assured that the bank in the current financial year will make the shareholders happy with bumper returns on their investment.
Another bank that suffered similar fate is First Bank of Nigeria Plc. According to audited results, the bank recorded gross earnings of N218.3 billion, an increase of 40 per cent over the N155.7 billion in 2008. However, profit before tax fell by 42 per cent from N47.9 billion to N27.7 billion, while net profit stood at N12.6 billion, showing a decrease of 66 per cent from N36.7 billion in 2008.

The dip in profit resulted from the N26.1 billion provision made for the decrease in value of the bank’s investments in its asset management and trusteeship business.

The bank explained that the shares were held on behalf of clients under a guaranteed principal fund agreement and on account of the company’s proprietary investments

But First Bank ended the year with total assets of N2 trillion, an increase of 32 per cent above the N1.5 trillion in 2008.
The Group Managing Director of First Bank, Mr. Olabisis Onasanya said that despite the challenging market conditions, the bank continues to capitalise on its well established value chain in Nigeria’s financial services sector and has achieved another year of strong organic revenue growth.

He said, “Recognition of the bank as one of the strongest and most dependable banks in Nigeria, especially in a time of global downturn, has driven considerable growth in our deposit base, with the total group’s deposit liabilities increasing by 71 per cent to N1.2 trillion. Furthermore, strong year-on-year growth was recorded across all business lines.

This is a fantastic achievement and First Bank is well positioned to continue to grow its asset base supported by a sustained robust capital position with a strong capital adequacy ratio of 24.69 per cent  and stable funding.”

He added “Going forward, our growth aspirations will be driven by our commitment to attain the full benefits of scale and scope by accelerating growth and diversification of assets, revenue & profit.

“At the strategic level, we have identified three pillars that we believe are integral to our objective: they are acceleration of growth by diversification of assets, revenue and profit; service and operational excellence via a single-minded commitment to operational excellence; the design of appropriate institutional processes, systems and capabilities necessary to deliver world class service levels; performance management and people to deliver unmatched results by creating a performance culture with clear individual accountability at all levels as the foundation of all that we shall be doing over the medium-term.

“There is no doubt that the trajectory going forward would encounter pockets of turbulence. Within this prognosis, our challenge at First Bank is to build positive momentum around these three pillars and to build on our progress to date.”

Ecobank Nigeria Plc story was not different. It recorded a significant decline in its bottom line, as its profit after tax dipped by 71.43 per cent in spite of rise in its gross earnings and other financial indices. The bank posted gross earnings of N55.16 billion in its year end, December 31, 2008 financial statement, representing an appreciation of 68.62 per cent from N32.71 billion recorded in 2007. Its profit after tax and exceptional items dropped to N2.13 billion from N7.45 billion recorded in the previous year.

The drop in profit performance was occasioned by the huge provision for margin loans during the year. In fact, the huge loan provision accounted for the drop in profit performance of the group – Ecobank Transnational Incorporated, ETI.

Gross earnings for the group exceeded $1 billion for the first time during the year. Gross revenue increased by $451.33 million, from $578.77 million in the year ending December 31, 2007, to $1030.10 million in the year under review, representing an increase of 78 per cent. However, profit before tax declined by $29 million due to loan loss provisions and losses posted by new subsidiaries. Net loan loss provision for the year increased by $94 million or 495 per cent, to $113 million.

Ecobank Nigeria contributed 92 per cent of the incremental provisions. All the other regions together contributed the remaining eight percent. Included in the loan loss provisions was the sum of $54 million for margin loans in Nigeria. Although these loans are fully covered on a mark-to-market basis, the illiquid nature of the market and the inability to easily sell down meant that the bank to adopt a prudent approach.

Profit after tax also went down by $28 million or 20 per cent to $111.14 million. Profit attributable to shareholders dropped by $13 million to $94 million giving basic earnings per share of 1.39 cents, down 11 per cent.

Shareholders Support
This has been the pattern of banks that have so far made their results known and it is expected that others may not deviate from this trend, if at all, very much. However, one thing is that most shareholders seem to support the banks making the full provisions for the bad and doubtful facilities now than postponing the evil days.

Timothy Adesiyan, President, Nigerian Shareholders Solidarity Association, NSSA, in a telephone interview with Financial Vanguard, stated this much. According to him, “shareholders of like minds have agreed that the banks should fully provide for the margin loans in their books now instead of postponing the evil days.

“This will allow the banks to start the new financial year on a clean slate and be able to pay us dividend in subsequent years”.
Adesiyan says poor result should not deter banks from making full provisions for toxic assets in their books. Just like goodwill, he says, “not until it is fully written off, the bank will not be in a good position to pay dividend. The longer you carry it the longer it stands in your way so it is better to get rid of it so that shareholders can get dividend in subsequent years,” he stated.

Gbadebo Olatokunbo of the Nigerian Shareholders Solidarity Association is also of the view that banks should make full provisions for the margin loans in their books. “If there is a standard and the banks have not been following it, it is not good. They should do what is right now so that their tomorrow might be better,” he says.

He however suspects that the banks have not been having good performance all along. “If they have been having good performance, they can write off the margin loans at once and still be in good business.

“I don’t believe in sentiments. I’m a retiree too and I need dividend but that should not make us to encourage the banks to do what is not right,” he stated.

Olatokunbo blames shareholders for some of the problems associated with the margin loans episode. “Those managing the business should do their job well. But shareholders are also part of the problem. Some of us saw the problem coming but could not confront those managing the business with the truth that what they were doing was wrong after being compromised in one way or the other,” he said.

Harder They Come
But appears the harder they come for the banks, especially with the regime of the new CBN governor, Mr. Sanusi Lamido Sanusi. Only last week, the CBN came up with yet another directive that could further raise the stakes for banks.

The CBN in its determination to ensure that the banks do that which is right directed that henceforth Commercial Papers (CPs) and Bankers Acceptances (BAs) should no longer be treated as off balance sheet items. Ordinarily, there is nothing wrong with banks issuing these instruments in the course of their operations. But over the years, the Nigeria Deposit Insurance Corporation (NDIC) has come to observe that some banks have been abusing the use of CPs and BAs to understate their loan portfolios and deposit liabilities as well as window-dress financial statements through creative accounting in the name of balance sheet management.

“The use of BAs and CPs to window dress accounts as well as manages non-performing loans assumed a worrisome proportion during the year and required urgent regulatory action to stem the tide especially, as some banks used them to cover their excessive lending activities,” the NDIC reports stated.

This might have prompted the apex bank to issue the July 15, 2009 circular. Titled, “Submission of Schedule of Commercial Papers (CPs) and Bankers Acceptances (BAs)”, the apex bank stated that, all banks were to submit to the Ag. Director of Banking Supervision a schedule of their Commercial Papers (CPs) and Bankers Acceptances (BAs) of N20 million and above bought and sold for counter-parties. The details should include the names of the counter-parties and the amounts involved.

Announcing the suspension in a circular titled, the CBN noted that it has, “observed with concern the abuse of the use of Bankers Acceptances (BA’s) and Commercial Papers (CP’s), by Deposit Money banks and Discount Houses.

“The abuse ranges from repackaging of troubled assets into CP’s/BAs for purported sale to other institutions, non-existence of underlying transactions for the CPs/BAs, and frequent rollovers beyond the allowable tenor. In addition, CPs and BAs are often used as the instrument of choice for raising liquidity in an attempt to conceal the extent of dependence on the Inter-bank market for banks funding needs.

“Consequently, the sell-down of BAs and CPs as off balance-sheet instruments is hereby suspended with effect from the date of this circular. All maturing CPs and BA’s are to be either fully liquidated or treated as on balance-sheet items.

“If a bank is likely to exceed its single obligor limit as a result of this circular, it is advised to seek the CBN’s approval for exemption in line with BOFIA, Section 20(1)A as amended, subject to the loans being performing and a plan for regularization by 31st March 2010.”

The suspected abuse of these instruments by banks, some analysts have said is not out of place. Often, when a bank grants a loan and it becomes problematic, to avoid making provision as required by the prudential guidelines, the bank would repackage the loan into a CP or BA and also move the same value from its deposit base or also repackage the deposit of a customer of the same value as a CP or BA. By so doing the bank gives the impression that the deposit was to fund a CP or BA issued on behalf of a company raising money through it.

This then enables the bank to remove the loan and the corresponding deposit liability from its balance sheet and it then avoid making provision for the non-performing loan. And because its deposit base is now understated, its liquidity ratio and cash ratio i.e. proportion of deposit the bank is required to keep in liquid assets and cash improves, off course in its books. Also the amount of deposit insurance premium paid by the bank to NDIC reduces. This is based on the total deposit liability of the bank at the end of the year.

Challenges Ahead
Given the CBN directive, a good number of banks could encounter further problem as they try to comply. It is said that a good number of the banks are involved in this practice. Some people have even predicted that, not more than ten banks would meet the 25 per cent liquidity ratio required by the apex bank going by the requirements of the circular.

From the foregoing, it appears most banks may have to embark on intensive deposit mobilisation to address the expected short fall in their liquidity ratio and secondly to cover up the artificially created transactions in their balance sheet.

By the time these are added to the common year policy which requires all the banks to end their financial year by December 31 every year then the industry would have been effectively goaded on to the path of second phase consolidation.


Comments expressed here do not reflect the opinions of vanguard newspapers or any employee thereof.