By Lucky Fiakpa
The Central Bank of Nigeria under Sanusiâ€™s watch made scape-goats of five managing directors of banks over the weekend for serious liquidity strain as it has made it known from the onset that it would not accept any form recklessness in its oversight functions of banks in the country, Lucky Fiakpa writes
The meeting with chairmen and chief executive officers of banks last Friday had all the signposts of something serious in the offing. The first time a meeting of this nature was called was in June 2004, when the immediate past CBN governor, Prof. Chukwuma Soludo announced the phenomenal consolidation agenda for the banks. The consequence was the drastic reduction of the number of banks from over 90 to 25.
Given the urgency and the calibre of those invited to the meeting the media speculated before the meeting that some boards of the banks with some CEOs could be eased out in the process. The media were proved right.
As the Central Bank of Nigeria, CBN, governor, Mallam Sanusi Lamido Sanusi, read his address last Friday the tone was clear that the end has come for five of the ten banks audited so far. The affected institutions are Intercontinental Bank Plc, Union Bank of Nigeria Plc, Oceanic International Bank Plc, Finbank Plc and Afribank Plc.
The CEOs that have been sacked by the CBN are Erastus Akingbola (Intercontinental Bank); Okey Nwosu (Finbank); Sebastian Adigwe (Afribank); Mrs. Cecelia Ibru (Oceanic Bank); and Bartholomew Ebong (Union Bank).|
To take over from them, at least in the interim, are Mahmud L. Alabi, Intercontinental; Mrs. Suzanne Iroche, Finbank; Nebolisa Arah, Afribank; John Aboh, Oceanic Bank; and Mrs. Funke Osibodu, Union Bank.
While announcing the sack of the five managing directors and their executive directors, the CBN governor noted that as far as October last year, some of the banks showed serious liquidity strain and had to be given financial support by the Central Bank in the form of an â€œExpanded Discount Windowâ€ (EDW) where the CBN extended credit facilities to these banks on the basis of collateral in the form of Commercial Paper and Bankersâ€™ acceptances, sometimes of doubtful value.
â€œAs at June 4, 2009 when I assumed office as Governor of the CBN, the total amount outstanding at the Expanded Discount Window was N256.571 billion most of which was owed by the five banks.
â€œA 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 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€œThe impact of the situation of these banks was being felt by the market in different negative ways. Because of this strain in their balance sheets, the banks pushed up the interest rate paid to private sector deposits and their competitors had to follow suit.
They also contributed to the destabilization of the inter-bank market as many of their competitors were unwilling to take an unsecured risk on them. It was primarily because of these banks, or at least some of them, that the CBN took the step of guaranteeing the inter-bank market when it stopped granting new lines under the EDW. Without that guarantee, almost four banks would not have been able to borrow in the inter-bank and would probably have collapsed.
â€œAs you are aware, we guaranteed the inter-bank market to give us the time to conduct a thorough diagnostic of the banks and ensure that appropriate remedial action is taken. At least four of the banks in question have since the guarantee came into force either remained heavy users of funds at the EDW or drawn heavily from other banks under cover of the CBN guarantee to wind-down at this window. In all events, it is clear that they do not have the ability to meet their obligations to depositors and creditors as they are in a grave situation,â€ he stated.
In view of the aforementioned circumstances, according to him, he instructed the Director of Banking Supervision of the CBN to carry out a Special Examination of the following five banks: Afribank Plc, Finbank Plc, Intercontinental Bank Plc, Oceanic Bank Plc and Union Bank Plc.
The examination was conducted by a joint team of CBN and NDIC officials. The major findings on the five banks included:
Â·Â Â Â Excessively 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 bankâ€™s credit risk management practices.
Thus the percentage of non-performing loans to total loans ranged from 19% to 48%. The 5 banks will therefore need to make additional provision of N539.09 billion
Â·Â Â Â The total loan portfolio of these five banks was N2,801.92 billion. Margin loans amounted to N456.28 billion and exposure to Oil and Gas was N487.02 billion. Aggregate non-performing loans stood at Nl,143 billion representing 40.81%
Â·Â Â Â From 1 and 2 above, it is evident that the five banks accounted for a disproportionate component of the total exposure to Capital Market and Oil and Gas, thus reflecting heavy concentration to high risk areas relative to other banks in the industry
Â·Â Â Â The huge provisioning requirements have led to significant capital impairment. Consequently, all the banks are undercapitalized for their current levels of operations and are required to increase their provisions for loan losses, which impacted negatively on their capital. Indeed one is technically insolvent with a Capital Adequacy Ratio of (1.01%). Thus, a minimum capital injection of N204.94 billion will be required in the 5 banks to meet the minimum capital adequacy ratio of 10%
Â·Â Â Â The five banks were either perennial net-takers of funds in the inter-bank market or enjoyed liquidity support from the CBN for long periods of time, a clear evidence of liquidity. In other words, these banks were unable to meet their maturing obligations as they fall due without resorting to the CBN or the inter-bank market. As a matter of fact, the outstanding balance on the EDW of the five banks amounted to N 127.85 billion by end July 2009, representing 89.81% of the total industry exposure to the CBN on its discount window while their net guaranteed inter-bank takings stood at N253.30 billion as at August 02, 2009. Their Liquidity Ratios ranged from 17.65% to 24% as at May 31, 2009. (Regulatory minimum is 25%).
Even so, the CBN governor noted that three of the bank systemically important (accounting for more than five percent of Assets and Deposits in the Banking System) and together the five banks account for 39.93 per cent of loans, 29.99 per cent of deposits, and 31.47 per cent of total assets as at May 31, 2009.
Given the extent of the asset quality problem leading to liquidity stresses, and the variety of stress points on the banksâ€™ balance sheets, Sanusi noted that failure to act to secure the financial health of these banks will clearly place the system at risk. â€œThe Central Bank has a responsibility to act to protect all depositors and creditors and ensure that no one loses money due to bank failure. The Bank also needs to move decisively to remove this principal cause of financial instability and restore confidence in the Banking System.
Consequently, he said, â€œhaving reviewed all the reports of the examiners and the comments of the Directors and Deputy Governors, I am satisfied that these five institutions are in a grave situation and that their management has acted in a manner detrimental to the interest of their depositors and creditors.
â€œTherefore, in exercise of my powers 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, I hereby remove the Managing Directors and the Executive Directors of the following banks from office with effect from Friday, August 14, 2009,â€ he declared.
However to avoid a run on the bank, the CBN approved N400 billion facility to tidy the affairs of the bank pending when they would be properly recapitalized.
Problem of the Banks
The problem of the sector has to do with the huge toxic assets in their books and the CBN directive to them to make full disclosures while mandating the banks to make provisions for such debts in their accounts. Eight banks have so far made provisions of about N124 billion in their current financial reports under the provisioning agenda, with fears that funds of shareholders and customers could be compromised, given the size of the bad debt stock.
Some banks are not only exposed to margin loans, they are also exposed to failed loans granted to importers of petroleum products. The total exposure of Intercontinental Bank alone to the three oil marketing firms translates to almost N36 billion. This excludes loans to other sectors and margin loans for which eight banks have already made provisions of about N124 billion.
The companies include Capital Oil and Gas Industries Limited, owned by Patrick Ifeanyi Uba, said to be owing N4,350,080,676.00; Rahamaniyya Oil and Gas Limited, owned by Abdulrahaman Musa Bashir, N12,858,892,054.00; and Tanzilla Petroleum Company Limited, promoted by Alhaji Shehu Badamasi, N18,589,143,492.37.
Oceanic Bank on the other hand, had declared a profit before tax of N53.2 billion for its 2008 financial year. Going by the directive of the CBN for full provisions for all its toxic assets, a whopping N41.9 billion was written off the profit as provision for bad and doubtful debts leaving just N11.3 billion as profit after tax.