Doing Business with Zain is suicidal – Dealers

It would seem as if major dealers of GSM network giant, continues here.

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OCEANIC BANK, BANK PHB AND STERLING BANK GET CBN LIFELINE

L-R, Cecilia Ibru, Oceanic; Francis Atuche, BankPHB; Yemi Adeola, Sterling

L-R: Cecilia Ibru, Oceanic; Francis Atuche, BankPHB; Yemi Adeola, Sterling

Nigeria’s version of the global credit crunch might have crystalised into a reality that may not be easily wished away. Reports from sources inside the Central Bank of Nigeria asserted that three banks in Nigeria have been given lifelines to shore up their liquidity standing. These banks according to the source are; Oceanic Bank Plc, Bank PHB and Sterling Bank. With the exception of Sterling Bank that secured a N90billion lifeline, the other two got N100billion funding in what banking industry analysts said is akin to a financial bailout for the banks.

This is coming on the heels of a meeting of chief executives of banks held on Tuesday, 15 October 2008. The high point of that meeting was the decision by the banks’ chief executives to formally request the Federal Government to intervene in the nation’s financial sector to forestall the effect of the ongoing global financial crisis on the system.

The committee of banks chief executives also agreed at the meeting to request the Federal Government to intervene in the nation’s financial market through a package of measures similar to those introduced in developed countries and that the Central Bank (CBN) should continue to support the interbank money market.

Reports indicated that the bankers would have preferred the United States of America and Europe’s option where government directly intervened to inject funds into selected crisis ridden banks and, in some cases, nationalizing the financial institutions that were strategic to the main-stream banking public but whose liquidity profile had become moribund.

Sources inside the Central Bank of Nigeria informed that the CBN Governor rather opted for the fiscal management approach. The CBN, had, before the meeting of the banks chiefs, granted the banking industry a concession through a circular directive of October 2, 2008 to restructure some of their capital market exposures to December 31, 2009. Interpreted, this concession allows banks not to make provision for non performing loans and other facilities that had gone into the nation’s capital market that had taken a dive for the deeps since March, 2008.

“Apparently, the concession was not enough to stave off the simmering threat of illiquidity banks were experiencing.” The CBN source said. “In response to the appeal of the banks chiefs, the CBN offered the option of an expanded discount window operation. The key elements of the expanded discount window operation provided the opportunity for banks that need to assuage their liquidity problems to use short term financial instruments, like overnight standing facility, treasury bills, federal government bonds and non-federal government securities as collateral to secure long term funds from the CBN. You know the CBN conducts liquidity mop up of the money market by selling treasury bills and also sell bonds to financial institutions, normally, treasury bills are due in 30 days while bond are due in period ranging from 90 days to 180 days. Now, to help the liquidity problems in the banking sector, the CBN, with the expanded discount window, allows the banks to present these short term instruments which the CBN will use as collateral to provide funds for them for repayment period of 365 days.” The source explained.

This option does not seem to have been effective, the Nigeria Inter Bank Official Rate, the rate at which banks lend themselves money, have continued to increase, spiking to as high as 21 percent last week. This may not be unconnected to the fact that just a few banks are in the position to lend money to needy banks. Fortune&Class Weekly reported last week that many banks chief executives continued to troop to First Bank Plc, to negotiate and secure funding to keep their operations going.

BANK MDs TROOP TO FIRST BANK FOR BAIL-OUT…FINANCIAL INSTITUTIONS REJECT SHARES AND PROPERTY AS COLLATERAL

First Bank of Nigeria might have become the unofficial lender of last resort for many banks currently experiencing liquidity problems. A bank is said to experience liquidity crisis when it can not support its short term obligation to its customers by itself. Thus to continue to serve the needs of its customers, the bank may have a recourse to another commercial bank which may lend it the short term fund, usually for a period of between seven days and 90 days.

Traditionally, the Central Bank of Nigeria is supposed to be the lender of last resort for banks and other financial institutions, but FORTUNE&CLASS cross checks in the banking industry showed that rather than many commercial banks approach the CBN to augment their liquidity position, most of the banks managing directors opted to seek the support of the management of First Bank to provide short term funding support for their operations.

“I can tell you that most of the banks managing directors, these even include so called first tier (banks that are supposed to have more than a billion dollar capital base) troop to First Bank to negotiate funding support.” A banking industry insider said.

The option of adopting First Bank in the rather unusual role of a lender of last resort might not be unconnected with many commercial banks efforts to shy away from the official channel of funding provided by the CBN so as not to be labeled as desperate to survive and consequently provide ammunition for the de-marketing campaigners that are going around the sector, insinuating the parlous state of health of some banks on account of their liquidity position.

“It is easy for bankers to know who is applying for what with the CBN.” A senior banker said. “But negotiating and securing funds from a colleague banking institution has all the trappings of confidentiality and utmost secrecy. So, I think, these other banks would rather prefer to relate with First Bank on the inter-bank lending platform. At least, there is nothing illegal about that and as far as they are concerned, other practitioners and the public are not privy to these negotiations.” The banker explained.

Though the inter-bank lending platform is an organic relationship channel in the banking industry, however, concerned members of the board of directors of the bank are becoming quite uneasy with the load of demands from other banks.

A source in First Bank informed that the bank is becoming more serious with risks control measures.

“This is not a recent development. First Bank has been experiencing a deluge of demands for lending from other banks over the last six to seven months. I think that at one of the board of directors meeting, board members directed the management team to be more circumspect about their lending to these other banks.” A First Bank insider revealed.

The irony of banks seeking out bridging funds for their operations is not limited to beseeching First Bank, the industry is already abuzzed with banks chasing after deposits from the banking public in preference to approaching the CBN. The unofficial explanation for this action has the same texture with the one given by insiders for the First Bank option. Banks, industry sources said, would rather prefer to go after deposits in the public domain than to approach the CBN where data of their application for funding could be used against them when the CBN make public such data.

On the whole, nerves are gradually getting on the edge in the banking industry as interest rates and other related data show an escalation that are, increasingly becoming alarming signals.

“Even the illiterate can read the signs.” Ori Adeyemo, a forensic accountant said. “These banks are chasing after deposits with tempting offers beyond the market rate, they are not bothered with the implication for the cost of funds both to their operations and to the borrowers. Of course, we know that they are only interested in making their liquidity position look good as their different year end draw to a close. Despite the figures the CBN make public, you won’t believe that interest rate and other charges for loan in many banks are adding to about 34 percent of the loan offered. And that is where the borrower is lucky to get a bank to provide the loan. The simple truth is that lending activities have reduced significantly. That is a fact.” Ori argued.

The general impact on the liquidity position may have been further indicated with the considerable increase in the Nigerian Inter Bank Offer Rate (NIBOR) (the NIBOR is the rate at which banks lend short term funds to each other) CBN data on the NIBOR as at the preceding week, released last week, showed that the 7-day NIBOR at the inter bank market transactions increased by 123 basis point to close at 18.14 percent from the week before figure of 16.92 percent.

The 90-day NIBOR also closed higher in the same period from 17.42 percent to 17.96 percent.

“Is it not clear that there is a situation in the banking industry if banks are lending to themselves at these high rates? You can imagine what rate they will lend to their customers. Even at that, it is becoming increasingly difficult for some banks to secure funds from the inter-bank lending platform because the strong banks are considering exposures to them as highly risky.” Bisi Iyaniwura, a lawyer with specialized practice in banking and corporate law said.

Meanwhile, it has been revealed that some financial institutions now reject collaterals in the form of shares and property and even treasury bills as securities for loans.

“FORTUNE&CLASS gathered that a second tier bank had approached a discount seeking its (discount house) assistance to secure a N150 million short term fund for its operations. However, after the discount house which is a subsidiary of a another first tier bank sought the position of its principal, the first tier bank rejected all the traditional forms of securities like shares, treasury bills and property the fund seeking bank was willing to provide.

“This, ultimately, foreclosed the funding negotiation.” A source privy to the negotiation informed that the discount house demanded for trading securities.

“They said they would prefer collateral that can be easily turned to cash like goods in warehouses and some other strange stuffs.” The source informed.

REAL ESTATE INVESTMENT MAY BE IN TROUBLE SOON – EXPERTS WARN

Many investors have taken a flight to the safety of real estate in the aftermath of the worrisome protracted correction that had turned the Nigerian stock market into the grazing ground of the bears with stock prices continuously hitting new bottoms by the day.

Analyzing the prospects of a downturn in the real estate sector, a second tier bank managing director explained that the frenzy of investors’ movement to the real estate sector would end up in creating artificial value for property which, as result, will lead to a correction in the sector.

“Everybody is now rushing to the real estate sector because the stock market is no longer providing the kind of capital appreciation we witnessed up to March this year.” The bank’s MD observed.

“But the problem I see is that not many people are giving consideration to proper valuation of property. Like it happened in the stock market, the herd mentality is being enacted in the real estate sector, especially those that are rushing to take position in highbrow areas. For instance, in the Lagos area, most investors think that properties in the Lekki-Ajah corridor would continue to appreciate forever. This is a wrong notion because the price of these properties is high at this moment for reasons of high demand pressure.

“What I believe will eventually happen is that properties would soon be priced out of reach of usage. When you get to that point, people that had bought into these properties with intent at trading them off may not be able to free their investment because there would be nobody to buy, even letting may no longer be feasible because of over pricing. When we get to this scenario, the only plausible response would be another desperate bid to get out of the sector; the consequence would be too many properties asking to be bought by too few buyers. This leads to price crash” The MD argued.

“I will counsel that anybody who wants to go into property should consider newly developing areas that are just growing so that they can buy cheap and tend the properties with a medium to long term view.” He advised.

Mr. Ori Adeyemo, a forensic accountant, however, reviewed his consideration of the fate of the real estate sector from the background of the banking credit relationships with their customers.

“The logic is simple enough. The two most reliable forms of collateral for Nigerian banks are stocks and properties. Now with the protracted fall in the stock prices, stocks that have been pledged as collateral to banks have become more or less worthless such that stocks are no longer popular with banks as collateral.

“But there is a tie-in somewhere in the credit transaction between banks and their credit customer. Most customers had pledged their properties as collateral to secure credit to finance their stock market transactions, some had gone ahead to use the money from the credit transactions from their banks as margin participation funds with their stockbrokers and in some cases, their banks.

“Of course, I had always warned that the stock market was headed for a crash, but not many people heeded my call. Now that we found ourselves in this situation of price falling endlessly, it translates to mean that banks cannot redeem their funds from selling pledged stocks, so the next would be to start offering the properties pledged as securities in the open market in the desperate bid to recover their money from their credit customers. You will expect that so many properties would be in the market at the same time competing with those other properties investors had taken position in. The result is a saturation of the properties market on the supply side. What I see is properties prices falling drastically.

“At this point in time, I advise the average investor to remain calm and proper evaluation of whatever is his or her next investment step because situations tend to change drastically at time like this.” Adeyemo suggested.