CAPITAL MARKET CRASH: THE CASE AGAINST THE BANKS

EFCC Boss

EFCC Boss

When the Director-General of the Securities and Exchange Commission demanded that some banks’ chief executives that had become richer than their banks should be questioned, it was the first formal acknowledgement of the abuses some commercial banks chief executives perpetrated in the Nigerian stock market while the gains and benefits in the market were on the upward swing.

Yet in a report filed by Reuters, a news agency, and published in various national newspapers in August 2007, it had become apparent that there were wary signs of obvious manipulations in the market for the benefits of a few, especially, banking chiefs.

“Investors in Nigeria’s burgeoning stock market are seeing danger signals that the recent rally is turning into a bubble,” the report filed in the third quarter of 2007, had observed .

“Concerns focus on banks, where share price growth has been spectacular since a wave of consolidation in 2005. Most bank stocks have more than doubled in value this year (2007) alone — some have risen by more than 500 per cent — and the majority now trade at more than 20 times their expected 2008 earnings,” the report alerted.

Furthering its alarmed reading of the stock market back in 2007 when it seemed everybody was a winner in the stock market, the Reuter report added:

“Investors say these multiples are unsustainable, even for a fast-growing “pioneer” market like Nigeria, where investor confidence has been growing steadily since economic reforms began in 2003. The report quoted Mr. Jonathan Chew of Imara Asset Management UK Limited which had $25 million invested in Nigerian securities back then as saying that:

“All the indicators of a market going out of control are here, when the entire retail sector is talking about stocks and shares, you know it is getting toppy,”

Reuters had observed then that fears of a bubble in the banking sector have mounted on reports that some banks were engaged in highly leveraged share purchase schemes through stockbrokers. The Reuters 2007 report supported this claim with the opinions of notable operators in the market.

“One senior bank executive said he knew of one case where a capital market operator borrowed six billion naira from a bank to invest in that bank’s shares.” The report asserted while quoting Bismarck Rewane who the report described as a consultant with Financial Derivatives Co. in Lagos who agreed that the practice (highly leveraged share purchase scheme) was widespread.

“Margin trading is the biggest gamble in town right now. It’s very dangerous,” Rewane was reported to have said.

The Reuters report also quoted Godwin Obaseki, managing director of Afrinvest, who said banks have extended big loans to brokers, perhaps as much as 20 per cent of the whole country’s credit.”

Obaseki was, however, quoted in that report to have said he did not know of cases where banks insisted on the loans being used to buy their own shares, which according to him, would be illegal.

More than a year after the report was filed, the Nigerian stock market had unraveled, the suspicion and alarming indicators have been more or less confirmed by the outburst of the SEC’s DG on banks’ high exposure to the stock market, but more than this is the confirmation of the existence of the illegality Obaseki had denied in 2007 about banks granting loans to stock brokers and investors on the condition that they use the facilities to buy their (banks) shares.

Indeed, the practice became a standard in the banking industry especially during the second wave of public offers conducted by listed banks on the Exchange. Industry players talked of how banks provided funds for brokers and other investors to acquire their own shares during public offer. Industry watchers explained that most of the banks resorted to this to make their standing in the capital market look good to the investing public.

Besides, public offers by the implicated banks provided opportunities for bank chief executives and other directors to jostle to take position in the equity of the bank to acquire enough stakes in the bank either to position for influence or to later trade in the equity when price of the stock moved up,” an expert revealed.

“Again, banks also engaged in providing funds to brokers and investors to acquire shares of banks considered choice banks, especially the shares of First Bank Plc, this is one of the reasons the public offer of the bank was over-subscribed by more than 600 per cent, the bank merely wanted to raise N100 billion but it ended up with more than N600billion, money mostly funded towards acquisition of its shares from other commercial banks,” the stock market expert said.

“The idea is that since public offers provide the opportunity to acquire enough shares without the possibility of price moving as a result of demand for the shares outstripping demand as it would happen in the secondary market, funds are routed into the market to acquire as many shares as possible during the public offer with intent at trading in the shares when they are listed for transaction in the secondary market,” the expert further explained.

While the bullish run persisted in the market, the performance of a bank’s stock in the stock market was a measure of the buoyancy of the bank, expert said; this, coupled with the desire of bank’s management to raise cheap funds from the market made many banks to provide funds to willing stock brokers and selected investors to mop their shares in the secondary market. Prices of such banking stocks naturally moved up because of the pressure of the programmed demand on the stocks.

“I can tell you that at a point in time, it seemed as if the only preoccupation of most banks was manipulating the stock market to wring out the last hope of gains. All these contributed to defacing the market and inevitably led to the crash of the Nigerian stock market,” an analyst submitted.

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.

DEMAND FOR NEW CARS HITS THE HIGH…INTENDING CAR OWNERS NOW ON WAITING LIST

Nigerians now seem to prefer new cars to used ones a FORTUNE&CLASS Weekly survey has shown. A snap survey conducted by the magazine’s correspondents across new cars dealers shows that there is a strong demand for new cars, especially, the Japanese and Korean brands.

Most intending buyers are now placed on waiting list. FORTUNE&CLASS correspondents explained that demand is now high that customers can’t just walk into a dealers shop to pay and drive off with a car. “It takes an average one month or more to get a car after a commitment to buy is made to the dealers.” One of our correspondents that conducted the survey said.

Three brand names are reported to be in high demand; Toyota, Kia and Hyundai. Giving reason for the demand pile up for these brands, a marketing manager with a popular Toyota sales outlet said the desire by Nigerians to acquire new vehicle may not be unconnected with the long term financing provided by banks.

“The five years vehicle repayment plan on a 10 per cent down payment being spearheaded by First Bank Plc has created a new demand push for new cars.” An official of a car dealership said.

The emerging preference for new cars is in sharp contrast to the choices of Nigerian car owners until three years ago when most intending vehicle buyers would rather buy second hand vehicles, this, in fact, gave impetus to the thriving ports in Benin Republic, Nigeria’s neighbouring country, from where the second hand cars known as Tokunbo are smuggled into Nigeria through bush paths and unmanned border points.