Cancellation of uniform year-end saves banking sector …bank stocks now best buys – experts

As published in the Sept. 28, Iss. 33. Site Admin. ol’Victor Ojelabi

The idealism of Central Bank governor, Prof. Chukuma Soludo, did transform the nation’s banking industry. From a motley crew of pretender-financial institutions, Prof. Soludo presented to the nation on the first day 2006 a manageable community of 25 banks that have passed his test of the N25billion mark.

On the attainment of this feat, believed before 01-06-2006 to be an impossibility, the Nigerian banking public celebrated the Professor of Economics and, of course, got inebriated with the promise of greater things to come from the banking sector. Banking experts caught on to propelling excitements steaming from the office of the CBN governor, “with more money from consolidation, banks were going to drive the active sector” was the chorus.

The industry did make a jump to new levels of growth, Nigerian banks, have since 2006 been involved in financing billion plus naira projects in the hefty oil and telecommunications sectors, that was unheard of in the pre-consolidation era. Personally, I am enamoured with the gleam of glamour and high tech platforms on which Nigerian banks dispensed financial services to the public.

The banking consolidation certainly has an impact in galvanising a trendier banking culture and it shows in the lifestyles of bankers and their institutions that have become celebrities in the public place with each competing for media attention in a rather morbid claim to the nation’s number one ranking in the banking sector. So much that Nigerians were regaled with figures of banks that had crossed the one billion dollar shareholders’ fund, some other countered on their multi-trillion naira asset and all that. For the naïve watcher of the banking sector, the easy conclusion would be a sector that is vibrant on all measures of indices. The investing public was apparently taken in, for good reasons too, banks had become the main drivers of the Nigerian Stock Exchange, accounting for the biggest chunk of trading activities in the market in terms of volume and value.

All these together must have emboldened the CBN governor to push farther his idealistic template to ensure a banking industry that can compete with any other across the world on credibility of operations and status ranking in translating turnover to profit. Unfortunately, this altruistic illusion was the undoing of the CBN governor. Soon after he announced that the nation’s banks must all adopt the same December year-end, all manners of strange things started happening.

The same year-end implies that each bank would stand alone in presenting report of activities to investors. This would provide the basis for comparing the profile of banks against one another and of course, lend credit to claims by each bank.

Then a state of near stultification of the ordinary banking operations commenced. Banks started a desperate hunt for deposits to shore their vaults in the run up to the year-end deadline. To secure these deposits, banks were ready to obligate themselves to very high interest rate. There were clear signals that the economy was grinding to a halt as banks lending activities were thrown to the back offices in preference for deposits drive.

The inter bank rate, the rate at which banks lend themselves money sprinted beyond the year on year average, there were suspicion that banks needed to use this borrowed funds from other banks to make their books look good.

The signs of trouble were noted in the CBN Quarterly report but not many gave much thought to it. The report notes that “With tight liquidity conditions in the money market, following the upward review of the MPR from 9.0 to 9.5 per cent in December, 2007, deposit money banks (DMBs) accessed the CBN lending facility more frequently to square up short-term positions. Consequently, a cumulative sum of =N=8,658.91 billion was granted to DMBs on overnight basis in the review period, compared with =N=523.91 billion in the preceding quarter.”

The report further asserts that “available data indicated mixed developments in banks’ deposit and lending rates in the first quarter of 2008. With the exception of the average savings deposits and seven-day savings rates which, fell by 0.26 and 0.16 percentage points to 2.97 and 5.38 per cent, respectively, all other rates on deposits of various maturities rose from a range of 7.75 9.90 per cent in the preceding quarter to 9.48 10.71 per cent. On the other hand, the average prime and maximum lending rates fell by 0.44 and 0.07 percentage points to 16.05 and 18.17 per cent, respectively. Consequently, the spread between the weighted average deposit and maximum lending rates widened from 15.01 percentage points in the preceding quarter to 15.20 percentage points. On the other hand, the margin between the average savings deposit and maximum lending rates narrowed from 10.77 percentage points in the preceding quarter to 10.31 percentage points. The increase in interest rates during the review quarter was attributed to the upward review of the MPR in December, 2007. At the inter-bank call segment, the weighted average rate, which was 8.25 in the preceding quarter, rose to 10.30 per cent, reflecting the liquidity squeeze in the inter-bank funds market.”

The CBN was rather being merely academic with its reasons for the lending rates’ differentials and liquidity squeeze, by the time the reports for subsequent quarters are made public the spiking of credit relationship between banks on one hand and with the CBN on the hand, would tell of the tension that would have run the banking sector aground if the CBN had gone ahead with same year-end policy.

The unusual tempo of activities in the sector eventually got the CBN scared of the dire consequences if it insisted on going ahead with the same year-end policy. It was obviously a beaten Prof Soludo that informed the nation of the CBN’s decision to cancel the same year-end policy as a result of what the apex bank described as observed unhealthy trend/development in the industry whereby some banks were mobilizing deposits at very high interest rates that were inconsistent with economic fundamentals which was becoming a threat to market stability.

The CBN confirmed in the public announcement that it was compelled to cancel the same year-end policy “in the light of the developments in the economy and the misplaced perception that the interest rate trends are linked to the requirement of a common year end and therefore decided that the year end will no longer be a requirement. Consequently, each bank and discount house is at liberty to adopt its own accounting year end as it deems appropriate and can inform the CBN accordingly.”

The announcement has certainly calmed the brewing storm in the sector, so it is back to business as usual. Banks will continue to declare enormous profit, banks would continue to inundate the investors with sparkling financial positions and because banks drive the national economy in an awkward inverse relation to the active sector that should, in the ordinary sense of economics, drive the national economy, banks would continue to make more money than any other sector of the economy. This is why any investor wishing to make the fast break in the stock market should now start hunting for banks’ stocks. With the exception of Unity Bank and Wema Bank that are currently on suspension, all consolidated banking stocks listed hold great prospects, principally because bankers know how to play the Nigerian economy better than any other sector player. This is a lesson in fundamental consideration in investment decision making.

WE ARE VINDICATED

Since mid-2007, we had stridently made calls for reformation of the Nigerian stock market, we had published stories of infractions that threaten the integrity of the market, we had revealed manipulative antics of some operators and their collaborators, and had asked for more pro-active monitoring and supervision of the market, especially in transactions involving moribund companies. Some had hailed our courage for revealing the truth, some had vilified us, and some did not even pay any attention to our positions. But a five-month bearish run in the market has justified our position calling on all market players to play by the rules. The roll-out of emergency measures to put in abeyance the unwholesome domination of the capital market by the bears, have justified our principled position.

Yet, the surveillance continues.

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.

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.