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.

SEE NO EVIL, HEAR NO EVIL

Government is no doubt the biggest business in Nigeria, so it is in countries around the world. Exception is that in more economically developed lands, especially those that are inclined to the capitalist economic model, rather than government to directly engage in the economic arena, they provide an environment where individuals play the economy in pursuit of personal benefit for the good of society in accord with the policies and philosophy of government.

The Nigerian situation won’t pass the test of a capitalist model, what with the confusion that defines government roles in the productive and service sectors that had left public utilities in vicious spasm of a slow death.

The failure of the Nigerian government in business and provision of society’s essentials like potable water and electricity power is no longer controvertible, Nigerians have generally given up on their expectations from government in this regard, it is, however, troubling that government and its agencies now garb economic policy positions and thrusts with odious subterfuge and double speak.

Moments after, the economies of the United States of America and the United Kingdom went into a tailspin, even the most economically ignorant was able to conjecture that the global economy was on its way to a storm which consequences may surpass the storied damnation of the Great Depression that commenced in 1929. But officials of Nigerian government would rather see no evil, hear no evil. The two finance ministers and the Governor of the Central Bank of Nigeria assured that the country was immune to the vagaries of the devastation that had begun to shake the economic foundations of the United States, United Kingdom, Europe and Asia.

Yet, signs of malevolent economic change were becoming obvious. Price of crude oil, the nation’s mainstay natural resource suddenly took a dive southward from high in the $150 per barrel of crude oil to $44. Reason for this is obvious, one needs not be a Keynesian to rationalize that developed economies that are the major consumers of crude oil disciplined their appetite for crude oil which in turn reduced the pressure on the demand with attendant fall in price. For Nigeria the implication is grievous, reduced revenue collection, cut down in GDP growth projection, a cascading fall in value of the naira, the national currency, the direct deployment of the $58.11 billion foreign reserve as intervention to save an imperiled economy. And eventually, a life of further distress for the average Nigerian. You don’t need to be a professor of economics to anticipate this turn in the economic sphere.

Already, the scenarios are playing out, the national budget for 2009 is a deficit budget due to anticipated reduction in revenue, three weeks ago, the Naira took a hiding from speculators and others when it lost more than ten per cent of its value to the Dollar in three days; just as there are discomfiting indications of distresses in financial institutions.

The CBN, after its Monetary Policy Committee meeting announced it was going to intervene directly in the daily two way quote foreign exchange market with fund from the nation’s foreign reserve.

Apparently, government and its agencies lack economic anticipatory skill. Soon after the first sign of trouble in the west emerged, a more focused government and its agencies would have cobbled a fiscal and monetary policy position targeted at the eventual impact of the roiling global economic scene on the country.

It is not too late, rather than the piece meal attention to specific worrisome spectre of economic emergency, it is better for the CBN, finance ministry and whoever, to evolve policies and measures with strong anticipatory ingredient to address likely troublesome financial and economic scenarios that may impact the country in the next 12 months.

As it is, we lost the opportunity to seize the initiative of building a bulwark against the negative consequences of the global economic downturn by acting the ostrich with its head in the sand even as trouble raged.

Certainly, responsible and responsive countries around the world are girding their loins in anticipation of a long tenor of battling with the economic crises. For Nigeria, the consequences of the global economic troubles are yet to fully manifest in the country, it would, indeed, be a matter of common sense to put together measures and policies that can help stave the negatives of the eventual infiltration of the global economic crises. This is a better option than to continue to beat the chest in the assurance of the community enjoying certain immunity from the global crises.

We all know that Nigeria is not exactly blessed with enduring economic structures and initiatives that have the capabilities to self correct in the face of a crisis that slowly but inevitably heads toward the country.