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.

$8m Foreign Investment Drives FCMB’s Stock Price: Other Banks Consider Share Buy Back

Though it has not been formally announced, authoritative sources close to First City Monument Bank have informed that despite global economic downturn that have witnessed foreign capital fleeing Nigeria in particular, a foreign investment firm may have injected $8 million dollars into the bank.

The sources explained that as soon as the capital injection was made into the bank, the management deployed part of the investment in the Stock Exchange to burnish the position of the bank in the market. Market experts that have been monitoring the volume and price activities of the FCMB stock in the market observed, a stable range of trading for the FCMB stock over the last two weeks compared to the free fall of many banks’ stocks.

The FCMB stock closed at N4.25kobo at the end of the trading session on Monday, 19 January, 2009, gyrated upward to N4.28 kobo the following Tuesday and despite losing marginally through the sample week to the following week, experts asserted that it must be the strong liquidity position of the bank that helped support the stock price to throttle in the stable region of N4.12kobo.

On the sideline of the stock market, Fortune&Class Weekly has been informed that most banks have started giving serious consideration to one of the market revival solutions that allows listed companies to buy back their shares.

In the face of the desperate decline of stock prices, there are indications that listed commercial banks are giving serious consideration to buy back as an option to drive their individual stock price. The strategy, according to a market operator close to banking sector decision makers, dedicated funds would be channeled to stocks by individual banks that are yet to be named:

“The expectation is that the increased liquidity will drive the prices of the banks’ stocks up and since banking stocks constitute more than 60 per cent of total market capitalization, signs of rebound would clearly show in the market and this will encourage other categories of investors to come to the market to participate,” the operator, who does not want to be identified, said.

Meanwhile, an official of International Finance Corporation (IFC), has said that the emerging markets like Nigeria will likely remain a viable alternative for private-equity investors seeking returns during the deepening global financial crisis.

“Emerging market economies are expected to still expand in 2009,” said David Wilton, manager for private equity and investment funds at the IFC, the World Bank’s private sector arm. “As a result, the private-equity investment model in emerging markets, based mainly on revenue growth and margin expansion, “remains intact,” he said.

“The growth is going to be lower, but it is still going to be there, and enterprises are going to be largely compensated, so you still have a very viable business model” in emerging markets, Wilton told Reuters in a recent interview.

Emerging markets will be the alternative for many private-equity investors who had focused on the now-defunct Leveraged Buyout Sector (LBO), he added. The LBO market collapsed in September, when banks became unable to keep funding such deals, and analysts see no quick comeback.

Fund raising for new private-equity projects in emerging markets is also frozen, and should remain so for at least the first half of the year, according to Wilton.

While profitability has also been hit, private-equity funds backed by the IFC posted average returns of 16 per cent in 2008, below the 22 per cent average seen in July, Wilton said.

“Risk aversion has gone up enormously, partially because nobody has seen this before. Everyone is trying to figure out what is happening and what to do,” he said.

But eventually, Wilton argues, risk aversion will diminish and liquidity problems will be sorted out. And, if emerging markets are not decoupled from developed markets, they are still in better shape to weather the crisis, he said, mentioning opportunities in countries such as India and Vietnam, as well as the African continent as a whole.

“I think some people thought the correlation (between emerging and developed markets) was much closer to zero than it really is. And now they think it’s much closer to one than it really is. But it is somewhere in the middle,” he said.

The IFC has about $1-billion invested in about 100 emerging market funds, more than 80 per cent of which are private equity. The institution supports the private sector with funds and expert consulting, in order to foster growth in developing economies.