Investigation Reveals Where Bank Loans Went Bad

A Fortune&Class in-house panel of experts has, after a review of the bad loans accrued to the five banks currently under the Central Bank of Nigeria’s direct supervision, submitted that the Federal Government holds largest liability in repayment to the banks. The committee of experts nonetheless observed that the figures made public by the CBN also affirmed that the affected bank officials must have been heavily involved in unethical manipulation of the stock market even as the panel agreed that the banks, indeed, tried to play their economic role of financial intermediation by providing a big chunk of their facility for real sector activities.

The conclusions of the panel’s review may put the lies on the generalized opinion prevalent in the public place of the bulk of the five banks financing going into loans for stock market trading and the importation of petroleum products.

The panel reports that 51 per cent of the N747,000,000,000 alleged bad loan, approximated at N375,487,000,000 was given out by the banks to the real sector. The classification of the real sector, in the consideration of the panelists includes activities in construction, manufacturing, imports of raw materials for industries, farming and telecommunications.

Interestingly, the panel reports that a mere 22 per cent of the N747billion bad loan aggregated at N163billion can be attributed to the stock market while N218billion, about 27 per cent of the bad loan has been tracked to have been borrowed by players in the oil and gas sector.

The Case For Union Bank

Taken on individual profiling, Fortune&Class panelists submit that the sanctioning of Union Bank managing director should raise questions because of the five banks under the CBN’s thumb, Union Bank’s hope of recovering its bad loan is more assured because the bulk of the bad loans atissue are facilities given to entities in the real sector.

Of the total N73.582billion bad loan attributed to Union bank N66billion summed up to be loans to the real sector. The bank’s only stock market related bad loan is the N1,291,737,218 granted to GMT Securities.
In the same vein, the bank’s only outstanding to the oil gas sector is the N6,251,658,228 taken by Zenon Oil and Gas. Panelists argue that Zenon has a higher likelihood of paying up because of its track record in the oil and gas sector.

It is not, however, a shared optimism, as in the hope of recovery of the bad loan from a company like Femi Otedola’s owned Zenon when compared to the N28.5billion Oceanic Bank is expecting Rahmaniyya Global resources, a company in the petroleum products marketing sector, to repay it.
Rahmaniyya’s operations are reportedly hampered at the moment.

Crosscheck of operations at the Apapa depot of the company shows that not much activities are going on there. A senior staff of the company confides that operations have been hampered because of the company’s huge indebtedness to banks. The official took time to protest that the company’s situation became bad because an appreciable percentage of the loans secured at commercial banks were usually given out as kick backs to officials of the banks where the loans originated from.

Where Oceanic Bank May Lose Out

As a stand alone, Oceanic Bank’s loans are locked into the real sector, that is about N122billion of a total N278.2billion. The worrisome aspect of the bank’s bad loan portfolio, as it were, would be the N56billion exposure to the stock market. This figure aroused much concern because just six companies, as recorded, were found worthy enough to enjoy margin loan from the bank. The panelists reasoned that what the figures suggest is that officials of the bank merely decided to employ the services of this small number of stockbrokers to help it exploit the stock market.

The panelists also submit that the larger percentage of Oceanic Bank’s expected repayment from the bad loans tracked to the oil and gas sector of about N100billion hold no prospect of recovery in consideration of the track records of most of the entities that secured the loans.

Intercontinental Bank shares the same fate that may befall the recovery efforts of Oceanic Bank. With N34billion outstanding from just seven stock-broking houses most of which have continued to dispute the figures in the public domain.

Bad Loan Recovery Challenges For Intercontinental Bank

As in the case with Oceanic Bank, all of the brokerage houses involved have protested that the loan accounts were opened jointly with the banks. Some even complained that they never received any cheque book on the account that was in the joint names of the brokerage house and the bank.

In different letters of protest forwarded to the banks, some of these brokerage houses had hinted at being asked to engage in stock market manipulation by the bank. One of such protest letters written and forwarded to Intercontinental bank which Fortune&Class got a copy, reads:
“…Your bank also included clauses in the contract that gives you the sole right to decide which stock can be purchased and when such can be sold. The records presented to us even show that some of the shares purchased with the margin loan included the stock of your bank.”

The letter from the lawyer tells of more worrying aspects of the margin loan where it notes that:
“Our client mentioned the fact that they never solicited the loan but rather your bank approached them with the offer of the loan…even as their accounts were debited for the processing and management fees for the transaction before they had even had any opportunity to review or sign the offer letter.”
For our panelists, it is issues like these that may stunt efforts to recover the bad loans for Intercontinental Bank. This is besides the crisis of the Federal Government non-payment of petroleum products subsidy differentiation to oil marketers that secured a large part of the N79billion loan that was used in importing petroleum products into the country.

‘Afribank played big in the Stock Market…sure to lose big’

Not even the EFCC Chairman can yet fathom how the five companies that Afribank granted about N60billion to trade the stock market, would pay back their exposure in the current lacklustre stock market.

Whose interest was the bank management advancing by farming out the huge sum of N60billion to just five entities? Again, it is believed that the bank played big in the stock market to forward its interest. “That N60billion cannot be recovered in the short term,” one of our panelists said.

Finbank Liberal Lending Policy

Of the five embattled banks, Finbank Plc profiles a liberal lending culture. Though we can’t say for certain how the loans were collaterised, the fact of farming out its loan to a larger number of borrowing entities compared to other banks in the bad loan quagmire, suggests that recovery of debt may be easier Finbank.

The bank’s total non-performing loans as calculated by the CBN is approximated at N42.4billion. Of this, about N15billion was borrowed out to 83 operators in the real sector. This is just as the total sum of N11.1billion bad loan accruing from stock market activities, was granted to nine entities with the highest calculated to still owe about N3billion.

The same liberal lending policy shows in the figure of the loans repayment of N14billion from 17 entities in the oil and gas sector.

The Sector That Is Sure For Repayment

Our panel of experts are of the opinion that bad loans accrued in the real sector may easily be recovered because of the quality of collaterals that would have been provided before approval to draw down. This, however, excludes any insider related dealings.

Compared to loans to the real sector, recovery of bad debts accrued from stock trading activities may be considered hopeless in consideration of the state of the Nigerian stock market, the macro-economic environment and the harsh realities of the global economic meltdown. The collaterisation of loan assets in margin loan is linked to securities purchased, the lender is, however, supposed to dispose of with the securities in the open market when prices go below an agreed threshold. But it turned out that these banks didn’t effect the power of cashing the securities by selling off when the prices of the securities slid below the agreed threshold. Thus, the lenders are left with collaterised securities that are way below the worth of the loans.

Same is the extant downside of the oil and gas sector. With consistent sliding petroleum product prices and the unwillingness of the Federal Government the only buyer of petroleum products in Nigeria, to pay up the difference between the landing cost of petroleum products in the country and the price at which the marketers are mandated to sell to retailers, the expectation of bad loan recovery from the entities in these sector may be challenging.

Who Is Paying Up

The Economic and Financial Crimes Commission has said that it had so far recovered a sum of N25.5billion out of the N1.143 trillion of total non-performing loans of the five banks.

The break-down of recovered debt and the banks are as follows; Intercontinental bank N7, 736, 571, 744.19; Finbank.N1, 590, 417, 332.05, AfribankN7, 551, 121, 378.69, Oceanic bankN8, 033, 481, 868.65; Union bank N659, 240, 400.78.

Executive Directors Took N5bn Unsecured Loans Each

More troubling revelations have continued to emerge from the banking industry in the wake of the sack of five bank chiefs and members of their senior management cadre. Some top banking industry staff have started talking of the justification of the action of the Central Bank of Nigeria’s Governor, Sanusi Lamido Sanusi to sanction the affected bank chiefs and their senior management cadre because of their connivance to fleece the bank.

Specifically, the entire management board of one of the banks is said to being investigated by the CBN to ascertain how each Executive Director got approval of N5billion loan facility.

IBRU FAMILY RECRUITS SENATE LEADERSHIP, PRESIDENT’S WIFE TO SAVE CECILIA

The Ibru family reportedly threw all its influence and moneyed privileges into the battle to mitigate the public embarrassment of Mrs. Cecilia Ibru, sacked Managing Director of Oceanic Bank and wife of the patriarch of the Ibru’s clan, Olorogun Michael Ibru.

Details emerging in the wake of the sudden appearance of the erstwhile Managing Director of Oceanic Bank at the office of the Economic and Financial Crimes Commission (EFCC) last Wednesday, indicate that the wife of the Chairman of the Ibru organization was advised to beat a tactical retreat to allow the family deploy its massive goodwill in the nation’s political arena to stave off the prospect of an embarrassingly long detention for Mrs. Ibru by the EFCC.

Knowledgeable insiders to the horse trading that led to the eventual emergence of the woman fondly revered as the Nigeria’s first lady of banking, confided in Fortune&Class Weekly that the Ibru family pulled all the plugs through the Senate and the Presidency to get certain assurances from the EFCC before Mrs. Ibru was given the green light to submit herself at the EFCC.

“Seriously, we have only heard about the ingenuity of the Ibru family in making money, but I was a witness to another aspect of their lives these past days when I experienced their ability to move around and lobby office holders to intervene in the roiling crisis that had claimed one of their own, Mrs. Ibru. It’s not as if you saw any of the Ibrus physically, but there were many people lobbying on her behalf especially at the Senate,” the source said.

“You know, the second day after the Governor of the Central Bank of Nigeria, Sanusi Lamido (Sanusi) made those earth shaking pronouncements about sacking five bank chief executives, the President left the country in company with his wife, Turai. The next level of authority, in the real sense of it, at that time, was the Senate. And it was to the Senators that the Ibru lobbyists took their battle to get political pressure to be applied on the EFCC boss to provide lighter treatment and shortened detention for Mrs. Ibru. The fulcrum of the argument of the lobbyists is that the Central Bank of Nigeria was making a mountain out of a mole hill by its decisions to sack the bank managing directors and their arrest by the EFCC.

“The lobbyists pleaded with the leadership of the Senate to prevail on the Chairman of the EFCC, Mrs. Farida Waziri, to make a commitment to making Mrs. Ibru’s detention before taking her to the court as short as possible.

“Of course, they got sympathetic ears in the Senate. The Senate leadership made overtures to the Chairman of the EFCC who insisted that Mrs. Ibru must first surrender herself to the anti-grafts agency before she could determine the next step.

“Hajia Binta Turai, wife of President Umar Yar’Adua also played a peripheral role in the Ibru EFCC saga. Two of the first lady’s friends were drafted to talk to the EFCC Chairman to provide a soft landing for Mrs. Ibru, the source said.

Mrs. Ibru had, as part of her battle to stop her arrest and detention, dragged the Central Bank of Nigeria and its governor, Sanusi Lamido Sanusi before a Federal High Court in Abuja over her compulsory removal from office, demanding the sum of N50 billion for “exemplary, punitive and aggravated and general damages.”

The EFCC, however, declared Mrs. Ibru and Mr. Erastus Akingbola of Intercontinental Bank wanted on Sunday, 23 August, after failing to honour invitations for interrogation, sequel to their sack on August 14 along with three other bank MDs, Mr. Sebastine Adigwe of Afribank, Okey Nwosu of Finbank and Bartholomew Ebong of Union Bank.

A statement issued by EFCC Head of Media and Publicity, Femi Babafemi, explained that Ibru and Akingbola “are wanted in connection with fraudulent abuse of credit process, insider trading, capital market manipulation and money laundering running into billions of Naira.”

Investigation Reveals Where Bank Loans Went Bad
A Fortune&Class in-house panel of experts has, after a review of the bad loans accrued to the five banks currently under the Central Bank of Nigeria’s direct supervision, submitted that the Federal Government holds largest liability in repayment to the banks. The committee of experts nonetheless observed that the figures made public by the CBN also affirmed that the affected bank officials must have been heavily involved in unethical manipulation of the stock market even as the panel agreed that the banks, indeed, tried to play their economic role of financial intermediation by providing a big chunk of their facility for real sector activities. (read more)

Three Nigerian Banks break into Forbes List of World Biggest Companies

The year 2009 is rather an unlikely year for any Nigerian company… continues here.

What Happens to Stock When Company Files Bankruptcy

Bankruptcy Is Not Good News for Stocks and the stock market.

In this write up I will treat bankruptcy in the broad sense and why companies choose this route (if they have a choice).  Also, I will be looking at the two main types of corporate bankruptcy and what rights or options investors have […]

Read the rest here.

75 Per Cent Of Credit To Stock Market Cornered By Operators Affiliated To Banks

Analysts at Proshare Nigeria have said that banks’ exposure to loans secured by their affiliates for stock market activities might have triggered a 65 per cent drop in capitalization of Nigerian banks and may, therefore be a fair reflection of the possible loss on the portfolio held by the banks through margin loans.

Click here

CAPITAL MARKET CRASH: THE CASE AGAINST THE BANKS

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.

BankPHB EMBROILED IN N17BILLION FRAUD SCANDAL …EFCC ARRESTS THREE DIRECTORS, IAA VICE-CHAIR

MD, BankPHB

In the past three weeks, a whirlwind had swept through the gilded offices of BankPHB. At the last count, three executive directors had been sacked in tow with an unspecified number of other management staff. At the heart of the sweeping sack in the bank is perhaps, one of Nigeria’s most sophisticated white collar fraud, involving a whopping 17 billion naira, and said to have been engineered by Mr. Funmi Ademosun, the Vice-Chairman of Investment and Allied Assurance Company (IAA).

A source at the bank confided that various sums of money totaling 17 billion naira had been parcelled through the accounts of Home Trust Savings and Loans Limited, another company where Ademosun is the chief executive.

“The sums were given out in the form of margin account targeted at shares purchase, particularly for the mopping up of the shares of IAA in the stock market,” The BankPHB insider said. “But it turned out that rather than focus on the IAA shares, Ademosun decided to diversify his investment portfolio by playing on other stocks.”

While observing that there was nothing patently wrong in the bank lending to customer for margin trading, the source observed that 17 billion naira was given out to Ademosun without appropriate management decision.

“The management of the bank as a body was not in the know of the whole thing; those involved exploited their high offices to approve facilities within the threshold of their approving authorities as executive directors for Ademosun’s scheme.”

Stock market operators that are now aware of the sums siphoned from the vault of the bank to Ademosun to target the shares of IAA reasoned that Ademosun, by virtue of his official standing in IAA was engaged in criminal manipulation of the share price of the IAA stock with the money availed him by BankPHB.

“Of course, we all suspected that something was not correct with the IAA shares. This is an insurance company with no branch except its head office branch with various analyses pointing to the fact that the whole business and administrative structure of the company were underpinned by financial engineering. Right from its private placement to its listing by introduction its 28billion units of shares on the floor of the exchange it was clear that some undercurrents were pushing the direction of the shares. It was not until we got to hear of the 17 billion naira funding of Ademosun by BankPHB that I personally understand the whole reason for the movement of the shares of IAA. The money was used to simply mop up the shares at a particular point in time and, thereafter, dump the mopped shares when the price is right,” a stock broker explained.

Troubles, however, burst on to the scene when the market decidedly headed downward, meaning that the shares of IAA would not respond to any form of manipulative manoeuvres even where billions of naira is involved. The BankPHB source said this limited the capacity of Ademosun to pay back and the scandal broke out. In clearing the mess at the preliminary stage, the management of the bank reported the case to the Securities and Exchange Commission who in turn invited the Economic and financial Crimes Commission into the matter.

“As of this week, Messrs. Solomon Omoregieva, Ahmed Kuru and Emma Abugu, all executive directors, had been quizzed by the EFCC and they had been sacked in company with some other members of the middle cadre management who were said to be involved in the scandal. It is believed that these officials compromised and fell short of their responsibility by collectively exposing the bank to a facility of that magnitude. The general belief in the bank is that these officials must have soiled their hands in the transaction,” the source added.

Heavy Debt Burden: Banks suspend funding for Dangote’s cement project

A heavy debt burden and the anticipation of high profile competition for the share of the Nigerian cement supply side from Femi Otedola may have compelled Alhaji Aliko Dangote to call off investments with intent to expand production lines in his many cement manufacturing plants and to build new ones. Sources in the banking industry indicated that some bank’s exposure to Dangote have become quite high and more discomfiting for the banks in consideration of hurdles they would have to contend with in the effort to get the debt repaid.

Though Forbes Magazine had listed Dangote as the richest man in Nigeria in 2007, financial sector source said his total debt folio drawn from various Nigerian banks may add up to N622billion. According to the source, about N300billion was secured from a bank by Dangote to play in the stock market between February and March 2008 when prices of stocks were at their peak.

“Prices of stocks started falling soon after the investment in the stock market and the fall in prices have become protracted which has resulted in stock prices sliding to historic lows. This, apparently, has affected the repayment traction of Dangote and this had added to the depressing situation of the banks that gave out the fund,” the source explained.

According to the source, Dangote also secured a N75billion loan for Obajana Cement and N240billion for his cement production plant in Ibeshe while also funding his Alheri Engineering, the company that won the 3-G GSM licence and will manage the GSM telephony service provider in the Dangote group.

Dangote’s decision to beat a retreat from cement manufacturing besides Nigerian banks refusing to make their money available for his use, is the wholesale opening up of the supply side of cement through the cement importation scheme of the Federal Government.

Dangote had enjoyed near monopoly status on the supply side of cement in Nigeria, and not a few aspiring builders had protested persistent increase in the price of cement which got to a high of N1,800 mid 2008. The Federal Government under Alhaji Umar Musa Yar’Adua removed the protectionist policy of the Olusegun Obasanjo’s presidency which banned the importation of cement into the country and closed down some other Nigerian cement producing companies ostensibly to protect the manufacturing essence of Dangote Cement production subsidiaries and the other players in the sector.

“This did not help price at all, because just a few producers can come together to determine the price of a bag of cement,” an industry player told FORTUNE&CLASS Weekly.

The Federal Government’s bid to beat down the price of cement by flooding the market with imported brands may have started impacting the market as the price of a bag of cement has come down to about N1,500 even as the imported brands are yet to fully land in the country.

Industry buzz, however, suggests that Dangote may also be worried with the licence granted Femi Otedola by the Federal Government to import two million tonnes of cement into the country as part of the effort to crash cement prices.

“The Federal Government had to consciously look out for a Nigerian business that has enough cash to back up the importation. It would not make sense to allow for importation of cement when you don’t have high profile business people that can mobilize enough funds to flood the market in the shortest possible time. That is why I think the Federal Government gave Otedola the licence to be involved in the importation of cement and I think he has a commitment to the Federal Government to sell at very cheap rate to Nigerians,” a source in the Presidency said.

NIGERIAN COMPANIES AND THE HERD MENTALITY

Philip Kotler, in his book, Marketing Management, posited that “all companies must look beyond their present situation and develop a long-term strategy to meet changing conditions in their industry. They must develop a game plan for achieving their long-run objectives.” He further opined that there is no one strategy that is optimal for all companies. Each company must determine what makes the most sense in the light of its position in the industry and its objectives, opportunities, and resources”.

This principle was applied by some notable companies in the United States and Japan in varying degrees to strengthen their operations as well as markets and hence improved revenue base. Companies like Goodyear Tire and Rubber Co., Uniroyal and Armstrong Rubber Co. in the US and Toyota in Japan applied this strategy to perfect their operations and products.

In the tire industry where all the major players adopted it, it was so used efficiently that each of the company got something and was, in a way, content retaining its distinct character and having to run to the other for assistance at any given time.

Here in our dear country, Nigeria, any thing and every thing runs on the herd mentality, This is why any strategy employed by company A to shore up its operations is automatically copied by company B irrespective of the differences in objective, resources and opportunities available to the two companies and to some extent, experience in their respective fields?

It is for the same reason that our telecom providers are all in the race to promote one event or the other usually in the entertainment sector that in a way alter and pollute our culture. No thought is given to the education sector by way of empowering the youths through scholarships as the oil companies do nor assisting with social projects that benefit the majority across economic strata.

During the re-capitalization efforts by banks, the stock market became the centre of attraction to all the banks. And they are yet to leave that market till date, not even the crisis in that pot of confusion is discouraging them, no. When it was the turn of the insurance sector to shore up their capital base; they too turned to the capital market for succor. The irony in this as it concerns the insurance companies is that the sector that is supposed to invest more in the capital market and in such other critical areas of our economy because of its potential to raise more money than other financial institutions, is the one begging for money. A direct opposite of what obtains in other climes is what our insurance sector represents here in Nigeria. Too bad.

By some slips arising from misconceptions or miss-application of strategy, our banks are increasingly finding it difficult to match reality with expectations. Rather than attempt a review of business plans and carry out some radical changes, marketing plans are being updated and probably are now made to replace business plans the result of which are the various panic measures being put in place to hunt for deposits even from school children as if that is what will give value and stability to their business.

While all these comedies are playing out, some of the banks are declaring mind boggling figures and mouth watering figures as profits, some as high as 98% over the previous year. And if we are to believe these fantastic performances it then becomes very difficult to reconcile the crazy hunt for deposits that now bothers on desperation. Worst still is the fact that daily, our highly performing banks are being accused of cheating their customers maybe to make up for the big profits declared.

Understandably, and in line with the bandwagon behavior, the new craze has shifted to the micro finance sector with virtually all the major banks falling over themselves to take vantage (?) position in that area. The obvious fact that that sector is also banking at the low level makes no meaning to the extent ‘deposit money’ will be sourced there.

While commending our banks for their innovation and ingenuity in what is gradually becoming a phenomenon in the way we do business in this country, it is better some good thought is given to carry out a review of operations based on reality. It will be a better strategy for each bank to look inward and turn its distinctive competence into its competitive advantage as IBTC used to be. Cutting an edge for your business will be a better strategy to this uniformity approach. Harassing people on the streets for deposits sends a signal that all is not well with our banks.

Can we be more creative in doing these things? Enough of these pretensions.

USING EARNINGS PER SHARE EFFECTIVELY IN A RECUPERATING MARKET

A lot has been said about Earnings Per Share (EPS) but there is still more to be discussed. I have met a number of investors with total misconception of what E.P.S is and what it is not. This write-up is aimed at correcting the “absolute confidence” placed in it by some investors. No doubt, the use of EPS is one of the most reliable methods of picking good stocks but it is definitely not all-self-sufficient as misconstructed by some.

What is EPS?

Earnings Per Share is the net profit declared by a company per unit of its shares. This is calculated by dividing the total net profit by the number of shares in issue. If for instance the net profit of a company is N100, 000,000 and the number of shares in issue is 500,000,000 units, then the EPS is arrived at by saying N100m/500m units of shares which is equal to 0.2 or 20k.

How it is used

How is EPS applied in making investment decisions? As earlier said, EPS is the profit per unit of shares of a company. It shows how much a company has to share as dividend or plough back into the business to yield future returns. Therefore, given two identical stocks {selling at the same market price} whether in the same industry or in different industries, the simplest yardstick to use in checking which one is better is by subjecting them to the litmus test of EPS. A good example: stock “A” is priced at N10 in the stock market and stock “B” is also priced at the same N10 per unit. The EPS of stock “A” is 20k and that of “B” is 45k. Looking at it on the surface, a naïve investor will quickly jump to the conclusion that stock “B” is better. Why? Because it records a higher EPS compared to “A” and by implication it means stock “B” will have more money to pay as dividend and also have money to plough back into the business.

Its limitation

But the question is: Does it always work like that? Have you ever wondered why a stock with a lower EPS commands a higher price compared to the one with higher EPS? Has it ever occurred to you why investors will prefer to pay at premium for a stock which EPS is little or nothing to be compared with a counterpart stock? If your mind has been working as mine, you will realize that EPS in itself is not an all-sufficient factor that should influence your investment decision; hence its limitation.

Additional factors to consider

The following are additional factors an investor must consider to complement his buy decision having spotted a stock with strong EPS:

Investors Confidence

We have seen so many stocks whose EPS are high and yet are selling below those with lower EPS. Yes, some may argue that the market is yet to discover such a stock or such a stock definitely has potential for future growth. These are all possibilities, but more often than not, the fortune of such a stock is determined by the level of confidence placed on it by investors. We have myriads of examples at present in the stock market especially at this recovery juncture. If the market does not have confidence in the stock, definitely it cannot do well in the market.

Easy Entry and Exit

The attractiveness of any stock lies in the fact that there is easy entry and exit in and out of such a stock. Irrespective of how robust the EPS of a company is, if the market perception is that it may be difficult to exit as at when desired, such stock may not do well as expected.

Quality of Management/Ownership structure

The integrity, aptitude and industry knowledge of the management paraded by a company is a very important factor to consider. The ownership structure of a company is also very essential. A friend once called me and said he had just spotted an insurance stock with a very strong EPS. Upon a closer look and some findings, I discovered that it will not be a good buy because the company was being run like a “one-man-show”. Of course, he bought the stock but not able to get the desired result because the market did not respond to it.

Consistency/Future prospect

How consistent a company can replicate its past performance is also a very serious issue to consider. A stock could record an exceptional brilliant performance for a season, but that may be short-lived for several reasons. Also, the future prospect of such a company is of great importance.

Source of profit declared

It is not enough to buy a stock based on high EPS which is as a result of huge profit declared. The profit recorded could be from a source outside the regular business of the company e.g. sale of assets like building, machinery e.t.c. when such items are disposed, some organizations capture it as part of income for the accounting year, thereby impacting positively on the profit and by extension the EPS.

The above factors are of course not exhaustive as there are other factors like: Industry regulation, cash Liquidity e.t.c. EPS is a dependable way of identifying and picking a good stock, but it must be supported by other factors to make an informed buy decision.

HOW YOU CAN INVEST NOWAS THE YEAR WINDS DOWN

On the strength of what market performance is now with the influx of third quarter results to the market and stocks are beginning to make significant gains as investors pick up stocks at rock bottom prices which demonstrate that a bullish run appears to be in sight. Therefore the best time to buy is now as the year winds down. Also as a result of the prolonged bearish period in 2008, we have single digit P/E’s and price to book ratios below 1. I recommend the following strategy.

– Invest with the medium term in view. This is predicated on market volatility which makes geometric increase in the prices of stocks slim at this period. On few stocks, 20% gain could be achieved but substantially, you get less before a downward movement in the short term. Investing for medium term towards the first quarter of 2009 is recommended.

– Invest in fundamentally strong stocks that had experienced sharp decline in price in recent time. Consider those with strong last quarter earnings, bright/impressive earnings projection, good product mix and good management among others. Using earnings per share as a sure guide on these stocks.

– Invest in stocks with closer dates of release of the next result. Some results that were expected in December that may not come would be released in January. Target these stocks particularly, when the earning per share outlook is bright.

– Consider some stocks whose calendar year ends in December, their full results will hit the market between first and second quarter 2009.

– Investing profitably for the medium term requires good industries. Attractive industries to consider first include Banking, insurance, Petroleum, Healthcare and few stocks in Conglomerate, Chemical and Paints etc.

You may need specific guide and further investment tutelage against the unforeseen volatility, you can me reach for advisory services.