Nigeria Banking Sector Coverage - December 2011 'Bad ... - Imara

Nigeria Banking Sector Overview
Having undergone a major recapitalisation in 2005, where
new minimum capital requirements of NGN 25bn led to the
number of banks in Nigeria reduced to 25 from 89 through
regulatory mergers and acquisition and later to 24 through
market-induced merger and acquisition, Nigeria’s banking
sector was supposed to be sound and well poised for the
growth that its under banked retail market would provide
with bank branches growing from 2,900 in 2005 to almost
5,500 in mid-2009. Indeed, all seemed well, until the GFC
hit in 2008, and the sector’s shiny coat began to unravel.
As noted by the current CBN Governor in a public lecture in
December 2010, the GFC affected Nigeria through both the
financial and real (trade, remittances and aid) channels.
The undiversified nature of the Nigerian economy and the
high dependence on exports of crude oil as well as foreign
capital inflows compounded the impact of the external
shock arising from the crisis, as Nigeria experienced low
demand for its oil export due to recession in the economies
of her major trading partners. This, coupled with the
collapse in the international price of oil, led to severe
decline in foreign exchange receipts and consequently,
government revenue contraction. There was a substantial
decline in foreign capital inflows just as foreign trade
finance reduced significantly for some banks while for
others credit lines literally dried-up.
The greatest impact was, however, felt in the capital
markets. The excess liquidity that had hitherto found its
way into the stock market in the heydays of 2006/2007,
which had also allowed banks to raise capital, had led to
many of Nigeria’s bank’s being overcapitalised. The increase
in capital supported banks’ balance sheet growth with
banking sector assets as percentage of GDP increasing
rapidly to 60% from about 30% in 2004. Struggling to
profitably deploy all of this capital (most banks actually
took in more capital than they had sought to raise as the
NSE allowed this at the time in the event of
oversubscriptions), banks were under pressure to create risk
asset amidst limited product innovation and diversification.
This, the CBN notes, coupled with poor risk management,
led to a concentration of assets in certain areas, in
particular margin lending and oil trading/marketing. As at
end-December 2008, banks’ total exposure to the oil
industry stood at over NGN 754bn, representing over 10% of
the industry total and over 27% of shareholders’ funds.
Thus, as foreign investors began to pull their funds out of
the market, looking to reduce their exposure to “riskier”
emerging and frontier markets, further exacerbating
investor negativity due to the waning economy, panic selling
by domestic investors followed. The capital market
downturn had a negative impact on bank balance sheet
through increased provisioning for bad debts and lower
profitability. The result was a sharp deterioration in the
quality of bank assets which then led to concerns over
banking sector liquidity.
Concerned about the state of some of the Nigerian
banks and the overall stability of the financial
system, the Central Bank of Nigeria (CBN),
commissioned special examinations on all 24 banks
in Nigeria. These examinations highlighted
significant deficiencies in capital adequacy and
liquidity requirements, and illustrated major
weaknesses in corporate governance and risk
management practices. Ten banks were adjudged
to be in grave states with deficiencies in capital
adequacy i.e.: Oceanic Bank, Union Bank of
Nigeria, Intercontinental Bank, Bank PHB, Afribank
Nigeria, Finbank, Equitorial Trust Bank, Spring
Bank and Wema Bank Plc. The tenth bank, Unity
Bank, was not deemed to be in grave danger, but
still adjudged to have insufficient capital and
unacceptable levels of non-performing loans
(NPLs). Of these, eight also had significant
deficiencies in liquidity, risk management
practices and corporate governance policies.
Dec 2010
Negative NAV (NGN bn)
Oceanic Bank International
Nigeria Plc (94 261)
Union Bank of Nigeria Plc (135 894)
Intercontinental Bank Plc (330 709)
Bank PHB Plc (242 309)
Afribank Nigeria Plc (260 940)
Finbank Plc (104 751)
Equitorial Trust Bank Ltd (27 253)
Spring Bank Plc (87 869)
Source: CBN
The CBN took proactive steps, including the
injection of NGN 620bn as a convertible loan that
amounts to Tier II capital into the banks, replacing
the Chief Executives and Executive Directors of
eight of the banks with competent managers with
experience and integrity, introducing the
guarantee of the local interbank market to ensure
continued liquidity for all banks and guaranteeing
foreign creditors and correspondent banks’ credit
lines to ensure confidence and maintain important
correspondent banking relationships. The CBN also
moved to create a “bad bank”, the Asset
Management Corporation of Nigeria (AMCON). By
31 December 2010, AMCON had executed loan
purchase and service agreements with 21
participating banks to acquire NPLs with a face
value of NGN 2.04tn for just under NGN 800bn.
92.5% of the purchased NPLs were from the 10
“intervened” banks with the balance of 7.25%
coming from other banks. AMCON issued 3-year
zero coupon bonds with a yield of 10.125% as
consideration for the purchased NPLs. This helped
to further stabilise the banking sector.
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