A rough-and-ready stress test conducted by Nigeria’s central bank (CBN) showed that at least three out of 23 deposit taking banks in the country are in dire straits as their capital adequacy numbers tumble. This comes as no surprise to many as speculation was already rife that some banks where treading deep waters, despite continual denial by the industry’s primary regulator.

“You didn’t need to be a wizard or witch to see behind CBN’s confidence-building veil” says economist and investment analyst, Tony Madojemu, chief executive officer of Investment Company, Maven Investments and Finance, ” You only needed to observe how hard these banks struggled to keep customer deposits, create new but less risky loans and build adequate operating margins for you to know that the financial grass was suddenly turning from green to yellow”.  As things stand the grass may be turning amber.

A number of big banks have shown difficulties with their operations in recent months. The challenges have ranged from shrinking low-cost deposits from customers, above industry average cost- to- income ratios, falling incomes on foreign exchange transactions, declining earnings from high quality loans and a flattening of net interest incomes from core lending businesses. ”weaker banks are victims of Murphy’s Law which states that anything that can go wrong will” says Madojemu, a fellow of the Institute of Chartered Accountants of Nigeria (ICAN). He argues that, ”the banks that failed CBN’s recent stress test need to rise above their past and adopt fresh thinking and proper strategies that place their customers at the centre of their operations using big data to lead service.  In the present ecosystem, the customer is not king or queen, he or she is an emperor!”.

Be that as it may, the emerging financial numbers for banking’s little league in 2018 looks tough. Unity Bank Plc has been a quiet but queer little money lender. Traditionally strong with finger-licking liquidity the bank has since fallen on harder times as it struggles to post decent operating margins. The bank’s nine months 2018 financials strips its inner problems naked.

Gross income of the bank in the nine months to September 2018 tumbled on its face, as gross earnings slipped from N65 billion in the first nine months of 2017 to a lighter N26 billion in the contemporary period of 2018, representing a 40 per cent slump in income on a year-on-year basis. Net interest income also tragically collapsed over the period, dipping from N38.5 billion in 2017 to a skinny N9.9billion in 2018, indicating that the bank suffered significant shrinking of income in its core activity as lending shot down a dark hole.

Net trading income went from N1.0 billion in 2017 to a paltry N79.6million in 2018, a fall of 92 per cent over the nine months period on a year-on-year basis. On a better note, the bank’s other operating incomes went from a modest N775.3 million in the first 9 months of 2017 to N3.3 billion in the contemporary period of 2018,representing a staggering 326 per cent rise in the bank’s none core business activities. Oluwarine Olawale of Capital Express Securities is of the opinion that the event is none recurring, ”you should strategically grow your core business channels as a bank, and keep a steady eye on costs; the other income budget line is a risky item made up of a mixed revenue salad as predictable as a rainstorm. Relying on this budget line item is a not-so-clever way of getting into financial trouble fairly quickly”, she insists.

A unity of headaches

Unity Bank’s nine month profit before tax in 2018, gave a cold shoulder to the large increase in the banks mysterious other incomes and collapsed like a poorly made pancake, slumping 76.3 per cent from N2.7 billion in the nine months to September 2017 to N643.8million in the same period of 2018. According to Olawale, ”the bank over the one year period has turned from victor to villain. Management may have a nasty time with shareholders come April next year”, she notes.

The bank’s loans and advances to customers shrunk from N309.5billion by September 2017 to a shrunken N39.6 billion in September 2018, underscoring the reason for the bank’s massive drop in net interest income.  The trouble with Unity Bank is that the cream of its customers has voted with their feet as they take their businesses elsewhere. To order its state of affairs (in other words become more liquid) the bank has had to sell off financial assets at massive losses. Loss on this profit and loss item rose from a blinding N1.9 billion in 2017 to a staggering N2.3 billion in the first nine months of 2018. ”If there was ever a time to shed tears of pain for shareholders of Unity Bank, this is the hour and the season”, says Chuks Iloegbunam stock analyst at Capital One Investments and Trust. According to Iloegbunam, ” the books tell a dark tale nobody particularly cares to read”.  But even bigger banks appear to have had a fair share of operating worries in the last few months.

Shining bright like a Diamond?

For example, Diamond Bank equally seems hard pressed.  Squeezed between energy-sapping backroom board politics (four directors recently resigned in one fell swoop including the bank’s Chairman, Bickerseth) and damaging loan assets. The fiscal arithmetic of the bank has gone off the rails and made it difficult for the incumbent managing director, Uzoma Dozie, son of the founding chairman of the bank, Dr Pascal Dozie, to keep the books in stable balance. Profits numbers have cascaded like Ekiti State’s warm springs, while loan impairment costs have kicked a dent in the bank’s ability to make a clever comeback. An independent analyst who requested that he should not be mentioned by name recently noted that, “Diamond Bank is a poster boy for Murphy’s law that what can go wrong will go wrong”. According to this observer, ”the bank like other banks between 2014 and 2016 got locked into some dodgy risk assets especially in the oil, gas and energy sectors, these loans have come to haunt the institution, but what has made it worse has been the poor marketing acumen and public sector engagement of the younger Dozie era”, he argues that although the digital foray of the bank led by Uzoma Dozie has been a necessary part of the evolving ecosystem, ”it is not an authentic offensive corporate strategy, it is a plain and simple product add-on”, he insists.

To be fair, Diamond Bank has tried to grow its books in a sustainable manner through cutting back loan assets, renegotiating the terms of repayment for bad debts (helped by the recent rise in international oil prices) and shrinking its bank wide operations to concentrate on domestic activities (it sold off its total stake in Diamond Bank UK to the GFG group). So far those efforts have been mildly successful. The numbers, however, still look a tad weak.

Reviewing the bank’s 9 months figures till September 2018, Diamond Bank still has some miles to go before its fortunes look up noticeably. Gross earnings between September 2017 and the contemporary period of 2018 fell from N143.7 billion in 2017 to N142.5 billion in 2018, a marginal slump of one per cent. Net interest income also took a dive, dropping by 13.6 per cent from N 77.7 billion in 2017 to N 67.1 billion in the same period of 2018. However impairment chargers for poor loans equally dipped  33.7 per cent from N 33.2 billion at the end of September 2017 to N22 billion by the end of the contemporary month of 2018. This suggests that the bank is gradually trying to take a hold of a bad credit position and attempting to turn the tables on the sticky situation. Impairment charges of the bank as a proportion of its customer’s loans outstanding was 3 per cent in 2018 down from 4.5 per cent in 2017 while loans and advances to customers climbed down from N755.5 billion in the first nine months of 2017 to N730.2 billion in similar period of 2018. The drop reflects an industry wide reduction in loans by banks as a number of them try to wind down bad debts and narrow credit to less risky trade-related commercial transactions.

These turn of events, according to analysts, have badly affected manufacturers who have found it ever more difficult to access credit from the local money market. Hence, explaining the race by larger corporations with good name recognition to float short-term commercial papers (CPs) rather than seek bank loans.  ”The ‘once-upon-a-time’ commercial paper market is back.”, notes Chris Okenwa, chief executive officer of FSS Securities, ”Companies now feel confident that with strong balance sheets and good corporate names, they can borrow money directly from the public, but only at what the market considers the right price ”, he says. According to Okenwa, ”with the economy growing at under 2 per cent (actually 1.5 per cent as at June), the prospect for lending growth is bleak. The growth in bank profit numbers for 2018 is likely to be as flat as pancakes”, he insists.

Diamond Bank’s books at face value look untroubled, nevertheless behind the scenes lurk major challenges, perhaps as serious as Unity Bank’s. Like Unity Bank, Diamond Bank needs a fresh infusion of capital by way of equity rather than debt. Poor loan quality carried over from the period of erstwhile managing director, Dr Alex Otti, and additional weak loans accumulated by Dozie himself have weakened the bank’s balance sheet. Concerns about the banks healthiness, it has been alleged, were a major reason for the four directors that resigned to take a walk. They were dissatisfied with the bank’s response to the problem of fresh capital. While Dozie preferred an internal reengineering of the business process to free up capital from within, the other directors seemed to have opted for the raising of equity from new investors, or existing investors by way of a Rights Offer.

Dozie’s reluctance to go outside the banks operating earnings and non-strategic asset sales to reduce liquidity pressure and capital adequacy, according to one analyst, ”appears to be the Dozie family’s fear of share dilution and losing grip over the bank they started”. This may be a legitimate concern, but is not supported by anything but speculation.

Dark Skies

Another bank with clear operational headaches is Polaris Bank (the former Skye Bank). A legacy institution set up by the Asset Management Company of Nigeria AMCON) to take up the assets and liabilities of the old Skye Bank, Polaris is a solution waiting to happen. Before the Central Bank of Nigeria (CBN) took over Skye Bank, in a cloudy liquidation arrangement (bankruptcy procedures in Nigeria are a mystery), the regulator had chucked out the old management led by Timothy Oguntayo, and put a new management in place, but apparently things had gotten so out of hand at the bank that even the new executives were helpless in pulling the institution from the brink.

Before Skye Bank was untidily wound up, the unfolding tale was like an extract from an ‘Arabian knights’ fable, with charismatic robber barons running riot, bank executives delighting in the adrenaline of paper profit rush and the regulator keeping up appearances, until recently, that all was well with the bank (a clear Nero moment, named after the Roman emperor who fiddled while Rome burned), the only things left was a magic lamp and a cave.

In 2014, Skye Bank was the fourth largest commercial lender in the country with 469 branches across the country after acquiring defunct Afribank, christen Mainstreet bank when it was nationalised by government.

Before recent developments and the bank’s management crisis the stage had been set for an epic battle to save it from its own past.

Weak asset quality, rising funding costs and increased customer wariness about the safety of their deposits have conspired to squeeze out the bank’s balance sheet and tear current profit figures to shreds as its management tries to restore confidence and recover bad loans. The not-so-subtle easing out of four immediate past executive directors of the bank, has thrown an additional pall over its fortunes as stakeholders continue to fret over the reasons why four senior executives would collectively resign on the same day.

The affected directors Idris Yakubu, Markie Idowu (Mrs), Abimbola Izu (Mrs) and BayoSanni were said that have occupied their senior positions for less than two years.

They were believed to have been part of a new board that came into being following the intervention of the Central Bank of Nigeria on July 4, 2016.

A letter from the bank notifying the Nigerian Stock Exchange (NSE) of the departure of the directors and signed by the banks Group Managing Director, Tokunbo Abiru, said in a terse and frigid statement that the executive directors had contributed immensely to the successful leadership transition which commenced the previous year.

The statement noted that “…the new development does not in any way affect the smooth running of the bank as it continues to deliver services to its customers across the country.”

It added that the portfolios of the directors had, unprecedentedly, been reassigned to general managers to ensure a seamless transition. Market observers insist that the resignation of four Executive directors at the same time was abnormal and reflective of a festering problem with the banks broad operations, particularly its loan book.

In the view of some outside observers, Skye Bank was yet to resolve its internal kinks that started manifesting last year when the Central Bank of Nigeria (CBN) announced the removal of its erstwhile chairman, Mr. Tunde Ayeni, who, it was claimed, had an overbearing influence over the banks credit process which in turn led to a hefty exposure to a faltering Oil & Gas sector in which Ayeni was known to be a major player ; other directors that got the boot at the time were non-executive directors and its managing director, Mr. Timothy Oguntayo; deputy managing director, Mrs. AmakaOnwughalu; and two other executive directors. The clean sweep of the top echelon of the bank was designed to allow for a fresh start and a rejigging of the banks business model and the reconstruction of its credit portfolio. Apparently, the gambit did not pan out, and in a swift move to get a firmer handle on the increasingly eerie state of the banks operating expenses and recalcitrant risk asset portfolio, the CBN has had to ease into the banks parlous affairs again with a new team of managers, preferably at lower personnel cost.

Apart from obvious problems with its loans and advances the bank has been known in the past to have challenges with its board and management. The first problem was the delicate balance between staff of the former EIB Bank Plc and Prudent Bank Plc, after some bitter internecine squabbles it was agreed that the Chairmanship of the board and the Managing Directorship would swing alternately between candidates of both legacy banks who were the major equity holders of the new enlarged institution, explaining why the pioneer Chairman Musiliu Smith, came from the old EIB while the Managing Director, Sola Akinfemiwa, was a product of the old Prudent Bank and close ally of the former governor of Lagos State, Asiwaju Bola Ahmed Tinubu. During Akinfemiwa’s tenor the bank enjoyed huge patronage from states controlled by the now defunct Action Congress of Nigeria (ACN) whose principal promoter was Asiwaju Tinubu. These were the halcyon days of the bank, a period when it saw its liquidity wax stronger and its profitability grow sturdily. With the exit of Akinfemiwa, things began to grow steadily awry as the new helmsman, Kehinde Durosimi-Etti took office as the Managing Director. Durosimi-Etti equally had a strong relationship with the preeminent leader of politics in the South west, Tinubu, but he lacked the personal drive and rugged marketing charisma that stood Akinfemiwa out. This meant that the bank gradually lost market share and clout to other institutions that had since warmed their way to the hearts of the regions political gladiators.

By the time the mantle of leadership of the bank was handed to Timothy Oguntayo, new internal powerhouses of influence had taken control of the bank and its Chairman Ayeni, who had deep pockets and strong fraternal links with the federal government, had started calling the shots. This saw some of the previous strong influencers within the bank such as Tinubu and the new governors of the south west states quietly withdraw their patronage. The consequence was that business with states like Lagos fizzled, thereby elbowing the bank into a tight liquidity corner. The worsening liquidity eventually snowballed into dodgy credits and a panic drive towards the now declining Oil & Gas sector. Poor credit quality and declining liquidity has been the bane of the bank in the last two years and the CBN has doggedly tried to stem the leak as the bank struggles to keep from sinking.

Regardless of the expected curated statement of the banks new management of, confidence of customers has continued to dissipate. Those of them who have accounts in other bank are gradually transferring their funds.

The CBN governor, Godwin Emefiele, had said that the regulators last intervention was necessary in view of the persistent failure of Skye Bank to meet minimum thresholds for critical prudential and capital adequacy ratios that brought it repeatedly to the CBN’s lending window. Emefiele told journalists that Skye Bank’s liquidity and non-performing loan ratios had been below and above the required thresholds respectively for quite a while.

Worsened by loan losses which stood at N21billion in Q4, Proshare Nigeria Intelligence noted that the banks performance was ”an extremely poor set of results that was broad based. Both funding income and non-interest income were negative”. The bank’s liquidation was inevitable and its conversion to the new Polaris bank a stop gap that many would have preferred never happened.

Not such a lovely CAR for some

Capital Adequacy Ratios (CARs) of three big banks have dipped under regulatory requirements, as shown by the CBN’s recent stress test on the status of the banking system has shown.

Generally, the result of the solvency stress test shows that the potential for high contagion risk  through  unsecured  interbank  exposure  as  three banks (two Systemically Important Banks (SIBs)) failed the CAR measurement.

The test, contained in the Financial Stability Report, released recently by the CBN governor, Mr Godwin Emefiele, classified lenders into three, namely; large banks, those with assets greater than or equal to N1 trillion; medium banks with assets greater than or equal to N500 billion but less than N1 trillion and small banks with assets of less than N500 billion.

Analysts observe that the CAR is a ratio of bank’s assets to its risks and is 10 per cent for national banks and 15 per cent for banks with international subsidiaries and 16 per cent for SIBs.

It said the baseline CAR for the banking industry, large, medium, and small banks stood at 14.78, 15.47, 12.75 and 3.14 per cent respectively.

The banking industry stress test was carried out at the end of December last year. With the economy still hobbling the strains on the arms of the three banks struggling to keep heads above water will take its toll, but survival will depend more on brains than brawn, which hopefully the banks have in abundance.



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