Problematic Loans

Sanusi Lamido Sanusi, governor, Central Bank of Nigeria

The decision of Nigerian banks to make provision for the margin loans that most of them extended to stockbrokers, individuals and other investors during the bullish capital market is now having its toll on their financials
By Bayo Amodu
It is true that Charles Chukwuma Soludo, immediate past Governor of the Central Bank of Nigeria, CBN, no longer calls the shots at the apex bank, but, some of the practices in the nation’s money and capital markets during his tenure, which led to a meteoric rise and fall in the prices of shares in the Nigeria Stock Exchange, (NSE), are still having negative impact on the nation’s banks.
Some of the untoward practices, according to experts, include margin trading, unbridled pushing up of stock prices in order to earn higher returns, especially by institutional investors and stockbrokers, and delays in releasing share certificates. While the party lasted, speculators earned so much returns on equities.
In fact, according to findings by The Source, many banks earned over 1,000 per cent capital appreciation, even when their fundamentals were not strong to sustain such hype and mark-ups.
However, some of these banks are groaning currently under a heavy burden of N1.2 trillion margin loan. Margin loans are advances given to stockbrokers and investors generally to buy shares. During the bullish market in 2006 and 2007, Nigerian banks, according to the Nigerian Deposit Insurance Corporation (NDIC), extended margin loans of around N678 billion to stockbrokers, and an additional N147 billion was said to have been given to asset management companies. The banks are thus struggling with such non-performing loans.
According to a report by a synergy of Nigerian Investment analysts, Proshare, Value Fronteira Ltd. and Co titled: “Making Money in the Nigerian Capital Market, 2009,” 754 per cent of bank’s credit to the market was in the hands of operators who were associated to them.
With transactions on the exchange seeing the market indicators daily shedding valuable points, there seems to be no respite in sight soon. For instance, analysts contend that banks have lost a market capitalisation of about 64.94 per cent, and in the same vein margin loans extended by banks have depreciated by the same percentage– amounting to N237.70 billion eroding the share capital of the banks. The market capitalisation of 19 of the nation’s 24 banks, which as at January 2008 stood at N6.7 trillion, was to go as low as N2.4 trillion as at January, 2009.
The analysts also revealed that market operators are heavily exposed to banks, a development which may have serious implications on banks.
“Banks such as PHB and Oceanic Bank which are highly exposed to Capital Market may face serious challenges since the repayment of credits may be difficult,” said a financial expert.
He added that the health of the banks is now a subject of worry as portrayed by the CBN and NDIC, which seems to suggest that some banks have called for government intervention in their operations. Investors therefore, according to him, need more clarification before investing in the banks. His words: “Margin loans have generated a lot of controversies in the recent past. It is now problematic as a result of the global financial meltdown which resulted in stock market crash around the world. The CBN recently put the total estimate of the facilities banks granted individuals, stockbrokers as well as lending secured with share certificates at N1.2 trillion.”
Investigations by The Source showed that 11 banks in the country granted a total of N229.9 billion to individuals and stockbrokers as facilities to purchase shares, while the other 13 have about N778.3 billion. The process of getting repayment is even made more difficult because the prices of shares used in securing these loans have fallen below the value of the loans they were used to obtain. So, selling such shares at the level of share prices now will make it impossible for the banks to recover the full value of the loans granted. Financial experts further explained that most of the shares so purchased are being warehoused by the banks. The inability of banks and stockbrokers to sell off the shares has resulted in some level of liquidity crunch in the money and capital market.
Yet, the CBN has already directed that banks should make provision for the loans, which implies that the facilities provided for though not lost as banks will eventually recover the loans when prices of shares go up to the level of the facilities granted. The Source learnt that managing directors of some Nigerian banks who were not thinking of addressing the issue frontally have been forced to have a rethink after Sanusi Lamido Sanusi assumed office as new CBN governor. Many refer to the respectable banker as ‘Mr. Risk Manager.’
The Eurosia Group, an American-based research concern, contends that policy-wise, the most substantive difference between Soludo and Sanusi may be with regard to the mark-down of bad assets held by Nigerian banks.
Soludo, in what has shown why the banking industry showed so much enthusiastic support for his re-appointment, gave the banks until the end of 2009 to declare the true extent of their bad loans and affiliated losses on the country’s capital markets.
By contrast, Sanusi led First Bank to comply with Basel II and International Finance Reporting Standards (IFRS), and will likely push for adoption of more stringent risk management and compliance protocols across Nigeria’s financial industry, the group remarked.
According to Eurosia, if the banks are forced into recognising their losses, the current crop of 24 banks will shrink even further as some middle-tier ones who are more stressed would be compelled to seek for mergers in order to survive.
A new wave of bank Mergers and Acquisition (M&A), could result from a move by a Sanusi-led CBN to force the banks to disclose their losses. Already, there are moves by the banks to take bold steps in writing-off their toxic loans, even before the apex bank give any directive in that regard. Ecobank Plc recently wrote off $54 million margin loan. The ripple effect of this was felt in Ecobank Transnational International (ETI), the parent company where its profits went down because of the margin loan write–off in Nigeria. Despite the fact that the bank’s revenue increased from $544 million recorded the preceding financial year of 2007 to $826 million in 2008– about 51.84 per cent increase – the bank’s pre-tax profit during the year under review reduced significantly. Profit before tax fell from$191 million in 2007 to $162 million in 2008. This partly led to a reduction in dividend for the year ended December 31, 2008 to 0.2 cents, from 0.4 cents in 2007.
The realisation of this, according to financial experts, is that had the Nigerian subsidiary not written off its bad loan, the situation would have been different since the $54 million margin loan written off by Ecobank Nigeria would have been part of the Group’s pre-tax profit and this would engender an increase in bottom line. On the other hand, the written off loan would be recovered by the banks when share prices begin to rise again.
Explaining to the shareholders of the bank recently, the Managing Director of ETI, Arnold Ekpe said, “the sell down meant that we were obliged to adopt a prudent action.”
The Source gathered that more banks are following the footsteps of ETI as they have decided to make full provision for losses arising from margin loans.
According to The Source’s findings, Oceanic International Bank Plc is set to make a provision of about N25 billion, which is making its directors cut dividends to shareholders for the year ended December 31, 2008. The bank paid a dividend of N1.02 in respect of its year ended September 30, 2007 and some stakeholders of the bank may have been expecting about N1.30 dividend per share for the year ended December 31, 2008, which would have amounted to N30 billion. The Source learnt that the directors may have decided to cut the dividend due to a decision to make provision of about N25 billion for its exposure to the capital market.
While the banks are grappling with making provisions for toxic loans, there is now palpable anxiety in the nation’s capital market as fraudsters have started hijacking shareholder’s dividend warrants, a development that has caused Registrars of issuing houses to warn banks against endorsing third party accounts for the payment of dividends.
A director with a stockbroking firm, Valueline Securities Limited, Erem Erem, told newsmen in Lagos recently that the dividend warrant of one of the company’s major clients was recently hijacked by fraudsters in Benin City, Edo State.
Said he: “Some bank officials connive with these fraudsters to defraud investors. We are still investigating the matter. The fraudsters target dividend warrants with large value and use it to open a fresh account and after a week or less, they withdraw the entire amount from the account. This is a very bad development, especially at this period that investors are beineg encouraged to re-enter the market. We are trying to build market confidence and some people are there damaging the market.
Erem, however, advised shareholders to be very careful with their dividend warrants immediately, adding that any shareholder who happens to change address should, notify the Registrar, as well as the stockbroking firm that he or she uses. He also advised shareholders to patronise the e-dividend initiative, which automatically allows dividend to be credited directly into shareholder's accounts within 24 hours of payment by a company.