Storm in the Banking Teacup: Interesting and depressing times ahead
That the Central Bank unceremoniously fired the CEOs and Executive Management of five (5) banks in Nigeria on Friday, August 14th will only be news to either those just let off the kidnapping hook of the gentlemen from MEND or illiterate Nigerians on the fringes of civilisation. The Central Bank in what is now being termed as “Black Friday” has done the undoable and touched the supposed untouchables of the Nigerian business sector. To say that fear of the CBN has now become the beginning of banking wisdom in Nigeria is to be stating the bloody obvious. While the decision and the Gestapo like efficiency of its execution is interesting in itself, I believe the greater interesting points lie in the wider implications of the decision for the banking sector and the Nigerian business environment in general.
The sack of these executives and the emergence of “kings who do not know Joseph” in the form of interim management teams appointed by the CBN to steady the affected banks and recoup the Central Bank’s investments has serious implications for the Banks’ creditors. Various loans which have now gone bad were granted to either related companies of the ousted executives; longstanding customers of the affected banks and/or close personal/business associates of the executives. The interim executives – who are mainly retired folk – would most likely swing towards loan recovery if the choice came to either recovering loans through asset sales or maintaining the existing business and personal relationships of the ousted executives. As a result, we are very likely to see a huge rise in forced sales of various collateral assets in the coming months and something tells me that in light of the prominence given to downstream Oil and Gas loans we are likely to see a preponderance of tank farm and Oil Tanker sales in the coming months. The next few months will be very appealing for companies and individuals seeking to acquire downstream Oil and Gas assets as banks seek to recover whatever they can. Same goes for relatively under occupied high end real estate assets in Lagos and shares of companies listed on the Stock Exchange. The NSE’s All Share Index is likely to dip further as considerable selling pressure will be on the affected Bank’s shares which constitute a very significant portion of the index, this selling pressure may yet spread to other banking and non-banking stocks as banks recover whatever they can of the margin loans they have given out.
Beyond the expected pressure on asset prices across board in the coming months, the actions of Mr. Lamido Sanusi is very likely to result in changes to the ownership structure of the affected banks with shareholders of these banks likely to find themselves left out in the cold. To put this in perspective, the CBN Governor stated that one of the affected banks had a Capital Adequacy Ratio (CAR) of only 1.01% as against the minimum regulatory requirement of 10% (this implies that the said bank has only N1 in capital for each N100 in Risk Weighted Assets). The CBN is injecting fresh funds – in the form of hybrid Tier 2 capital – to bring the CAR to the 10% minimum, what this means is that the CBN is going to inject – into the bank over this weekend – new capital amounting to 9 Times! the current capital of the bank. Needless to say, current shareholders of that particular bank are practically wiped out as their current shareholding will amount to only 10% of the capital of the bank post bailout!. While the CBN has signified its intention to recoup its investment in the banks as soon as practicable through capital raising exercises that the interim managers are expected to conduct in the near future. It is clear that given the near comatose state of the Nigerian Equity Capital Markets, a normal public offer of securities will be very unlikely to succeed. As a result, the guys who will be supplying the funds – to ensure the CBN’s exit – will be deep pocketed strategic investors and not the thundering herd of gullible, over leveraged retail investors that have typified our markets. This will provide a very good opportunity for the foreign banks - whose incursions have been very effectively blocked by Prof. Soludo - to finally enter the banking sector. I will be very surprised if at least one or two of the affected banks do not fall into the hands of foreign banks in the next 12-24 months.
Finally, we are likely to see a big change in the competitive structure of the Banking industry with each of the affected banks losing market share over the next few months as: interim managers focus on fighting fires rather than growing the business; depositors grow increasingly wary of the Banks’ survival chances and competitors swoop on them like vultures. I believe a number of big ticket accounts may flee those banks for the refuge of supposedly more stable banks such as GTBank, First Bank and UBA with the affected banks losing the marketing and business generation edge provided by their very charismatic and highly connected CEOS.
The next few months are likely to be interesting and depressing in equal parts with losers and winners being thrown up by the current crisis, we can only keep our minds attuned towards seeking opportunities in the crisis!
