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Implication of the CBN's Action Against the Five Banks

Implication of the CBN's Action Against the Five Banks

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Published by tsoetan
Implication of the CBN's Action Against the Five Banks
Implication of the CBN's Action Against the Five Banks

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Published by: tsoetan on Aug 31, 2009
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On Friday, August 14, 2009, the Central Bank of Nigeria (CBN) announced thesack of the management of 5 banks namely Afribank Plc, Finbank Plc,Intercontinental Bank Plc, Oceanic Bank Plc and Union Bank of Nigeria Plc.
According to the CBN, the management of the banks were sacked because theyacted in a manner that was detrimental to the interest of their depositors andcreditors.
The CBN said the banks have liquidity challenges arising from their “huge”exposure to the capital market, petroleum marketing sector, specific large-tickettransactions and consequently “massive” Non Performing Loans. This left one ofthe five banks “technically insolvent” and the other four undercapitalised.
Major criteria used for determining the status of the banks include the number oftimes the banks approached the CBN Expanded Discount Window (EDW) andthe interbank market to shore up liquidity. The percentage of non-performingloans to total loan portfolio and relative share of non-performing loans to theentire industry were also relevant.
The CBN gave the following statistics to back up its action.1. Total Loan Portfolio - N2.8trillion2. Total Margin Loans - N456billion3. Exposure to Oil & Gas - N487billion4. Total Non-Performing Loan - N1.143trillion (rep 40.81%)5. Outstanding balance at EDW - N127.85billion (rep 89.81%)6. Net guaranteed interbank takings - N253.30billion7. Liquidity Ratio - 17.65% -24% (below 25% minimum)8. Capital Adequacy Ratio - Below 10% minimum (one has 1.01%)9. Market Share Total Assets - 31.47%10. Market Share Deposits - 29.99%11. Market Share Loans - 39.93%12. Minimum Capital Required - N204.94billion13. Capital Now injected - N405billion
Ultimately, the CBN immediately replaced the CEOs of the affected bankswith interim managers and simultaneously enhanced their capital base byinjecting a total of N405billion through Convertible Tier II Debt under guidancefrom selected consultants.
The interim managers are Nebolisah Arah (Afribank), Suzanne Iroche(Finbank), Mahmoud Alabi (Intercontinental Bank), John Aboh (OceanicBank) and Funke Osibodu (Union Bank).
Other banks audited
and found to be in good financial state
are DiamondBank Plc, First Bank of Nigeria Plc, Guaranty Trust Bank Plc, Sterling BankPlc and UBA Plc.
The audit exercise is continuing in the remaining 14 banks with a Septemberdeadline for the completion of the whole exercise. The remaining banks areAccess Bank Plc, Bank PHB Plc, NIB (Citigroup), Ecobank Bank Plc,Equatorial Trust Bank Plc, Fidelity Bank Plc, FCMB Plc, Stanbic IBTC BankPlc, Standard Chartered Bank Limited, Skye Bank Plc, Spring Bank Plc, UnityBank Plc, Wema Bank Plc, Zenith Bank Plc.
The CBN however does not anticipate that the continuing audit of theremaining 14 banks will throw up considerable surprises since thedecision on the five banks was based on an assessment of banks whichshow signs of distress.Implication for the Banking Industry
Unsurprisingly there are mixed reactions to the sweeping actions taken by the CBN.
Some industry participants see the action as disruptive, ill-timed and evenpre-meditated. They argue that while the need to take decisive measureswithin the industry was apparent, they should have been done gradually andwith continuous public consultation to obviate panic or uncertainty. They notethat the audit exercise in more than half of practicing banks is still on-goinglending a whiff of unevenness to the measures carried out. There remainssome uncertainty about the fate of these banks. In addition, the decision tosack Executive Directors might cause a lull in the continuity of the banks’businesses.
Other analysts strongly support the action, stressing that sweepingsanitisation is long over-due. In their view, most of the CEOs had overstayedtheir entrepreneurial effectiveness and should have left on their own volitionconsidering the tendency for funding gaps (arising from poor credit/riskmanagement) to worsen. They saw the action as a strong indication of theresolve of the regulator to sanitize the industry and protect innocentdepositors.
BGL’s View
We believe that the CBN is aware of the possible negative implication of these actionsand has gradually put measures in place to curb the effect. The measures include:
Introduction of guarantee for interbank takings in early July:
This willhelp to boost liquidity, clear trading uncertainty and eventually bring down thecost of funds.
Injection of fresh capital to the affected banks:
This is to allow the bankscontinue normal operation without loosing market share due to capitalinadequacy or a perceived loss of confidence.
Making cash available in all branches of CBN
to meet all withdrawalrequests, honouring all cheques issued on funded accounts and asking Stateand MDAs to leave deposits unmoved. By this action, the CBN envisaged thatthere may be depositor flight to safety. Again, these provisions are meant toaccommodate a possible run on the banks.
Soliciting the support of security agents in the recovery efforts ofdelinquent debtors:
This is another measure aimed at assuring depositorsand investors of the safety of their monies. By enhancing the debt recoverydrive of the banks, the Federal Government is keeping to its promise of notallowing any bank to fail. The recovery of the debts will boost the banks’liquidity and ultimately, profitability.
Appointment of a new Deputy Governor in charge of FinancialSurveillance Services:
The appointment of Dr. Kingsley Moghalu, a riskmanagement specialist based in Switzerland as the new Deputy Governor(Financial Surveillance Services) will add more teeth to the ongoing reformand strengthening of the regulatory capacity of the CBN. With his wideexperience in Nigeria and abroad, Moghalu will be able to ensure theimplementation of proper risk management policies and full disclosure bybanks.
Evident collaboration with NSE and SEC
to guard against adverse tradingof these (listed) banks’ shares. Public statements by the CBN have revealedsupport for the defensive actions taken by Capital Market authorities insuspending price movement and trading in the stock of the banks.In the final analysis, we believe the measures are adequate to cushion whatevernegative impact this action might have on the monetary system. The CBN hasquite boldly moved to assure that depositors’ monies remain safe. When the dustsettles, we are of the opinion that the pre-emptive actions will be correctlylauded. We also feel that in the short-to-medium term, the new managers will beable to turn around these significantly-sized banking firms and aid the CBN’s

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