Pending Re-consolidation: Would Nigerian Banks Resort to Bonds?

The gains of the Prof Soludo propelled banking consolidation are being threatened by the global economic meltdown. The financial adventurism of Nigerian banks has negatively impacted on the capital they raised under Soludo. So Sanusi finds himself contending with instilling confidence in the system. The comprehensive audit is speculated to precede another round of strengthening for the banks. How would it go? Kenneth O Eze writes.

Background
The trying times brought upon investors in the nation’s capital market seem reluctant to abate. Concerted efforts by the government and regulators under the former Governor of the Central Bank of Nigeria (CBN), Prof Chukwuma C Soludo, failed to yield the desired results.
Soludo made way for Sanusi Lamido Sanusi at the helm of the apex bank. Sanusi took over leadership at the CBN on June 4, 2009, after being confirmed by the Senate the previous day. The change is now manifesting on several policies of the CBN, part of which include the enforcement of the full disclosure and stringent risk assessment measures. These, together with other factors, seem to have tightened liquidity.. So the banks appear to be dusting their capital raising files to head to the people to equip for the future.
A potpourri of events add up to the public’s fear that all may not be well with the banks. It is no secret that many of them are struggling with exposures in the capital market and oil sector. Media reports have raised concerns with the voice of the CBN governor lending credence that the banks need to be independently audited to determine their true financial health status.
The nimble and feeble elephant led the way by making full provision for the doubtful assets in the accounting period ended March 31, 2009. It would not stop there, as it has gone ahead to propose a bond of N500 billion in what observers think is a smart strategy to heal the wound occasioned by the write-off. FBN wrote-off N26.113 billion.
How Did the Banks Get Here?
First Bank of Nigeria (FBN) and Guaranty Trust Bank (GTBank) seem to be proactively responding to the indication by Sanusi, that there might be need for Nigerian banks to bolster their capital base. They have advanced plans to issue bonds of N500 billion and N200 billion respectively.
This leaves many stakeholders asking: “What would have led the banks to the position where the regulator would be compelled to undertake an independent comprehensive audit preparatory to determining what form of strengthening would save the gains made by the apex bank in guiding the banks to consolidate in 2004?”
Eddy A Ademosu, the President of the Association of the Corporate Affairs Managers of Banks (ACAMB), views the matter gravely, preferring that it be addressed by the major decision makers.. “This would be done soon,” he says. Attempting the question, in his words, “would amount to letting the cat out of the bag.”
Kingsley Omose, a legal practitioner and thought activist, tracing the route to the poor financial state by Nigeria banks shortly after raising so much money from the people, opines that “other people’s money is easier to spend. The situation is made worse by the gamblers and buccaneers in the banking sector. The loss of value has already occurred but those behind it should be sanctioned.”
It is looking as if damage has been done, but Ademosu wonders if the people will not accuse the banks of declaring bogus profits when they start recovering the money and showing it in their books?
An impeccable source at Skye Bank that would not like to be named, told M2, that the banks raised money and utilised the capital for the purposes for which they were raised. He made example of massive expansion efforts that most banks embarked on during the period in question.
Continuing, he explained that most Nigerian banks now run on modern information technology platforms that conform to what obtains in the developed world. “I can assure you that information technology and branch expansion are very expensive but necessary investments that the banks had to undertake. The results may not be immediate, but they will surely bear fruits,” the source told M2.
Amidst insinuations that capital market and oil sector exposures have left many Nigerian banks in the cold, following the global economic crisis, the stance of the CBN under Sanusi that full disclosure and more rigorous supervision be made is keeping bankers on their toes.
Stakeholders are awaiting the outcome of the comprehensive audit that the CBN is carrying out. But the players would not be caught napping. GTBank was first to announce its results in keeping with International Financial Reporting Standards (IFRS). The FBN followed,  making full provision for the doubtful assets.
Now, informed sources opine that what the banks are making provision for as bad assets, they are poised to re-coupe from the public using the bond instrument. The bond places less stress on the issuers as they attract relatively low interest over a period. Investors are attracted to bonds because it gives higher returns than savings deposit while protecting them from the vagaries of the equity segment of the capital market.
It would be recalled that on assumption of office as CBN Governor in 2004, Prof Soludo convened an enlarged Bankers’ Committee meeting at which he announced plans for the consolidation of banks in Nigeria. July 6, 2004 remains a date that many would not forget in a hurry as the minimum capital of banks in Nigerian banks was upped from N2 billion to N25 billion.
No key player will forget that while the matter was still being discussed, Zenith International Bank and GTBank opened their offers as if to underline their ambition. So they led the race for almost all Nigerian banks to source capital from the public in response to the mega bank status that many of them sought to attain. The almighty FBN raised N150 billion through a hybrid offer shortly before the meltdown.
Is the Banking Sector About Witnessing Another Round of Fund Raising?
GTBank and Zenith blazed the trail in 2004. It is also on record that all the banks took their turns in raising money from the public. Some of the banks did more than twice. So with the imminent issue of bonds by FBN and GTBank interested parties are asking: “How would the competitors react?”
The Guardian of Thursday July 23, 2009 expressed concern on the looming reconsolidation. Under the caption, “Reconsolidation Looms, CBN Seeks only 15 Banks”, the well respected newspaper notes that there are dangerous signals of distress in the banking sector that have forced regulators to the drawing board.
It writes: “Among the options reportedly being proposed by the Central Bank of Nigeria (CBN) is a fresh round of capitalisation by banks. It was learnt that very soon, the CBN would present the consolidation plan to the Federal Government.”
Giving further insight on what to expect in 2010, the Guardian exposed that the difference between 2004 and 2010 would be that while “the CBN concentrated on raising the banks’ capital base to N25 billion, the proposed scheme slated for early next year would encourage merger and acquisition among the operators.”
Lending his voice to the whether the banks would take their turns in issuing bonds, Ademosu says: “The bonds being floated might succeed because of the brands involved. But for others, I would not like to comment.”
Omose, informed M2 that “calls for reconsolidation have to do with perceptions of weakness and the need to have stronger banks.” Given that the CBN made no categorical statement in defence of the strength of Nigerian banks, speculations are being fuelled that weak banks exist.
With the saying that the war with prior announcement does not consume the lame, it is only right that the banks begin to position to strengthen individually or align for merger relationships.
As if in response to the National Coordinator of Independent Shareholders Association of Nigeria (ISAN), Sir Sunny Nwosu’s call for a review of taxes to allow the issuance of corporate bonds instead of equities, Sanusi recently promised to collaborate with SEC and NSE to reduce the cost of issuing bond  so as to diversify funding sources away from banks.
Sanusi’s opinion is hinged on the fact that the bank’s ability to discharge their financial intermediation roles is being hindered by the cost of raking in short term deposits. In his words, “apart from the critical role financial markets play in mobilising savings and allocating them to productive investments, an efficient financial market would provide a more stable source of financing for both private and public sectors. At present, there is near total absence of debt instruments in the capital market..”
Nwosu traces this near total absence to the discriminatory tax system that discourages corporate bonds from being issued. Available records indicate that companies in Nigerian could not explore the corporate bond market for several years owing to the high cost of issuing debt instruments and tax concerns. Access Bank was the last institution that issued a corporate bond with its N13.5 billion bond in October 2006.
With the stance of the regulators to join forces and encourage debt instruments, the stage appears set for Nigerian banks to harvest from this untapped segment of the economy.
Omose’s thinking is that, “as long as gamblers and buccaneers populate the banking sector, additional increases in capital will make little difference.” This stance tends to tally with that of Ademosu that the big wigs would come together and address how the banks got to this point so soon after.
A segment of the populace is keen on what steps the banks and the regulators take to save the banking system.. Popular thinking is that Sanusi must move swiftly and decisively to shore up confidence in the system.
Nigerians are rooting for Sanusi to build on the success of the banking consolidation engineered by Soludo. Omose sums it up: “Sanusi may at best succeed in weeding out the gamblers and buccaneers in system. That way he can complete the foundation work started by Soludo.”
It follows that the mode of capital raising or strengthening that the banks or regulators put in place for themselves must be founded on strong pillars that can sustain the expected gains. Nigerians are eager to see a system with safety valves to forestall a quick erosion of whatever positives the looming reconsolidation might bring on the banking system and national economy.