Banks Consolidation and N25bn Recapitalization -Another Perspective


Bello Abdullahi


Banks consolidation through mergers and acquisitions and the N25bn recapitalization exercise, the thirteenth and first items on Professor Charles Soludo’s 13-point reform agenda in the banking industry, came to an end precisely on 31st December, 2005 as promised. Hear him, “Consolidation of banking institutions through mergers and acquisitions. Banks that do not meet the minimum paid up capital by end of December 2005 or which remain un-sound/marginal would be liquidated by January 2006”. I doff my hart for the CBN Governor for keeping to his word that the deadline would not be extended. That in itself is an achievement considering the “Nigerian factor” in whatever we do. Pressures from all quarters - from the industry operators, the National Assembly, up to the Presidency did not influence the time-table.

In his address on 6th July, 2004, the Central Bank Governor said “the Nigerian banking system today is fragile and marginal. Our vision is a banking system that is part of the global change, and which is strong, competitive and reliable. It is a banking system which depositors can trust, and investors can rely upon. Evolving such a banking system is a collective responsibility of all agents in the Nigerian economy.” He gave reasons such as persistent illiquidity, weak corporate governance, poor assets quality, insider abuses, weak capital base, unprofitable operations, and over-dependency on public sector funds, among others, that necessitated the banking sector reform. In the same paper, the CBN Governor said “One of the recent developments in the banking system, which is of great concern to the monetary authorities is the significant dependence of many Nigerian banks on government deposits, with the three tiers of government and parastatals accounting for over 20 percent of total deposit liabilities of deposit money banks. Although the distribution among banks is not uniform, there are some banks whose dependency ratios are in excess of 50 percent. The implications are that the resources base of such banks is weak and volatile, rendering their operations highly vulnerable to swings in government revenue, arising from the uncertainties of the international oil market.” Soludo went on to justify the banking reform by painting the uncomfortable picture of the banking industry stating that “in recent times, many banks appear to have abandoned their essential intermediation role of mobilizing savings and inculcating banking habit at the household and micro enterprise levels. The apathy of banks towards small savers, particularly at the grass root level, has not only compounded the problems of low domestic savings and high bank lending rates in the country, it has also reduced access to relatively cheap and stable funds that could provide a reliable source of credit to the productive sectors at affordable rates of interest.” He went further to say that “The current structure of the banking system has promoted tendencies towards a rather sticky behavior of deposit rates, particularly at the retail level, such that, while banks’ lending rates remain high and positive in real terms, most deposit rates, especially those on savings, are low and negative. In addition, savings mobilization at the grass root level has been discouraged by the unrealistic requirements, by many banks, for opening accounts with them.” “The banks were expected to shore up their capital through the injection of fresh funds where applicable, but were most importantly encouraged to enter into merger/acquisition arrangements with other relatively smaller banks thus taking the advantage of economies of scale to reduce cost of doing business and enhance competitiveness locally and internationally.”

Also in a paper titled “Post Merger Integration: Matters Arising”, the Deputy Governor, Dr Shamsuddeen Usman had this to say: “The need to address the distress syndrome effectively and holistically informed the recent banking sector reforms initiative, which is anchored on a 13-point agenda that included, among others the injection of fresh capital into the industry to strengthen the banks recapitalization, in order to support the real sector of the economy; consolidation of banking institutions through mergers and acquisitions; creating better platform for more effective banking regulation and policy realization, making Nigerian banks become more internationally competitive, especially in West Africa, and establishment of an Assets Management Company as an important element of distress resolution.”

It was glaringly evident that the Nigerian banking industry was in desperate need for reform. After the 1986 SAP-induced boom that brought about banking license liberalization and the deregulation of interest rates, the distress syndrome slowly and surely crept into the industry as a result of which many banks were liquidated, either singly or in groups. This did not provide the “final solution” as the CBN had identified about twenty five banks as “having liquidity problem”. Hear the CBN Governor, “The latest assessment shows that while the overall health of the Nigerian banking system could be described as generally satisfactory, the state of some banks is less cheering. Specifically, as at end-March, 2004, the CBN’s ratings of all the banks, classified 62 as sound/satisfactory, 14 as marginal and 11 as unsound, while 2 of the banks did not render any returns during the period.” Curiously enough, neither the CBN Governor nor the Deputy Governor cited poor supervision by the regulatory bodies of CBN and NDIC in their presentations as one of the reasons that created the “distress syndrome” in the banking industry, which eventually saw the demise of many banks. Poor supervision creates room for poor governance, insider abuse, non-performing assets, and poor internal control, among others; which are the main reasons cited for the poor position of the `banks.

By 1st January, 2005, after the close of the un-extended deadline, 25 banks emerged as having met the N25bn recapitalization requirement. The structure of the “Consolidated Banks” comprises of those that “stand alone”, to two to nine “merged banks”. In a press release of 3rd January, 2005, that is immediately after the 31st December, 2004 deadline, the CBN governor said “The program has resulted in the shrinkage of the number of banks from 89 to 25 through merger/acquisition involving 76 banks which altogether account for 93.5% of the deposit share of the market.” However, in a paper he delivered on 16th January, 2005, titled “The Outcome of the Banking Sector Recapitalization and the Way Forward for the Undercapitalized Banks” he revealed that “Twenty-five banks emerged from 75 banks, out of a total of 89 banks that existed as at June 2004.” He gave a list of “14” banks that failed to meet new capital requirement this way: “In the exercise of the powers conferred upon us by the Banks and Other Financial Institutions Act, the operating licenses of the following 14 banks are hereby revoked.” If fourteen banks failed to meet the deadline why are eleven earmarked for liquidation? Certainly the owners of these “soon to be liquidated” banks have every right to feel aggrieved since it appears the CBN found a “safe haven” for the other three banks.

To begin with, it is apparent from the structure of the twenty-five banks that scaled the hurdle; “acquisitions and takeovers” were consummated, rather than the “mergers and acquisitions the CBN would want us to believe. In fact there are credible evidences that some are even “hostile takeovers”. Most of the banks were of un-equaled asset base, liquidity, branch spread, information and technology capability, etc; not to mention different cultures and processes. The usual due process and verification exercises were also hardly carried out before they hurriedly came together and applied to the regulatory authority for an “Approval-in-Principle”. Industry watchers and the general public were quick to identify “strange bed-fellows” in the structure of the consolidated banks. Banks that initially had nothing in common, or had sharply contrasting cultures and systems emerged as a single bank. There is no problem if the reforms are achieved through acquisitions and take over, but the problem is when such acquisitions and take over are portrayed as “Mergers”. One of the implications is that both the shareholders, investing public, depositors, and industry experts are misled into taking poor decisions; in addition to the disharmony and ill-feelings it will generate amongst the various staff of the banks.

Secondly, some of the 79 banks that made up the 25 consolidated banks are no better than the 14 that failed to cross the hurdle. They were only lucky to be part of the consolidation because either the regulatory body wanted them to be there, or certain forces guided them there, or both. Such banks have been identified to be suffering from the same distress syndrome the CBN used in revoking the licenses of the “edged-out 14”.

Thirdly, the structure of the twenty-five banks that emerged after the consolidation exercise appears lop-sided. If the desire of the reform is to consolidate and as much as possible minimize casualties, then the so-called “stand alone” banks should have been forced to “take over” the other banks, just as the CBN (as an after-thought) “encouraged” Ecobank and Diamond Bank to take over the “assets and deposits” of Allstates Bank and AIB, respectively – in any case the “un-seen” hands of the regulatory authorities can be identified in some of the mergers. By allowing some banks to stand alone the regulatory authority is only confusing the situation and inadvertently polarizing the system.  Allowing six banks to stand alone, while a whopping nine come together to consolidate is, to my mind, lopsided and counter-productive, and is bound to make things difficult for the banks. It is obvious the stand alone banks will use their pole position as a marketing tool and the unethical ones among them will find it difficult to resist de-marketing their competitors to gain undue advantage. This is also contrary to the gospel the CBN Governor has been spreading that no bank would be allowed to “go under” in the interest of investors’ and depositors’ funds and to save jobs.

Fourthly, five months after the take off of the consolidation exercise most of the twenty-five banks are still struggling with post-merger challenges. Their branches are yet to be standardized, processes have not been harmonized, and they are yet to integrate their systems, not to mention personnel, training, risk management, internal control, and other administrative issues. The reasons for this are not far-fetched – the banks are either too many for comfort or there is so much suspicion and disharmony due to sharp differences right from the boardroom down to the branches. It is only now that most of the banks are changing their logos while they continue to operate different systems using different software.

Even those that had a head start in the integration are battling with culture challenges – simply because they either went through acquisitions or hostile takeovers, and not mergers of equal partners. Researchers have identified 80% of mergers that failed due to culture differences – it is even worse when such culture differences are allowed to blossom. The other banks will loose out on important positions as executive directors appointments, control and other senior management positions. Staff of the “other banks” will be left to play second fiddle – in worst case situations a multiple salary structure and grades are used across the board (which of course favors the “lead-bank”).  This is the case with most of the banks, except, of course, those that stand alone.

The way the banking sector reacted to the consolidation exercise also leaves much to be desired. Of the twenty-five banks only eleven or thereabout are able to post a double digit share price – that is from N10.00 and above. Of the rest of the pack, some post share prices as low as N2.50! In other emerging markets of the world the mere mention of a speculative merger between two companies is enough to jerk the share price of one of them, depending on how the investing public rates them. Also the daily volume of transactions in the capital market as released by NSE and reported by the dailies falls far short of the anticipated “dividends of reforms”. Still the breweries and other transnational conglomerates record higher volumes of shares traded than the banking sector. Of course, as the share price is poor other performance indices such as earnings per share and return on equity are also below average.

A critical look at the structure of the consolidated banks will leave one in no doubt that it is made up of three groups, irrespective of the fact that they all have the same share capital – Big, Medium and Small, or A, B, and C. Or anyhow you would want to categorize them. It appears the regulatory authority was not sure how many banks it wanted to emerge at the end of the consolidation exercise. While it left the number to “the forces of demand and supply”, the President was in the United States telling the world media that at the end of the reform twelve banks would emerge. Did the President have the Malaysian experience in mind when he was making that economic policy statement?

The consolidated banks are still groaning under the weight of high costs of consolidation and bad debts. Most of the promises made as stated in a Central Bank release titled “Guidelines and Incentives on Consolidation in the Nigerian Banking Industry” dated 5th August, 2004 such as the establishment of an Asset Management Company and the underwriting of the consolidation costs are yet to materialize. There is no doubt considering our operating environment consolidation costs are astronomical and allowing the banks to foot the bills on their own will  not only affect their performance but push interest charges and other costs to the limit. This is not to talk of the high cost of branch expansion and training as the banks settle down. Of course these costs will be passed down to the “big borrowers” of the banks, who will in turn pass them down to the consumer, which will further put pressure on government as workers continue to agitate for increase in wages and salaries. The earlier this issue is resolved the better for the economy.

It is also apparent that contrary to the aim, and the general belief that the exercise would wipe out core shareholding in many banks some pioneer Chairmen, MDs/CEOs and other executive and non-executive directors are still sitting tight after spending more than the maximum twelve years allowed. Some of the MDs/CEOs are synonymous with their banks. In fact most of the banks are today being identified by one personality or the other – their dominance is so overwhelming that sometimes one does not need to mention the banks they head. The mere mention of their names is enough for people to understand the banks you are referring to! Some of the consolidated banks still have family ties and are being run as units of the family businesses.

Or what is a “gubernatorial candidate” doing as a CEO of a consolidated bank under the present dispensation, even after having a spell as an MD/CEO before the re-capitalisation exercise? Is this not a case of potential conflict of interest?  With one eye on the road to the government house he is left with only one eye to focus on the vision of the consolidated bank, metaphorically speaking.

The truth of the matter is that if the contents of the draft of the “Corporate Governance for Banks in Nigeria Post Consolidation” dated 5th January, 2006 will be implemented to the letter very few banks out of even the present consolidated twenty five can escape being charged with one infraction or the other, as most of them are guilty of having sit-tight directors.

There is no doubt the banking sector before 31st December, 2004 was begging for reform. All the reasons given by the regulatory authorities for the reforms were relevant and evident. However with the benefit of hindsight, which, as they say, is 20/20, it is clearly evident that CBN did not adequately prepare itself for the enormous task it set for itself. Much as it deserves credit for not extending the deadline, which took most of the fourteen banks that did not make it by surprise, there are traces of inadequate preparation, poor enlightenment campaign, as well as haphazard blueprint to drive the exercise.

To start with, the timeframe was too short given the complexity of our environment and the under-developed nature of our economy. Secondly, hinging the reform on the experiences of South Africa, Malaysia, and Singapore, as contained in the CBN governor’s July 2004 address, was, to say the least, naïve. Hear the CBN governor: “ Consolidation is taking place in South Africa such that one bank in South Africa – Amalgamated Banks of South Africa (ABSA) has asset base larger than all of Nigerian commercial banks put together. Malaysia has recently gone through its first round of consolidation whereby about 80 banks shrunk to about 12 within one year. In Malaysia, banks were required to raise their capital base from about $70 million to $546 million in one year. In Singapore (with about three million people), banks have now consolidated to about six and further moving down to three – with the second largest bank having a capital base of about US$67 billion.” Let me just simply say that Nigerian economy has nothing in common with the economies of these three countries!

More serious is the regulatory authority’s inability to carry all the banks along prior to the exercise. Otherwise how does the CBN explain the curious IPO’s some banks posted just before the governor’s address of 6th July, 2004? One does not need to be an industry “expert” to know that such banks will have a head start in the recapitalization exercise. Was this a coincidence? Incidentally, the banks are among those that “stand-alone” after the consolidation exercise. Different folks, different strokes, you might say!

Requesting those banks that are interested in managing the foreign reserves of the nation to jerk their share capital further to N130bn or $1bn barely three months after the recapitalization exercise was misguided, counter-productive and ill-timed. Even without jerking their share capital to N130bn, the CBN knows those banks that have the capacity to manage the nation’s foreign reserves. So why heat up the system unnecessarily by putting pressure on the banks to rush for additional capital? What is the rationale of a bank having a share capital of this threshold before it is allowed to manage foreign reserves? As the banks are fully aware of the benefits the tendency is that most of them will have no option other than to run to the capital market to raise additional capital, since foreign direct investment (FDI) is not forthcoming given our unfriendly investing environment. Already the manufacturing sector is complaining that the investing public will prefer to invest their excess funds in the banks. Whether these fears are genuine or unfounded, the fact of the matter is that it will definitely affect the manufacturing sector’s ability to source funds to resuscitate our moribund industries. They will only be left with the first option of sourcing funds from the banks at high cost.

For the recapitalized banks to avoid going back to the “distress syndrome” era the CBN has the enormous responsibility of ensuring that the banks are supervised effectively and all loop-holes blocked to avoid abuse. The regulatory authority must re-engineer its supervision department and man it with qualified and experienced personnel to carry out this assignment in a professional manner. The automation of the process for the rendition of returns by banks and other financial institutions through the enhanced Financial Analysis Surveillance System (e-FASS) must be driven and implemented with all sense of purpose. In addition, the recommendations contained in the Pius Okigbo panel report on the Reorganization and Reform of Central Bank of Nigeria of 1994 need to be revisited and implemented to give a further impetus to the performance of the regulatory authority – it must direct the search light on itself too.

The CBN must also drive the full implementation of the “Code of Corporate Governance for Banks in Nigeria Post Consolidation” dated January 5, 2006. Implementing this code to the letter alone will sanitize and re-position our banks; restore international confidence and that of the depositors. All banks must be treated equally without favour or sentiment. It is important for the banks to be separated from their CEO’s and shareholders. Experience has shown that those banks whose CEO’s are closer to the government in power gain undue advantage over others. This should not be the case, otherwise before we start reaping the dividends of the reforms the whole exercise will come to naught. The CBN must keep its professional distance with the commercial banks.

The CBN needs to look at the “phased withdrawal of public sector funds from banks, starting end-July 2004”, as one of the reforms enumerated by the governor in his address of July 2004. There should be a clear-cut policy of where to leave public sector funds – with the central bank or commercial banks. Withdrawing such funds from time to time, even as a monetary policy tool, is misguided and counter-productive. It only heats up the economy and distorts key industry indicators such as interest rates, inter-bank rates, and liquidity ratios. The Federal Government is the largest spender and whether we like it or not, for some time to come, commercial banks in Nigeria will continue to rely on public sector funds to solidify their positions. Now that all the banks have qualified to “manage public sector funds” the CBN should allow them to remain with the banks and even where it becomes absolutely necessary for it to withdraw a portion of it for monetary policy reasons, it should do it quietly without too much publicity. Unnecessary publicity only puts such banks in a disadvantaged situation as their competititors capitalize on it to de-market them, jerking up inter-bank rates. This scenario is counter-productive to the industry in particular and the economy in general.

With the increase in the Single Obligor Lending Limit, the CBN must encourage and effectively monitor the commercial banks to ensure that the preferred sectors of the economy benefit most from all lending. This is the only way that the economy will feel the effect of the reform and develop for the benefit of the entire citizens of the country. It should place its searchlight on banks that will want to prefer huge tickets that will bring higher revenues at minimum cost.

The CBN must, as a matter of urgency, decide finally on the issue of recapitalization expenses and bad debt as allowing these two heavy burdens with the banks will distract their attention to make the desired progress. Also the establishment of the Asset Management Company “as an important element of distress resolution” is taking too long. The CBN should not join issues with the owners of the liquidated banks that dragged it to court but should fat track the exercise in the interest of many depositors whose lives hinge on these savings. Already there are rumours that these banks have created “ghost depositors” to inflate their customer base to benefit from pay-off by the NDIC. The banks must not be allowed to get away with this fraud at the expense of the taxpayers.

The banks earmarked for liquidation were being run like private business enterprises by their CEO’s and the regulatory authority was fully aware of this. Why should it be surprised now if these CEO’s drag it to court to either protect what remains of their investments or their necks from the noose of EFCC. Hear the CBN governor in a paper he presented recently at a breakfast meeting organized by the United Bank for Africa (UBA) Plc in Abuja for the Nigeria-South Africa Chamber of Commerce (NSACC), “The former chief executives knew they should be in jail if they were in a civilized society for the havoc they wreaked on their banks and depositors. Instead they are now finding ways of escape by going to court.” There is no doubt the regulatory authorities created the enabling environment for the CEO’s of these banks to wreak this havoc by parading personal business enterprises that were no better than Bureau de Change outfits as banks and have the guts to challenge their liquidation in court.

As the CBN sets out to implement the remaining eleven items of the reform as contained in the governor’s July 2004 address, it must ensure that the commercial banks are well positioned to effectively drive the economy to avoid distractions that may make it loose focus. What will ensure this is effective supervision, good corporate governance, legal backing and equal playing ground for all the banks. Barring any unforeseen “Nigerian Factor”, the implementation of the remaining items on the reform agenda will not only place our commercial banks on a sound footing, even if it is not close to those of South Africa, Malaysia, and Singapore, for the challenges of the new millennium and beyond, but give the economy as a whole the desired stimulant.

The confirmation by the CBN governor that they have contingency plans on ground for any of the twenty five banks that starts showing distress signs is reassuring. The apex bank should not hesitate to excise any bank confirmed to be weak given all the liquidity indicators before it affects other banks. Of course, in doing this the interest of the shareholders, depositors, and the employees will be taken into consideration, among other things.