Babajide Komolafe
12 January 2009
The banking industry appears pregnant and one key factor that would determine its course this year would be the reappointment or otherwise of Professor Chukwuma Soludo as CBN governor whose first tenure comes to an end in April, Babajide Komolafe writes;
For the banking industry, year 2009 is loaded with certain uncertainties that will greatly influence the direction and fortunes of players and institutions in the industry.
Top on the list of these uncertainties is the tenure of the Governor of the Central Bank of Nigeria, which ends on April 30th 2009. The CBN Act prescribes five year tenure for this position, and the current governor, Professor Chukwuma Soludo was appointed May 2004.
Given the success and impact of the banking sector reform introduced by Soludo, many in the industry believe that he should be reappointed to continue the "good work". But speculations abound that this might not be so and names of personalities in the present administration are been rumoured to have been pencilled down to replace Soludo.
If Soludo is reappointed then, there might not be earthshaking development or policy pronouncement except for the Naira redenomination project, and that is if the Yar'Adua administration changes its mind. But a new CBN governor will have significant impact on the industry as the new helmsman would likely introduce new policies or even revoke those initiated and implemented by the Soludo administration.
Already, some industry operators believe that for ethnic and political reasons, a new CBN governor would be appointed come May. They argued that given that the previous Governor, Chief Joseph Sanusi is from the West and Soludo from the East, a northerner would be appointed to replace Soludo especially given the fact that Sanusi himself took over from an Easterner - Dr. Paul Ogwuma.
This position is reinforced by recent appointments to key positions by the President, Umaru Musa Yar'Adua, which seems skewed in favour of the north. Thus the expectation is that a new CBN would emerge from the north. Who would it probably be? The names been speculated include current Minister of National Planning and former Deputy governor, CBN, Dr. Shamsuddeen Usman, and the Chief Economic Adviser to the President, Mallam Tanimu Yakubu.
Yakubu was the Special Adviser to Yar'Adua when he was Governor of Katsina State, and is known to be a member of the President kitchen cabinet. In addition to these are speculations that should a northerner emerge as the new CBN governor, some of the policies introduced by the Soludo team which were perceived not to favour the north might be reviewed.
Top on the list in this regard is the banking consolidation which reduced the number of banks' with northern control to one.
In fact some believe that the consolidation exercise might be probed or investigated should a new CBN governor be appointed. Consequently, a flood of petitions from those that lost out during the consolidation is expected to flow immediately a new CBN governor is appointed. While some believe these are development with little or no possibility of occurring, some think it is a possibility. Should it be so, the impact on the banking industry would be profound.
Yet many industry operators believe that Soludo would be reappointed given his remarkable performance in the management of the economy and the respect he commands in the global finance community. Whichever it goes, the reappointment of Soludo or appointment of a new CBN governor will go a long way in shaping the industry in the New Year.
Global Economic Meltdown
Second to this is the on-going global economic meltdown. The global financial crisis has occasioned liquidity squeeze and credit crunch, and in the process wiped out renowned and reputed financial institutions - Leyman Brothers. Arising from this, the global economy took a down-turn in the second half of 2008, owing to sharp decline in consumer demand, unprecedented employment figures as businesses closed shop, and hence falling growth rate in most developed countries.
These development occasioned a gradual persistent decline in crude oil prices down from $147 in July to $35.58 in December, 2008. While the global financial crisis translated into reduced credit lines to Nigerian banks, massive capital outflow which prompted a decline in the Nigeria Stock Exchange, and zero inflow of autonomous forex, the global economic crisis, and the concomitant decline in oil prices translated to reduced foreign exchange inflow for the Nigerian government and economy and hence less income to share from the Federation Account.
The combined effect of these developments prompted the CBN to become a major supply of forex, with virtually everybody depending on it for daily foreign auction. Again, given that the inter-bank money market heavily relies on the monthly statutory allocation shared by the three tiers of government from the Federation Account and with income from oil earnings sharply down, it means there would be less money to share this year. This, many believe could affect operations of the interbank market this year.
Thus, should this trend continue throughout 2009 the banking industry would be confronted with the twin problem of scarcity of foreign exchange and funds.
Scarcity of foreign exchange would lead to further depreciation of the naira. (Already the Naira depreciated by N7.75 between Monday and Wednesday last week) and re-emergence of sharp practice like round tripping.
Scarcity of Naira funds or liquidity will force banks to be more aggressive in deposit mobilisation and of course, this will exert an upward pressure on interest rate. Also, banks might increasingly depend on the Discount Window of the CBN.
Against this background, the CBN would have to pursue an expansionary monetary policy in 2009, as it did in the second half of 2008, where it rolled out measures to improve liquidity for banks.
Nigerian Stock Exchange
The fortune of the Nigerian Stock Exchange is another factor that will somehow influence the banking industry in 2009. In 2008, the NSE lost about N5 trillion in values as stock prices plummeted to unimaginable level, resulting in severe capital loss for most investors. As a result, investors that borrowed from the banks via margin loans could not repay the loans.
According to the CBN, banks exposure to the NSE is about N800 billion, though investigation revealed this figure is a gross under estimation, and last year it gave the banks the permission to restructure this loan by up to one year. Hence, it is hoped that the NSE will recover this year, and investors that borrowed will be able to recoup their investment and repay their loans.
The implication is that should the NSE fail to recover in 2009, and there are serious doubt as to the possibility and extent of such recovery (In fact the NSE lost N503 billion or 7.2 per cent in the first four days of trading in the year), and investors can't find alternative means to repay banks, the margin loans will become doubtful and banks will have to make necessary provisions as required by the Prudential Guidelines. Such provision will definitely impact their profitability for the year.
But the recovery of the NSE might poise another challenge to the banking industry.
The persistent decline in the fortunes of the stock market in 2008 occasioned a missive shift in preference for investment in the capital market to the money market. As the stock market became unattractive, investors shifted to term deposit and other money market instrument, and this prompted increase in bank deposits. This is reflected in the sharp increase in deposit portfolio declared by the leading banks during the year. Analysts believe that should the NSE recover fully as predicted by some experts, banks might experience massive shift of investment from the tenured deposit products to capital market instruments.
Another factor that might influence the banking industry this year is the Real Estate sector of the economy. Risk Managers in the banking industry confirmed to Financial Vanguard that the real estate might be the next sector to experience a decline in fortune.
They believe that the sharp increase in prices of properties in recent times is driven by speculation and the bubble might burst any moment from now. According to them, quite a number of banks are heavily exposed to the sector and should the sector experience a melt down, these banks would be affected. Should this happen, other banks might be affected.
In addition to these, industry experts expect an extension of the reforms to the mortgage banking sector as well as finance houses. Throughout last year, there was serious agitation for reforms by operators in both sub-sectors but none was forth coming.
Though the apex bank had in 2007 indicated its intention to reform the mortgage banking sub-sector, to the chagrin of operators no pronouncement was made, and this increased fears and apprehension in the sub-sector. Thus, some believe that the reform package will be unveiled this year. However, should the CBN announce a minimum capital base that is too high for them to meet, the will give opportunity for banks to move in and acquire the mortgage banks that can recapitalize by themselves. This will further increase banks' hold over the other sub-sector of the financial sector.
A similar situation is expected in the finance houses sub-sector in the event of major reform pronouncement by the CBN. In fact, more than half of the 24 banks presently has stake in these two sub-sectors or are planning to do so. Hence whatever reform the CBN announces for the sub-sectors will likely hasten these plans.
Also, lending activities especially consumer lending might be influenced by the expected emergence of credit bureaux this year. It would be recalled that last year, the CBN unveiled guidelines for registration and operation of Credit Bureaux in the country. Credit bureaux serve as data store on banks' debtors and provide such information to banks. Their services help banks from extending credit to chronic loan defaulters.
Although there are about two of such companies in the country, it is expected that more will emerge in 2009, and this might further enhance increase of consumer finance products of banks.
While the occurrence of the above development is not certain, but should they occur, they would have profound effect on the industry is certain. And for this the outlook for the year for the banking industry is hazy and highly unpredictable.
Mergers and Acquisition
The market induced bank merger, post-consolidation, was kick-started with the merger of IBTC and Stanbic Bank and the merger of Bank PHB and Spring Bank ended the 2008 year. From the look of things, this year could witness more mergers in the industry.
Ecobank and Unity Bank Plc took the market by a storm when they announced their proposed merger on Wednesday May 9, 2007. This was barely a week or two after the celebrated break up of Ecobank proposed merger with First Bank of Nigeria Plc.
In fact, a Memorandum of Understanding (MOU) was been signed by the two financial institutions. Professor Akin Mabogunje and Alhaji Falalu Bello, Chairman and managing director/CEO respectively signed for Unity Bank Plc, while Chief John Odeyemi and Mr. Offong Ambah, Chairman and managing director/CEO respectively signed for Ecobank.
Unlike United Bank for Africa, UBA, which was rumoured to be planning a hostile take-over of Unity Bank several weeks earlier, the merger between Unity Bank and Ecobank was said to be a friendly one. "The combination is a friendly and business induced one that allows opportunity to further expand our business in the country," the Managing Director of Ecobank, Mr. Ambah stated.
Since then, however, all has been quiet about the proposed merger. But sources close to the two financial institutions told Financial Vanguard that talks are still on going. Whether the merger would be consummated this year or UBA would move in to take over as earlier stated is left to be seen.
There was also this proposed merger between Ecobank and Sterling Bank last year. Discussions went very far but share exchange ratio, allegedly made a short walk of the merger proposal. While Ecobank was said to have proposed a two-to-one share exchange ratio in its favour, Sterling Bank, on the other hand wanted a one-for-one exchange ratio. The two institutions are at this level of talks and they could finalise this during the year.
Intercontinental Bank Plc and First City Monument Bank are also said to have put in their best bid for WEMA Bank Plc. The bank, which is currently under CBN management, is said to be nodding in the direction of Intercontinental Bank and the deal could be concluded before the end of the year.
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