Sanusi Abubakar
10 November 2009
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Abuja — Bankers are a quite bunch. Well, most of them anyway. Thus, when they start talking about their options for survival, we better listen. Especially when they have been given a deadline by the regulator, the Central Bank, to recapitalize and when investors are rather shy.
Therefore, the recent remarks by Falalu Bello, MD of Unity Bank, deserves scrutiny given that, for some of us who never bought any bank shares, that is the only bank we have a say in. Our state governments have shares they are holding on our behalf, theoretically at least. These shares are on offer on the instruction of the CBN.
While on a courtesy visit to the Daily Trust, Falalu said that Unity Bank is planning to raise between N50 billion and N70 billion, before June next year, to shore up its capital base as demanded by the CBN. He added that the bank is considering six options; public offer, rights issue, asset-stripping, debenture, sell of shares in subsidiaries and, as a last resort, merger. Since they put their thoughts in the public domain we shall give them our views. Free of charge. Let us look at the feasibility, efficacy and likely impacts of these options, and also ask if these are the only possible ones.
A public offer is possible, even if it is dicey. Will it work? I doubt it. Let us not quickly forget, as we often do, our immediate past experiences. We are only just recovering from an era of dubious public offers when junk was repackaged and sold to Nigerians some of whom are still holding those worthless papers. Few are in the mood for any offer now. True, Unity Bank would be a good buy, but one may have to discount those shares (currently at N1.04) massively to attract buyers. It is common knowledge that the CBN has directed the state governments to divest their holdings in the Bank, which will easily put over 50% of existing Unity shares currently owned by these state governments, up for sale in the secondary market. This would not come to the Bank but to the coffers of the respective state governments, which is why the MD is not even talking about it.
It will nevertheless make marketing the public offer by Unity Bank rather difficult. The CBN itself has to make up its mind between ideology and efficiency. It is not wise to insist both on state government divestiture, which in any case would not bring a kobo to Unity Bank, and on Unity Bank raising its capital base. There will be too many shares in the market with a likely negative impact on prices, resulting from an ideologically biased decision. Government can and should hold shares in anything they desire. What is important is stopping the governors from using the Bank as their kitty, as they did to Bank of the North and the cooperative banks. In any case, once the Bank raises about N50 billion to N70 billion additional capital, the share holdings of these governments will be diluted. We should use the market, and better corporate governance, to achieve this objective not just by administrative fiat.
Rights issue is simply offering of new shares by a company to its existing shareholders on favourable terms (often called "capitalization issue") Put differently, it is an offering of common stock to existing shareholders who hold subscription rights or pre-emptive rights that entitle them to buy newly issued shares at a discount from the price at which they will be offered to the public later. They would need an investment banker to handle the rights offering and to agree to buy any shares not bought by shareholders. Given Unity Banks less than sterling performance in publishing its accounts as required by law, this may be one of its better options. But we are then back to the other problem; we would be offering cheap shares to Rivers State and the northern governments, precisely those the CBN would like to see divest. (How Rivers State managed to get their deposits in First Interstate Bank converted to shares in Unity Bank is another story for another time!) However, as owners, existing share holders know better than outsiders the value of Unity Bank and are most likely to buy the discounted offer.
The MD puts the value of the combined assets of the nine banks that merged to form Unity Bank at N23 billion. (I would have thought that Bank of the North alone had much more than that, but let us not digress) Asset-stripping is not likely to raise more than N7 billion; or N10 billion, tops. Even that may be unachievable if the Bank rushes to sell; prices are likely to fall if one puts so much property in the market at the same time. The decision to locate the Head Office of the Bank in Abuja rather than Kano, where they already have solid assets, is a curious one that limits their options.
In what must have been a slip of tongue, the MD talked of using some of these assets as collateral for the debenture they are considering. He must be talking of a normal bond. Debentures have no collateral, as he knows very well. Bond buyers generally purchase debentures when they believe that the bond issuer is unlikely to default on the repayment. It is a debt instrument that is not secured by a physical asset or collateral. Debentures are normally backed only by the general creditworthiness and reputation of the issuer.
Sell of shares in subsidiaries? No problem with that, but how many subsidiaries do they have anyway, and how attractive would their shares be? Indeed we are back to all the problems associated with public offer at this material time. Finally, I totally agree with the MD, a merger is not really on the table, as the Bank is only just recovering from the problems of another one. In any case, which bank in Nigeria would bring the sort of new thinking, the managerial and financial innovations or the funds that would be required?
Others options must be considered. These include, but are not limited to, capitalisation of recovered legacy debts, relocation of the Head Office, sell-and lease-back, and even the Bank's acquisition by a core investor. Since it has been agreed that "all non-performing loans of all the legacy banks for which full provisions had already been made will be transferred to asset management company for the benefits of the shareholders" and since this amounts to about N49.6 billion, the Bank has a potential source of new investments. Already, over N13 billion is said to have been recovered from the legacy debts of Bank of the North alone, which should have been credited to the former owners. This, as well as future recoveries could be retained and converted to shares in favour of owners of those legacy banks, which could, however, also increase the amount to be divested, as per CBN directives. However, not all of this amount is available to be capitalised, as there are outstanding pensions liabilities of former Bank of the North workers.
I am sure those in charge of Unity Bank will find some way out of this situation, since they must have been brainstorming for a long time. But they must be more imaginative, and think out of the box. CBN, on its own part, should assist by lifting its target date for divesting of shares by the state governments, to three years, or even five years, to give room for an orderly exercise. By all means get the state governments out of the banks as historically they have been major liabilities to all the banks they have had shares in. But let us do it slowly.
The CBN may have given them a pass mark in corporate governance, but we are still not convinced. The law requires that all companies produce audited accounts annually, and publish these in respect of public companies. These are part of what investors would consider. Nobody invests in legacies. The management and board of unity bank should sit up and ensure regular, published, audited account of their stewardship.
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