Banks’ losses: Implications on the capital market
Monday, January 4, 2009

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With recent disclosures of losses amounting to over N1.2 trillion suffered by six banks quoted on the Nigerian Stock Exchange, signifying an erosion of the banks’ capital base, stakeholders are wondering the implications these losses would have for the capital market.

There are sufficient reasons to worry about banks’ poor performance in relation to the equities market. Activities on shares of banks drive the market that has been on financial straits for too long with all performance indices fallen by over 60 percent.

Consider for instance, Stakes’ third quarter ranking of 55 largest companies on the Nigerian Stock Exchange. Top ten companies on the ranking according to capitalization had six banks leading the pack including First Bank, Zenith, United Bank for Africa, Guaranty Trust Bank, Ecobank Nigeria Plc, and Stanbic IBTC Plc.

Trailing behind only Nigerian Breweries, First Bank’s capitalization currently worth N358.023 billion; Zenith Bank followed with N351.640 billion in market value while United Bank for Africa’s capitalization worth N302.335 billion to emerge fourth on the ranking and with N252.699 billion market value, GT Bank occupied the fifth position.

Besides these top six, there were 14 other banks that made the list of 55 largest companies the least among them being Sterling Bank with N16.332 billion, Unity Bank N15.768 billion, and Wema Bank N12.325 billion.
The assessment and evaluation based on a research conducted by International Corporate Research, a department of Stakes Capital Limited, confirms leadership of the banking sub-sector.

According to the report, as at September 30, the top ten equities with a total value of N2.5trillion dominated the list of 55 largest companies, accounting for 56.7 percent of its value and 52.2 percent of the total market capitalization end of the quarter.

The total market cap of the 55 companies stood at N4.40 trillion which is 92 percent of the total market value of the first tier securities market of the stock exchange as at end of the quarter, though in number they are just 25 percent of listed equities.
In fact, 20 of the 21 banks listed on the Exchange make up 36.4 percent of the list with six of them among the top ten. The value of the six banks accounted for 62.3 percent of
the largest ten companies while the banking sector accounted for 54.8 percent of the value of the 55 largest companies, making the sub-sector the most dominant sector both in number and value.

Before now, expectation for huge profits and attendant returns on investment in form of mouthwatering dividend pay outs and bonuses had given rise to upbeat in activities at the market, resulting significant rise in performance indicators. And given the critical situation of the stock market, nearly everyone is rather concerned about how to reverse the downturn which has robbed the shine off the once vibrant capital market.

At least fairly good end of quarter or year result could have brought some respite to the market and help performance indicators to edge up. In fact, the expectation of market analysts was that improved result coming from companies would sooner than later give some recovery impetus to the market.
Unfortunately, half year financial results of ten banks have put the equities market to a spot. In the financial reports, six of the rescued banks accounted for over N1.2 trillion operational losses. The affected banks are Union Bank, Oceanic Bank, Intercontinental Bank, Afribank, Bank PHB, Spring Bank, Equitorial Trust Bank, and Finbank. The results released to council of the Exchange are as follow:

UNION BANK OF NIGERIA PLC: Unaudited result for the half year ended 30th September 2009 shows Gross Earnings of N97.506 billion, as against N59.715 billion in the comparable period of 2008. Loss after tax and exceptional items stood at N222.858 billion compared with profit after tax and exceptional items of N14.193 billion in 2008. The bank explained that the exceptional items included provisions for pensions, gratuity and long outstanding unreconciled items. Also, the significant loss recorded was due to provisioning arising from the joint CBN/NDIC examination and subsequent independent stress testing revealing an under-funded pension scheme and a non-funded gratuity scheme as well as significant unreconciled items.

OCEANIC BANK INTERNATIONAL PLC: Unaudited result for the third quarter ended 30th September 2009 shows gross earnings of N46.830 billion, as against N112.265 billion in the comparable period of 2008. Loss after tax and exceptional items stood at N286.036 billion compared with profit after tax and exceptional items of N29.082 billion in 2008. The bank made provision for losses of N315.115 billion, up from N1.161 billion in 2008.

The board of directors attributed the decline in the bank’s earnings to the suspension of interest of N93.9 billion on the various non-performing loans during the current period. The bank recorded loss before tax but after exceptional items of N400.901 billion compared with profit before tax but after exceptional items of N36.524 billion in 2008. The bank obtained tax waiver of N114.864 billion, which caused a reduction in the loss after tax and exceptional items to N286.036 billion in 2009. The bank’s management is confident that having taken these provisions, the financial statement now shows a true and fair value of the quality of the bank’s assets. Also, the management believes that the probability of booking additional provisions is low and that as on-going recovery efforts continue to yield positive results, there will be corresponding write back to the bank’s Profit and Loss Account.

AFRIBANK NIGERIA PLC: Unaudited result for the half year ended 30th September 2009 shows gross earnings of N64.238 billion, as against N43.284 billion in the comparable period of 2008. Loss after tax and exceptional items stood at N71.225 billion compared with profit after tax of N11.866 billion in 2008. The bank provided for risk assets of N647.84 million and exceptional items of N83.503 billion in 2009.

INTERCONTINENTAL BANK PLC: Unaudited result for the seven months ended 30th September 2009 shows gross earnings of N119.770 billion, as against N161.822 billion in the comparable period of 2008. Loss after tax and exceptional items stood at N328.450 billion compared with profit after tax and exceptional items of N28.561 billion in 2008. The Group has fully provided for the significant amount of N195.37 billion as loan loss provision and N241.32 billion as dimunition on investments and other known losses during the period under review.

The loan loss provision amount included the recommended additional loan loss provision of N117.83 billion from the joint CBN/NDIC examination. The Group recorded loss before tax but after exceptional items of N447.451 billion compared with profit before tax but after exceptional items of N33.033 billion in 2008. The Group obtained tax waiver of N119.001 billion, which caused a reduction in the loss after tax and exceptional items to N328.450 billion in 2009. The Group has embarked on aggressive loan recovery exercise and has recovered over N78 billion to date since the CBN intervention. The Group does not anticipate any unusual occurrence that would adversely affect the results for the remaining of the period up to December 31, 2009.

FINBANK PLC: Audited result for the half year ended 31st October 2008 shows gross earnings of N31.474 billion as against N37.987 billion as at period ended 30th April 2008. Loss after tax and exceptional items stood at N80.772 billion compared with N1.074 billion as at period ended 30th April 2008.

FINBANK PLC: Unaudited result for the eleven months ended 30th September 2009 shows gross earnings of N59.542 billion, as against N50.187 billion in the comparable period of 2008. Loss after tax and exceptional items stood at N120.686 billion compared with profit after tax and exceptional items of N8.256 billion in 2008. The loss position of the bank was caused by provision of N88.8 billion for delinquent loans and advances in line with CBN audit and diagnostic review. Also, the exceptional items of N25.9 billion reported in the accounts relates to provision for potential losses on guarantees and write-off of long outstanding general ledger balances prior to the merger of the bank effected in 2005.

Commenting on the impact of the losses, the Managing Director, Dependable Securities Limited, Mr. Chinenye Anyanwu said that impact of banks’ poor financial results on the market has come almost immediately adding that it was for that reason of the bad results performance indicators of the market had taken a turn for the worst in recent times.

According to him, the fact that investors are not expecting dividends and bonuses from banks are part of the grave impact which has robbed off on the market.
He said “The impact is what we are feeling already. Equities prices are dipping further and further resulting to further shedding of weight of market indices. In fact, the indices are not moving as they ought to. It has been wild fluctuation. We have bullish indices today, the following day it is bearish. Who knows what the next day will look like. So, this is the grave impact we are feeling already.

“The fact that we are not expecting dividend immediately from most of banks is part of the impact. Expectations of dividends and bonuses are the major factor that drives the market. However, it is likely going to make investors shun the banking sub-sector. It remains the toast of the market.

“But the truth is that we know some of these losses were made from provisioning and provisioning won’t continue in the market all through. If you make provision for assets that are not performing now, you have made full provision as par the loss. Of course, it means you are now operating on a clean slate now. So we expect better results after these provisioning. Whatever that is happening now is for a short period”, the senior dealing member stated.

As to whether market capitalization might further be depleted, he said the market capitalization had hovered around the level it is now, insisting “We don’t expect it to drop any further at close of final quarter trading. I think it has stabilized at the point where it is now. I don’t expect any drastic drop in the performance indicators”.
Even as the poor results suggest serious regulatory lapses, the stockbroker said that regulators were not to blame insisting that the season of poor financial results was not peculiar to Nigeria noting that it would be wrong to make regulators a scapegoat. “It is a global issue which is not peculiar to Nigeria”.

However, The Chairman of Progressive Shareholders Association of Nigeria, Mr. Boniface Okezie, deferred slightly with Mr. Anyanwu in their submissions. Though Okezie agreeed that the impact of the losses had been immediate and grave in the capital market with prices of shares dropping, especially those of the rescued banks, he faulted Mr. Anyanwu insisting that the grave impact on the market would likely linger for a long time.

“Prices of shares are dropping, nobody is buying for investors have finally lost hope of getting dividends and bonuses, the market indices have fallen to the lowest levels ever in spite new listings. The huge provisioning which CBN has compelled banks to make has sent more negative signals to investors”, Okezie said.
He continues: “People are investing to get returns. In the banking industry today, they are not paying shareholders any returns in terms of dividends. What is the cause? Provisioning. The huge provisioning has denied them of bonuses and dividends which are the only reason for investing in any equities.

“You asked the banks to make provision according to prudential guideline. In the past banks have been making provisions on non performing loans which also will be recovered at the end of the day if the banks apply aggressive market drive. Why do you now ask them to continue provisioning even in an unaudited account.
“Those who think the market will bounce back next year are deceiving themselves. I don’t see it bouncing back, not even with the proposed Asset Management Company after it has taken of operations if enabling bill is signed into law. Such is the impact today that investors are running away from those equities. And their share prices have maintained steady nosedive to the lowest ever.

These are shares that once sold for N40.00 to N50.00 but now they are worth next to nothing. This is the impact of the dislocation CBN has brought to those banks today.
“It will definitely make market recovery linger longer than expected. I have said it over and again that anybody expecting the market to recover in the next one year is deceiving himself. There is no basis for such expectation with what we have seen coming from the banks. This is because, banks account for volume and value of business on the capital market.

“And banks lend to other sectors of the economy to do their business, unfortunately they are no more lending because they have not recovered the bad loans. What has been done to sector has affected other sectors making quick recovery of both the economy and the market impossible
“To make matters worse, the uniform year end account is supposed to be in December but some of the banks have had to bring out their results owing to pressure from the CBN. Some of the accounts were not audited and signed. Yet the CBN is talking about corporate governance. In fact CBN ought to have done better”, Okezie concluded.

Re-echoing Okezie, the Managing Director, Begoz Nigeria Limited, Bede Ihekaire posited that the market is in for longer meltdown than initially thought. The equity analyst said that investors have nothing more to hold on to, no more attraction to invest in stocks since banks which are among the few rewarding equities to invest in have turned sour.

Blaming the CBN for the development, he noted that investors would rather wait for the full impact of the provisioning to elapse before coming in to position in the equities of their choice. Adding that with the record losses posted by banks which other sub-sectors look up to in terms of financial performance, the stage is set for other quoted companies to post negative returns to shareholders insisting that Nigerian bandwagon attitude to business will likely play out.

He said: “What we are saying is that insistence of the CBN over total provisioning within a short period has translated to these huge losses we are witnessing today. And this is sending negative signal to investors to the effect that the banks are not safe to invest in. if you are a depositor, and your bank is making huge loss which has almost eroded shareholders’ funds, it is another way of being told that you should stop banking with your banker because the foundation is shaky by writing down such provisioning.

“In fact the message is that your money is not safe. It is affecting moral of investors who ordinarily would buy the equity of the banks because they know that in the next five years dividend will not come as a result of the heavy provisioning.
“Because what you provide in audited account that has been approved by the board suggest that money has been lost but sometimes are recovered and ploughed back into the coffers of the company. And it becomes profit to the bank.

“Where will they get the money to enable them stabilize let alone paying dividends or bonuses. So, in the near future, returns on shareholders’ investments have been ruled out completely.

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