PETERSIDE ECONOMIC REVIEW

Chamberlain S. Peterside, Ph.DTuesday, February 21, 2006
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New York, NY, USA

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MILLION DOLLAR QUESTION
…WHAT FATE AWAITS AVERAGE INVESTORS IN FAILED BANKS?


…Liquidation Quandary

ooking at the flip side of things, I must start by reiterating that the just concluded banking consolidation on face value is truly a welcome development. Going by the opinion of most informed Nigerians, it was a fair and transparent process. Even pundits abroad had “a few good things” to say about Nigeria in that respect, what for the enormous infusion of investment assets into the economy, estimated at over $3 billion, within 18 months. By summarily withdrawing their operating licenses, on the 16th of January, the Central Bank sounded the final death knell on 14 weak banks that were unable to raise funds or merge.


So far, in strictly financial terms, one could consider the policy a resounding success, yet weighed against the backdrop of potential job losses, social dislocations, dent on average investor-sentiment, depletion of shareholder equity, there remains a lot of doubts.

The demise of these banks (some of who like Gulf Bank, Hallmark Bank, African Express Bank, Allstates Trust Bank, Liberty Bank etc were publicly traded) now raises even more questions than answers. Statistics reveal that over 100 billion Naira of depositors' fund are now trapped in the banks, 90% of which were uninsured. Up until two weeks ago, after the expiration of the deadline, stocks of these banks still traded in the Stock Exchange. According to a recent interview by Madam DG, Dr Okereke-Onyuike, she assured investors that they would be fully compensated for whatever stake they had in those banks – how and when is another story?

The general impression discerned from CBN actions is that depositors will be made whole for any funds stuck in the failed banks beginning in March. It is unclear to me what attention is being paid by the apex bank to the fact that when a public company (or bank for that matter) goes belly-up “involuntarily”, stockholders deserve some explanation or compensation based on a generally accepted accounting scale-of-preference. Unconfirmed opinion has it that a few of the banks had chances of survival save for the high capital requirement and short timeframe.

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The post-consolidation situation presents a quandary of sorts for several reasons; granted that the banks were unable to boost their capital base up to the required 25 billion Naira. What other plausible reason could be proffered as to why these banks couldn’t be absorbed by larger ones even for a pittance?

…Confidence At Stake
Under normal circumstances, a bank should be found seriously wanting in terms of its financial dealings or governance standards before it is put out of business - and it shouldn't take a crisis to decide so. I am hard pressed to imagine why those banks were left to degenerate into such dire financial straits so deep that, stronger banks were unwilling to take them over even at one Naira a piece as reported by the media. If their situation was so deplorable then;

  1. Was it only now that the true financial status of these banks come to light or was uncovered by the regulatory agencies?

  2. Why did it take the consolidation exercise to expose these serious deficiencies in the banks before shutting them down?

  3. Why did their stocks continue to trade in the exchange floor without regulatory sanction or outright de-listing all these years?

  4. Why were some of these banks allowed to venture back into the stock market to conduct secondary or initial offering, assuming that their weak financial condition was apparent?

  5. Are the banks being liquidated simply on account of their inability to raise new capital, or due to existing negative shareholder value (technical insolvency), or because of untenable bad loan portfolio?

  6. Could there be other serious corporate malfeasance as a result of which the banks were considered unfit to operate, if so how immune are the successful banks to these same ailments?

  7. How have the banks managed to continue posting handsome profits reflected in their financial statements on the basis of which average investors ploughed money into them?

The simple answer to my mind is that, the regulators were negligent in the supervisory function and fiduciary responsibility consequently; unsuspecting investors got sucked into this mess.

…Equity Value
These are very serious issues that must be troubling investing public and require urgent attention. It is assumed that in enacting and implementing this banking reform, the Central Bank was working in tandem not only with the monetary institutions (Nigerian Deposit Insurance Corp. NDIC, Ministry of Finance etc) but also with the securities overseers – Nigerian Stock Exchange and Securities and Exchange Commission. Therefore a solution must be found on how to cater to depositors and investors alike.

Just to illustrate the intractable dilemma; published reports indicated that for instance Gulf Bank despite the risk of failure still ranked as one of the 20 most actively traded stocks in 2005. As at the last trading session on December 29th, 2005 the stock was priced at 0.28 Naira, therefore an investor who owned 10,000 shares would have had 2800 Naira staked in the bank. Upon dissolution, unless the investor is compensated or was lucky to offload the shares, it would be virtually worthless.

Given the fact that investor confidence in the Nigerian market over the last decade has been bolstered by the integrity of the current crop of regulators in the industry, it behooves them (regulators) to cherish that trust by ensuring that investors are not “left out in the cold” now or in future through financial shenanigans of corporate officers. In times like this, average investors should be indemnified for losses suffered through no fault of theirs to some degree. Whether that would happen in the current Nigerian scenario remains to be seen.

…Whither Overseas Investors
Over the years, the NSE has successfully staged investment road shows abroad to sensitize investors and Nigerians in the Diaspora on the opportunities opening up in the capital market. Gradually some investors had begun to heed that clarion call. During the consolidation exercise the banks rode on the coattail of those popular road shows to host several investor forums here in the US and in Europe to attract investors. Some banks were successful in raising funds and even attempted to access the international capital market through a secondary market listing abroad.

To the best of my knowledge, there were investors abroad who deployed money in the failed banks, so the question now is what recourse do they have? For those investors who didn’t respond or were yet to, what impression would they be left with, knowing that some of those banks were unable to scale the hurdle and have therefore ceased to exist?

The fallout from this liquidation if not addressed properly especially from the standpoint of average investors at home or abroad, could seriously blemish the credibility of public companies as well as call to question the claims and regulatory oversight of market watchdogs in Nigeria.

Chamberlain is the Founder & President of New Era Capital Corp. and MyCompleteFinance.com, a New York based financial services group. He was previously a Financial Advisor in the Global Private Client Group, of Merrill Lynch.