Sanusi Lamido Sanusi, Governor of the Central Bank of Nigeria, CBN, was in Cape Town, South Africa recently for the Standard Bank Africa (Economic) Forum. He fielded questions from journalists from Nigeria, who included General Editor, ADEMOLA ADEGBAMIGBE
Q: You were recently quoted as saying that shareholders of the problem banks had lost their investments in these banks. All the banks are quoted on the Nigerian Stock Exchange and their shares are being traded on the market. Does it mean that the people that are buying the shares are just buying empty papers without value?
A: If a bank takes huge losses and those losses wipe out capital, in accounting, shareholders’ funds no longer exist. The bank is owned by creditors. So, in accounting terms, if you look at the balance sheet of some of these banks, by the time all the provisions have been taken, when you map market loss or what their loses are, the capital is gone. If you take depositors’ funds and buy your shares or other shares at N35 or N30 and those shares come down to N2 or N3 and they are significant enough, your marked market losses can wipe out your capital. That is in accounting.
Now does that mean the shares are worthless? No, because there are other ways of arriving at value for the shares - remember those banks still have huge branch networks. If worse comes to the worst, if you sold the real estate, you will be able to pay off your liability(ies) and get networth. These banks have goodwill, they have customer liabilities. So in the event of evaluation, book value is not all that is used to value an enterprise. However, the point I am making is that all these shareholders that are saying they are shareholders and they are suing, they probably do not realise that their capital has been wiped out in the books by the actions of these managements. They don’t realise that their money has been taken, a gamble has been taken on the stock exchange, the stock exchange has collapsed and because of the huge exposure of some of their institutions, those losses have wiped out their networth. Now that we are trying to recoup, every loan recovery we make for a bank is capital recovery. When you set up that asset management company, if there is any kind of price that we offer, that is more than the book value of the loans. If they are able to cover some of the loan loss provisions, it is capital recovery. Some of the loans that we classified as non-performing, if after examination date, through the pressure of our management and the pressure of EFCC, they now turn to performing status and therefore the provisions are reduced, it is capital recovery.
So, to say that they have lost their capital does not mean that the institutions are worthless. That is the point I think we need to bear in mind. I have not said that they are worthless, what I have said is that some of the shareholders do not realise that their capital has been wiped out by the losses hitting the banks from the actions of management or mismanagement of institutions.
Q: There is also this talk about the Assets Management Company. How will it operate?
A: The Assets Management Company, to me, serves two principal purposes. One purpose is on the banks’ books and the other is on the stock market and, therefore, the financial system in general. A number of the banks have tied up their resources in the capital market and they have shares. In the first instance, the focus will be on margin loans because of share-backed exposures, because those are easier to value and you can know the value of those shares today. What we planned to do – I think you should stress this – is that, this is subject to the approval of the National Assembly. It is going to do the legislation and these are ideas that are still being conceived within the CBN and being articulated, but this is what I think will likely happen. My view on this is that, the Asset Management Company ultimately will be a vehicle for distributing losses. The capital market has lost 70 per cent. We have a situation today where everybody is trying to minimise the losses. So the banks are saying: you owe us so much, we don’t care what happened to the market, we will take the provisions now but you have to pay us back the money. In other words, the banks are saying they will not take any responsibility for the losses. You have the brokers saying that: we don’t owe anything, we have lost our equity and we don’t see why you should be following us to pay you money even though you have the shares.
Q: Now the AMC provides an avenue for distributing losses. How does it do it? If we price the shares intelligently and we buy the loans off the books of the banks, we can buy the loans at a price that allows banks to recover some but not all of the losses that they have made.
A: When we say we, this means AMC, because it is being set up by CBN. So you buy the loans off the banks, but you price them in such a way that the banks are able to recover some of the losses they have recognised. For me it must be a pre-condition that the banks must first of all recognise the losses. This was why I did not rush into an AMC when I became governor, because it would be highly irresponsible to do an AMC, buy shares at market price and have the government absorb all the downside risk.
Having taken the loans off the books of the banks, what does that do to the banks? Yes, the banks have taken losses but they now recover some of the losses and that is good for their profit and capital. They also have taken loans off their books and in exchange they have taken either cash or bonds, whatever is given, and therefore their liquidity improves immediately. This is because if you give them bonds they can come to the Central Bank with those bonds and take cash, if they want cash. So you immediately have good liquidity ratios, better liquidity ratios, better asset quality ratios, better capital adequacy ratios and better earnings. In other words, you begin to strengthen the balance sheet of institutions. The AMC, on its part, because it has taken the shares on a small premium, but because it is quoting those shares for 3,4, 5, 6, 7 years, it is able, over time, to make up for whatever premium it paid and pay the cost of whatever bonds it issues.
Let’s say you as a bank have shares worth N40bn but you had lent N70bn, so you have taken a loss of N30bn. Let’s say I bought those shares for you at N50bn, you have recovered N10bn from you losses. You have not recovered all your losses, but I have bought shares worth N40bn at N50bn and because I am holding those shares for a long time, the likelihood is that over time they will appreciate and I will recover that loss. This is because the AMC is not in a hurry to dispose of the assets. It will distribute these assets to investment managers and these investment managers will have the option of taking a variety of portfolios. They will have an investment strategy that will be defined by AMC. That strategy may include, for example, selling some of those shares and going into Real Estate, sell some and go into fixed income, build a balance portfolio that will make sure that over time you are able to service your debts and also recover or get the upside on that investment. Any AMC you take and give an asset of over N350bn should be able to make enough profit over 4 or 5 years period, to make sure that the government does not lose anything. I don’t think the government will lose any money on AMC, at least at the level of quoting shares. Meanwhile, the AMC effectively becomes the creditor and the AMC is then in a position to negotiate payment terms with the borrowers. That can make sure that they have the liquidity to continue operating in the market and maybe include some forbearance of some of the debt.
In that way, you have sharing of losses across the system because it is a massive one-off thing. By the time a broker or a borrower is no longer under any pressure to pay the loan immediately – let’s say you have a moratorium of two years for principal and interest, and you have debt forgiveness of x per cent – whatever profit you make will go back into your trading activity. Right now whatever is at the market goes up, people sell the shares and pay the bank and the market goes back down. The market will never come back up because you must remember that the reason the market went up in the first place was the very high leverage that was in it. So any activity in the market is tied to the banks and the books of banks. If people make money it goes to the banks.
Q: How far have you gone in getting foreign interests in Nigerian banks?
A: The issue of interest is a very difficult thing to gauge. I started my life as a corporate finance person, so I know how these things are. You can have 10 to 15 banks saying that they are interested in Nigeria, but that interest you really don’t know; you know there is this saying that put your money where your mouth is. No serious Central Banker will say that simply because some people said they are interested in looking at things, he has an investor. These are just expressions of interest. I have had local banks that said they are interested in acquiring one of the banks when we were doing the audit of that bank, and I was like: you are coming to talk of an interest when we have not finished auditing you, do you know what we are gong to find in your own bank. So these are statements as far as I am concerned. We will see as we go along. There have been banks that have expressed interest in Nigerian banks before, which was why I think Governor Soludo talked about the 10 per cent rule. He wouldn’t have come with that rule if foreign banks weren’t making an attempt on Nigerian banks. We will wait and see. I don’t want to give out any details of who called me or who has written a letter or who said what, because until the process matures and people start dicoursing seriously with shareholders and with management and engage in serious talks, we cannot say who is interested in what.
Q: Critics have condemned this proposed uniform year end for all banks…
A: First of all, it is only Nigeria that I know that people/banks choose their year end. People should find out in which other country do you have banks choosing their year end. In the UK, if you see a different year end, it is for a bank that is a subsidiary of another bank. If you go the UK, ICICI financial year end is March 31 and that is because ICICI UK is a subsidiary of ICICI India and in India the year end for all banks is 31st of March. First Bank of Nigeria in UK is 31st of March because it is a subsidiary of First Bank of Nigeria. I don’t know of any country with a serious financial system where banks have different financial year ends, it’s only in Nigeria.
Q: Islamic banking seems to be slow in implementing. What is happening?
A: I don’t think it is slow. There is a framework document that has been drafted, that is being looked at by stakeholders. JAIZ has its licence subject to its raising capital. You know my views on capital adequacy and I think we have learnt from consolidation that sometimes you can demand too much capital of an institution and that can throw it into problems. I personally don’t think that an Islamic Bank needs N25b anymore than say a mortgage bank will need N25b. I think that we should do a comprehensive review of the capital adequacy requirement for banks. If you look at part of what may have led to the situation we are in today, it takes so much consolidation. But the second round of capital raising, why will a bank give money to its subsidiaries to buy its shares and show that it has met a N100bn threshold if not because that threshold was set out of thin air by the regulators? We’ve got to look at that entire process.
Q: You are saying that perhaps in the near future, we might have banks that might require no more than N5bn or N10bn?
A: I think it is possible. They may not be deposit money banks or universal banks. I said in my Senate screening that I personally think that the amount of capital that a bank requires should depend on the kind of business it wants to do.
Q: Has the exchange rate stability achieved its goal since you came in about four months ago?
A: Look at it. Before I became Governor, there was a depreciation. You know the real value of the naira is what you call the Malam rate. So the naira went down to 189 to a dollar, but it is now about 152. It is a substantial appreciation.
Official rate was never the rate, it was a fake rate. Even that official rate, people were taking that official rate and selling at the black market. I disagreed with Governor Soludo at that time, I didn’t think the value of naira was 145; the value was 189. So we moved it now to 152. Secondly, you had three exchange rates – multiple exchange rate ratio – now we have a single rate ratio. We moved from a gap of about 25 per cent to that of under 3 per cent. We are dealing on 150-153; it’s a 3 per cent gap.
In terms of exchange rate stability we have achieved what we wanted to achieve in terms of price stability. Inflation was 15 per cent when I became governor, in September, it was 10.4. If you look at all short term interest rates today, they are lower than they were in December 2008.
Did you Enjoy this story? you may want to subscribe to our RSS feed. Thanks for visiting!
Random Post
- April 8, 2008 -- I Wanted To Buy A ‘Tokunbo’ (0)
- March 23, 2009 -- Oyinlola’s New Antics—Bola Ilori (0)
- April 22, 2008 -- Branch Expansion Healthy For Bank Growth (0)
- January 26, 2009 -- The Man, Obama (0)
- January 25, 2010 -- Sifting The Grain From Chaff (0)
- May 26, 2008 -- Holding Abia Hostage (1)
- July 21, 2008 -- Dunlop Goes Flat (1)
- March 31, 2008 -- How To Curb Ritual Killings —Aminu Lawan (0)
- September 8, 2008 -- Tackling Congestion (0)
- April 6, 2009 -- The President Gives His Word (1)
No tags for this post.
Related posts
Comment