S&P: CBN Requires Guarantee to Sell Banks


By Ayodele Aminu and Emele Onu, 07.01.2010


Standard & Poor’s, one of the world’s most reputable rating agencies, has said the Central Bank of Nigeria (CBN) may need to guarantee the acquisition of the rescued banks to be able to win the confidence of investors.



S&P, which some days ago rated Nigerian banks as high investment risk, in a report obtained by THISDAY, titled “Banking Industry Country Risk Assessment: Nigeria”, identified a number of hurdles in the way of the recapitalisation of the rescued banks, the execution of the banking reforms and the return of the financial institutions to profitability.“Domestic and international banks appear to have an only moderate appetite for acquiring the rescued institutions at present, and any acquisition would likely require strong guarantees by the authorities, also after a period of protracted due diligence,” said S&P.



The rating agency said further consolidation and international participation in the Nigerian banking sector remains likely, “although it remains unclear how and when this will take place.”It said the Nigerian capital market might not be supportive to the recapitalisation of the banks owing to the legal battles regarding the ownership of the ailing institutions. “Consequently, we feel that a majority of the rescued banks could remain in state control for the foreseeable future, while their balance sheets could also shrink significantly – as lending operations are flat or negative and noncore operations sold-off or closed,” it said.



According to the rating agency, as the exact legal and ownership status of the rescued banks are not fully known, it is likely to mean that the government currently has control of approximately half of the banking sector, “although the CBN states that this is only for the short term.”S&P considers that the Nigerian banking sector is (B+/Stable/B) and of high risk, pointing out that it placed Nigeria’s Banking Industry Country Risk Assessment (BICRA) in Group 9 similar to banking systems in Costa Rica (local currency BB+/Stable/B, foreign currency BB/Stable/B), Lebanon (B/Positive/B), and Belarus (local currency BB/Negative/B, foreign currency B+/Negative/B). Explaining the low rating and high-risk tag on the nation’s banking sector, it said the development is inherent to the country’s operating environment, evident in high unemployment, low wealth levels, and high political risk.“The confusion caused by the long illness of President Yar’Adua, and the recent appointment of Goodluck Jonathan as President, underscores the potential for volatility in the country’s political institutions.Despite massive support, the Nigerian government’s propensity to support its banking system is considered by Standard & Poor’s to be uncertain, due to the fragility of domestic political institutions,” it said.



It added: “The global economic downturn in late 2008 increased the credit risks for all banks operating in Nigeria. Reducing oil prices placing strain on the resource dependent economy, and the rapid fall of share prices on the Nigerian stock exchange (NSE), were the chief factors leading to asset quality deterioration. Current levels of nonperforming loans (NPLs) across the sector are difficult to assess, although rated banks report between approximately 4 per cent and 20 per cent of loans overdue on a 90-day basis, as of Sept. 30, 2009. We feel that the rescued banks’ NPL ratios could be more than double this figure.



Consequently, the country’s gross problematic assets (GPA) range has been maintained at 35 per cent to 50 per cent.” S&P viewed poor corporate governance and risk-management deficiencies as one of the key constraints on the creditworthiness of the Nigerian banking sector. It stressed that while the economic slowdown, reduction in oil prices, and capital market turmoil had a negative effect on the balance sheets of banks operating in Nigeria, it was, the impact of very poor corporate governance that resulted in the “quasi-nationalisation,” in various degrees, of 10 banks by the CBN during the second half of 2009 (accounting for approximately 50 per cent of banking sector assets).



“Nigerian banks’ asset quality remains most vulnerable, in our view, to the exposure of past internal and external frauds, particularly for those banks rescued by the CBN. Certain industry exposures could also be sources of vulnerability going forward. Lending exposure to the real estate and construction segment could, for example, prove to be problematic, as the emergence of a price bubble in Lagos and Abuja appears likely, it said.Nevertheless, S&P disclosed that Sanusi’s proactive approach is viewed as a key strength of the domestic banking system, adding that his actions to support liquidity – by guaranteeing the domestic interbank market and international credit lines–and improve transparency are considered positive factors for Nigeria’s BICRA.



“Given the low level of financial intermediation in the country, lending should, in our opinion, likely pick up in 2010, as the economy continues to grow and commercial activity resumes after the slowdown in 2009. Rated Nigerian banks are still, in our view, are likely to focus more on portfolio monitoring, loan workout procedures, and the recovery of large NPLs, rather than aggressive new growth in their loan books,” said S&P.Meanwhile, Reuters yesterday quoted the Head of Research, Future View Financial Services, Anthony Orororo, as saying that the rescued banks’ first-quarter profits were due to last year’s high levels of provisioning rather than growth in lending, which has been reflected in the fact the results have failed to lift stock prices in the banking sector .



“I don’t think what we’ve seen from the first quarter is a result of their direct intermediation or improvement in their core business. The results represent some recoveries and provisions no longer required,” he said.After most of the banks declared losses in their audited statements, the first quarter results of some of the banks showed that they have returned to profitability. For instance, Union Bank  posted a profit of N3.56billion,  First Bank – N15.42billion, Zenith Bank – N13.2billion, GTBank N13.01billion, ETI – N8billion, Access Bank – N5.29billion, Syke Bank – N3.17billion, Stanbic IBTC – N2.47billion, Diamond Bank – N2.06billion, Sterling Bank – N1.4billion, Ecobank Nigeria – N1.21billion, Finbank – N1.165billion and  Wema Bank – N764million.



Orororo said: “The results have failed to lift market sentiment. I don’t see any of these rescued banks delivering 10 to 15 per cent upside (returns) between now and the third quarter.”The 10 rescued banks made provisions for loan losses totaling more than 2.2 trillion naira ($15 billion) after the bailout last August and October, wiping out their shareholders’ funds and throwing them deep into the red.





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