June 5, 2024/United Capital Research
The Nigerian banking sector is currently going through a transformation that will enable it to support a $1 trillion economy and as the CBN has shown, not everybody can come. On Monday 3 June 2024, the Central Bank of Nigeria revoked the Heritage bank Plc’s operational license due to the bank’s breach of Section 12 (1) of BOFIA, 2020. According to the CBN, “The Board and Management of the bank have not been able to improve the bank’s financial performance, which constitutes a threat to financial stability”.
The CBN also disclosed that “the revoking of the bank’s licence follows a period of engagement with the bank, with the apex bank prescribing various supervisory steps intended to stem the bank’s financial performance decline. Regrettably, the bank (Heritage Bank Plc) continued to suffer and had no reasonable prospects of recovery, thereby making revoking the license a necessary step.”
Operating conditions for the banking sector remain challenging with current reforms presenting significant near-term credit and market risks for the sector. The naira has fallen by over 218.0% against the dollar since June 2023, exerting pressure on the banking sector’s capitalisation necessitating the need for recapitalization, heightening credit concentration risks (Oil & gas Industry), and the FX market has yet to stabilize while Inflation has accelerated with April numbers at 33.7%. At the same time, policy measures to stabilize the financial system and increase lending to stimulate the economy have further increased pressures on banks. The CBN efforts restore balance in inflation and exchange rates, has seen an increase in the monetary policy rate by a total 750bps in May, and the large differential between the official and parallel market exchange rate has collapsed. Average daily FX turnover at the official FX window has risen sharply compared to H2’23, also the CBN has cleared its FX backlog, which is positive for the banking sector’s FX liquidity. However, there are risks of the CBN introducing more regulations that are detrimental to the banking sector to support macroeconomic stability.
In light of this, there can be no room for banks with unstable foundations, Heritage bank has struggled since its acquisition of Enterprise bank in 2014. Heritage Bank’s acquisition of Enterprise Bank turned out to be a major strategic error according to the bank’s 2018 unaudited financials. Its non-performing loans were among the most challenging in the industry. It posted an operating loss before tax of N38.5 billion in half year 2018, and a loss of N4.4 billion in the unaudited figures for December 2018. The bank’s debt-to-equity ratio was -0.17, a negative value that reflected a negative shareholders fund which could be impaired by as much as $1 billion. Its equity capital was virtually wiped out by accumulated losses, which raised red flag on the bank compliance to corporate governance culture as a number of its directors allegedly involved in a series of poor-performing insider loan transactions, with little known resolutions, if any. Also, In April this year, customers of Heritage Bank reportedly lamented the frustration encountered in their efforts to withdraw from their accounts, which the bank blamed on a system refresh exercise.
This marks the first instance in over a decade where a Nigerian bank has been allowed to fail, representing a significant shift from the policy stance of former CBN Governor Godwin Emefiele, who consistently opted to rescue struggling banks. Under Yemi Cardoso’s leadership, the CBN has adopted a different approach. The apex bank’s press release stated that Heritage Bank’s persistent financial underperformance necessitated the revocation of its license. These action by the CBN is poised to boost the confidence of both local and foreign investors in the regulatory oversight functions of the apex bank.
