On the health of Nigerian banks -By Nnaemeka Obiaraeri

CBN Governor, Godwin Emefiele

There have been several damning reports from independent/global rating agencies on the above subject. The Bankers Committee recently came out to debunk the rumours in Nigeria that the deposit money banks were retrenching and would continue to retrench a chunk of their personnel in order to reduce cost and overcome the dire situations they are in today. The Committee also stated the followings:

That these banks had capacity to create risk assets and ramp up huge incomes. They also claimed that these banks had robust capital base to absorb the upswing on the volume of non-performing loans in their books without much stress.

However, the trillion dollar question remains: How healthy are Nigerian banks? Are they currently stressed? Will they continue to retrench?

The other day, I was a guest at an early morning programme in a TV station based in Lagos to address the above subject. This is the summary of my position.

The real numbers and indices coming out from these banks (regardless of the hugely misleading report cards which show them posting hundreds of billions in profit after tax) clearly show that these banks are factually stressed. HOW?

1. Erosion of capital- The Tier One and Tier Two capital of these banks have been greatly eroded and shall be further eroded in the days ahead by the time the impact of the massively growing portfolio of bad loans hit their bottom-lines. Bad loans that emerged against the backdrop of lower oil prices and developments in the FX markets over the last one year, which have weakened macroeconomic fundamentals. Most of these banks are still carrying huge portfolio of non-liquidated dollar denominated Tier Two Capital/ Eurobonds they raised not too long ago, when the dollar to naira exchange rate was between N125 and 162/$1. Dollar denominated capital and issued bonds that they will have to repay at a period the prevailing exchange rate has doubled the size of their obligations. They will surely take a hit or have taken hits for the naira differentials on their tier one capital (which is massive) and are merely window dressing the impact till today (“ili etere nzu”).
2. Dwindling bottom-lines: The argument by the Bankers Committee that these deposit money banks have capacity to create more risk assets and ramp up income is not only shocking but very unfortunate. The major source of the income bazaar by these deposit money banks have been taken away from them with the implementation of the Treasury Single Account. Following this, the era of rent-seeking and playing “kalo kalo” with public sector funds while the real sector of the economy suffers is gone, hence, real net interest income, commission and fees for these banks have taken a downward spiral. Also, short trade and commerce transaction which used to be their low hanging and less risky sources of income has thinned out greatly as a result of the current FX situation.
3. Quality of risk assets: The quality of risk assets in the books of these banks has continued to deteriorate: The most deceitful thing about the magic profit figures which these banks continue to post is that most of the loan assets in their books, which they are still managing as performing (via crooked window dressing) have long gone bad and are non-performing. They keep on charging and recognising profits on dead assets and deceiving the public that all is well. The tragic aspect of the whole situation is that these banks are forced to pay corporate tax on fictitious income raised from dead assets that are in actual sense no longer sweating. In some instances, you see loans that have not been serviced by the debtors for over five years, being managed, window dressed and income booked on them by these banks. Unfortunately, a majority of the humongous bad loans are insider related. It is this deceitful income spinning on dead assets that a whole director of banking supervision at the apex bank will come on national television to gleefully announce that are doing so well. The simple question that one will beg to ask is: Are these banks operating in a different environment?
4. Forex developments: Impact of the greatest shock and tsunami that will soon hit some of these banks by end of 2016, if the Central Bank of Nigeria continues to play the ostrich without taking any pro-active steps to handle it, is the fallout of the recent devaluation of the naira to the dollar. The Category 4 storm that this will create upon land fall is still gathering strength. How can the CBN claim that these bad assets can be made good, looking at the huge holes that have been created? Where do you expect a manufacturer on lean margin to cough up huge overrun in his balance sheet occasioned by a regulatory and policy induced 56 per cent added cost to his business? Most affected are the oil and gas sector (both up, downstream and services), power sector, manufacturing etc. We are talking about trillion naira holes that will hit these banks if nothing is done urgently to remedy it. As a result of the dire FX position today, most of these firms are no longer doing business optimally. What they offer are skeletal output to remain afloat pending any unforeseen intervention.

Some of the few firms that have managed to ride the storm are those that have clairvoyance and deep/creatively thinking financial engineers in their system. Experienced experts saw the impending dark cloud in advance, hence, did not accumulate huge bills of unpaid LCs that the CBN could not meet.

Going forward, most discerning entrepreneurs will prefer to put their idle cash in T-bills and government bonds. The naira is still haemorrhaging because people are afraid. Those that have the funds are preferring to hold them in foreign currencies to hedge against the fear of the unknown.

The authorities can continue to fool those who may not be able to read the signs and the reality on the ground independently with their sabre rattling and lies. But for those that know. Those, who know their God and are empowered by deep knowledge of the market, we shall never again be exploited by their lies. Until they take urgent steps to holistically and honestly address the root causes of the challenges in the economy and the banking sector, the night of a long knife is around the corner.

Dr Obiaraeri, a financial investment strategist based in Ikoyi, Lagos, wrote in via nnaemeka.obiaraeri@taurus-capital.com. 09090900989