A SHEET OF A4 paper flaps on the doors of 600-odd bank branches across Nigeria – each one a formal notice from the central bank. From the outside, it is the only evidence that, just weeks before, these were different banks, with different names, brands, licences and owners.
It was a curious greeting to the banks’ employees when they arrived back one Monday morning in August. Rather than PHB, Afribank and Spring Bank, workers found they had unexpected new employers. Outside the bank, handymen had even erected new signage.
Most people had gone home for the weekend when, just as the banks were closing on Friday afternoon, the Nigeria Deposit Insurance Corporation (NDIC) told the banks it was replacing them with newly licensed bridge banks: Keystone, Main Street and Enterprise.
Before Monday, a deal was sealed for the state bad bank Asset Management Corporation of Nigeria (Amcon) to raise new bonds and inject enough capital into the bridge banks – N675 billion ($4.2 billion) – to bring their equity from well below zero to the N25 billion regulatory minimum.
The central bank hopes it will be enough to enable the new management that Amcon has appointed to rebuild businesses that might be attractive to future buyers.
But it was a bad start to the weekend for the owners of the three old banks. The Securities and Exchange Commission (SEC) suspended trading in the three stocks, then delisted them. Shareholders saw the entirety of their firms’ battered equity value wiped out.
Two years ago, the central bank had requested all 10 of the banks it rescued – after a margin-trading crisis and a N620 billion capital injection – to find buyers capable of recapitalizing the banks, alongside the planned state Amcon.
"The three banks were not able to find deals capable of recapitalizing to the degree that would have been safe and sound for the purpose of the regulator," says Kingsley Moghalu, the central bank’s deputy governor for financial stability in Abuja.
He adds that Afribank sent a letter to Amcon asking it to take over the bank after the regulator refused a proposed buy-out led by New York-based, Africa-focused private equity firm Vine Capital because of corporate governance concerns and the buying consortium’s lack of experience in running a bank. A deal between PHB and Pakistan’s Habib Bank also fell through, as did a private equity proposal for Spring Bank, which included Chicago-based, West Africa-focused firm Cloudleap, among others.
Massive erosion
As the central bank saw it, the owners of the remaining rescued banks needed a wake-up call to show what would happen to their shareholdings if they did not agree to recapitalization deals with new owners in time for the central bank’s new September 30 deadline. A previous deadline of end 2010 had been breached, largely thanks to bank owners’ disapproval of the central bank’s actions.
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| "If management or boards or shareholders run institutions in such a manner as to place creditors at risk, then they stand the risk of losing their investment" |
This time, the deadline was firm. "The situation couldn’t be allowed to go on indefinitely," says Moghalu. "It would have meant a massive erosion of confidence in the banking system."
From early June (when Moghalu and governor Lamido Sanusi issued the new September deadline), the central bank, alongside the NDIC, was regularly monitoring talks between the rescued banks and potential acquirers.
Two of the 10 rescued banks – Wema and Unity – had achieved the requisite capital levels last year, and by mid-August, all but three of the remaining eight had agreed recapitalization deals with potential partners. The central bank claims that PHB, Afribank and Spring Bank were still floundering.
For some of the others, it was a close call. Equitorial Trust Bank, for example, rescued a deal to merge with Sterling (one of the healthy local banks) only as the NDIC was closing in, after South Africa’s FirstRand pulled out of a bid to buy Sterling in early June.
Oceanic only just made the deadline, too. Togo-based pan-African lender Ecobank signed an agreement to buy Oceanic on July 30. A source close to the deal says Oceanic’s preferred bidder, First Bank (Nigeria’s biggest lender), pulled out of the deal in the spring due to disagreement on the valuation. There followed an accelerated bidding process that also involved Nigeria’s Diamond Bank and a London private equity firm, as well as Ecobank.
Nevertheless, the SEC was able to give its blessing to the five legally binding transaction implementation agreements before the end of August (earlier that month, a technical suspension was also put in place on the target banks, allowing share trading but no change in price). Court-ordered shareholder meetings were then held in the last week of September – just in time for the deadline.
"We would love to protect all stakeholders, including employees and shareholders, but if management or boards or shareholders run institutions in such a manner as to place creditors at risk, then they stand the risk of losing their investment," Sanusi tells Euromoney.
"The five banks [understood] very clearly what will happen to them at the end of September if they decide they don’t want to go into a transaction: either take a route where they remain minority shareholders or get a generous cash payment, or they lose everything."
At the court-ordered shareholder meetings, the remaining five banks’ owners ratified the deals proposed by management (which the central bank appointed in 2009 to replace the old managers of the 10 rescued banks, excluding Wema and Unity).
This paved the way for the acquired banks to be delisted, and for Amcon to take the banks’ net asset values to zero (in exchange for shares). To do so, Amcon needed to issue new bonds of a total face value, according to estimates by local investment bank Chapel Hill Denham, of a local currency equivalent of N1.85 trillion.
| "What allowed the deals to go ahead this year was that the courts dismissed the cases" |
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Amcon’s intervention, in turn, allowed the private-sector acquirers, as arranged, to take the banks’ capital adequacy ratios up to the minimum 15% through an aggregate investment of N219 billion, according to Chapel Hill Denham calculations. But it was also the collapse earlier in the year of court cases brought in 2010 by shareholders opposed to the recapitalization deals that allowed the central bank to demand, in early June, a new September deadline. Bolaji Balogun, chief executive of Chapel Hill Denham (one of the advisers in the M&A process), says the lawsuits derailed deals that had been through due diligence last year. Most of the remaining eight banks had received bids by the end of 2010, he adds.
"What allowed the deals to go ahead this year was that the courts dismissed the cases," says Balogun, adding that the courts agreed there was little alternative to the plan put forward by the central bank and its advisers (led by Deutsche Bank) – especially given that the plaintiffs lacked the wherewithal to sufficiently recapitalize the banks.
On the cusp
The former owners of Spring Bank have gone to court this autumn to seek damages from the central bank after the nationalization, according to Nigerian daily Vanguard. And there’s more evidence of how much anger Sanusi has caused – he admits to Euromoney of having one of the most comprehensive security arrangements in Nigeria.
Sanusi says the heightened security around him is a consequence of his having confronted what he calls a class of "very rich bankers with strong political connections" that had on certain occasions entered a coalition with "very rich borrowers, who were not paying back their loans".
Nevertheless, the governor reckons Nigeria is "on the cusp of fixing the crisis" that hit the country’s stock market and then banks after the collapse of Lehman Brothers. Moghalu agrees, deeming it "very likely" the central bank can keep to the end-December deadline for withdrawing the interbank guarantees extended to the 10 banks after the 2009 bailout.
After the initial bailout of the 10 banks in 2009, it soon became clear NDIC had not collected enough premiums to reimburse all the deposits on its own. Sanusi rejected immediate nationalization of the 10 banks, favouring a sponsored M&A process instead.
Today, compared with 2008, banks in Nigeria are, he says, "more adequately capitalized and their exposures are more controlled". Balogun reckons the average sector capital adequacy ratio will be more than 20% thanks to the recapitalizations.
The acquired banks will now be run as subsidiaries of the acquirers and must complete their integration into parent groups within the next year. Meanwhile, the three bridge banks will continue their rebranding, try to gain market share and increase lending.
"These M&A trades have changed the market considerably," says Balogun. Indeed, Access Bank and Ecobank’s Nigeria unit will have both risen into the top five banks in Nigeria by asset size after their respective acquisitions of Intercontinental and Oceanic. Before the crisis, Ecobank’s Nigeria unit was not even in the country’s top 10. Its branch network will grow from around 250 to around 600 as a result of the acquisition.
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Access Bank has paid N50 billion into Intercontinental in exchange for a 75% stake. But integration of Intercontinental could double Access’ deposit base, making it the second-largest bank in the country after First Bank, according to research from Chapel Hill Denham. While the acquiring banks might be getting a good deal, in some cases it also leaves the former shareholders in a relatively attractive position (relative, at least, to the bad debt their banks have had to write down). Former shareholders in Intercontinental, for example, have been left with a 10% stake in the recapitalized bank.
The Ibru family was the majority shareholder in Oceanic Bank. After Cecilia Ibru, CEO of Oceanic before the crisis, was jailed last year for fraud and mismanagement, the family was left with 10% of the bank. Because the deal with Ecobank is via a share-swap, the Ibru family will now be part-owners of the Ecobank group – which, in recent years, has developed the biggest branch network in Africa.
The acquiring banks are expanding their exposure to a profitable but poorly penetrated banking sector, where only about 20% of the adult population has a bank account. Sector loans and deposits in Nigeria both grew by around 15% in the first half of 2011, with profitability on average also rising thanks to healthy net interest margins, according to research from Renaissance Capital.
Since its creation at the end of last year, Amcon has bought much of the sector’s bad debt in exchange for government-backed bonds (all yielding less than government treasuries and with zero coupons). In April, Amcon sold three tranches of three-year bonds for a total N1.7 trillion, according to Reuters.
The first tranche (N1.15 trillion) was exchanged for consideration bonds issued at the end of December before Amcon was given approval to issue tradable bonds. Almost all of the three tranches were in exchange for bad debt (less than N30 billion of the April bonds were sold for cash for the purpose of price discovery, according to one of the issuing houses).
Amcon, after the shareholder approvals of the recapitalization deals, may now buy additional non-performing loans. Compared with an average NPL ratio of 7.5% at the end of June, Amcon aims to bring the sector NPL ratio to below 5% – the lowest rate in more than a decade, and less than half the level prior to Amcon’s establishment.
In some cases, acquiring banks also benefit from their targets’ technology assets. "[Oceanic has] a good technology-enabled collection platform," says Patrick Akinwuntan, Ecobank’s group executive director for domestic banking. "It is also strong in one of Ecobank’s group focuses, public-sector banking, for example in collections like taxes and payments for state exams."
Oceanic was the only other bank, aside from Ecobank, to provide banking services in some of the 3,000-plus outlets of the Nigerian state postal agency, Nipost. This creates more opportunities for synergy between the institutions, according to Akinwuntan.
The acquiring banks may win the regulator’s favour for helping rescue the sector too, hopefully making it easier to get the necessary approval to close duplicate branches.
Struggle
But getting permission to close branches will still be a struggle, says Chapel Hill Denham. Acquisitions could also be a drag on earnings, at least in the short term.
The acquired banks will bring very little in the way of loans, most of which have been exchanged for low-yielding Amcon bonds. Instead their earnings are being eroded, says Renaissance Capital analyst Adesoji Solanke, from interest and operating expenses, and from loan-loss provisions.
The intervened banks, says Solanke, rely on the central bank for liquidity, repoing the Amcon bonds for cash. In what has, of late, been an environment of consistently rising local monetary policy rates (against which the Amcon bonds are priced), the banks’ cost of funds has been going steadily up – although the central bank has purchased intervened banks’ Amcon bonds for cash, enabling interbank repayments.
The central bank hopes Amcon’s equity in the five acquired and three nationalized banks will be sold as rapidly as possible. Moghalu, who is also one of Amcon’s directors, says several investors have expressed interest in buying these stakes, including Amcon’s shares in Oceanic (soon to be in Ecobank) and in the former PHB. A combination of local and foreign banks and private equity firms are interested, says Moghalu.
He reckons it could take up to three years before the bridge banks are sold on. The nationalized banks might not yet be able to command a price that adequately reflects their potential value. But acquiring them at a later date could be relatively easy in so far as there is only one shareholder to deal with – Amcon.
International buyers have been potential purchasers of the rescued banks since soon after Sanusi’s appointment as governor in summer 2009. When he came to office, Sanusi removed restrictions on foreign ownership of Nigerian banks.
Sanusi picked Deutsche Bank, together with Chapel Hill Denham and Stanbic IBTC (the Nigerian unit of South Africa’s Standard Bank), to advise on the restructuring of the sector, a week after he took office.
When the central bank-sponsored M&A process started in December 2009, the advisers approached banks and private equity firms with exposure to African banking in the UK, France, India, north Africa, South Africa and elsewhere. The initial pool of investors looked as deep as around 80. Then, after the bailout, the rescued banks released their third-quarter results.
"For the first time, the market realized the extent of the damage – about $8 billion in negative shareholder funds," says Chapel Hill Denham’s Balogun. "The orbit of investors went from around 80 to around 20." More banks left after some initial due diligence. Publishing third-quarter results and revealing the scale of the problem at an early stage may have been necessary to give Sanusi the requisite political mandate to do what he needed to fix the crisis.
There was a lot of scepticism among potential buyers, according to Balogun, as to whether Nigeria’s creaky state structures would be able to set up a bank capable of recapitalizing the rescued lenders within an acceptable timeframe. Amcon successfully dispelled this scepticism after it bought its initial batch of bad debt on New Year’s Eve 2010, after the necessary laws were passed in record time in the second half of the year.
Nevertheless, discounting the purchase of Oceanic by Ecobank (which is listed in Lagos and whose biggest operation is Nigeria), the only rescued bank to get an even partially international buyer was Union Bank. Out of the rescued lenders, Union attracted the most attention from all buyers, and it was also Ecobank’s first choice too, says Balogun.
"Some of the foreign and global players bring to the table best practices in risk management and corporate governance," says Sanusi. "That would have been a major boost to the system." But the most important thing, in Sanusi’s view, is not the buyer’s provenance in itself, but that the institutions have been saved, and in future will be well managed and avoid past mistakes.
"Many [international banks] decided it was not the right time, partly because they didn’t quite understand the Nigerian market," says Sanusi. "They had no experience in it. [International banks] didn’t think it would make sense to go into a distressed institution [...] also partly because the problems were so deep, much deeper than we had thought when we started.
"[International buyers] will come back, and they will come back to stronger institutions."
Serious challenges
Nigeria now faces the equally serious challenges of recovering Amcon’s bad debt and enabling new, sustainably profitable lending by the banks.
Renaissance Capital’s Solanke says Amcon has around three times as many borrowers as the Malaysian equivalents on which it is partly modelled (Malaysia’s Danaharta and Danamodal were established after the 1990s Asian crisis). Deputy governor Moghalu says Amcon is still recruiting the requisite professionals – distressed loan specialists, lawyers and others. He says the corporation’s staff could be between 150 and 200, compared with around 50 people at the firm today.
Based on "conservative projections", Moghalu says Amcon expects to beat the 58% recovery rate on bad debt achieved by Danaharta. Much of the debt Amcon has bought is for the import of petroleum products (for example, to the petroleum products importer Zenon). There is still a lot of value in the collateral of such loans, says Moghalu.
About half of the loans Amcon bought in December were backed by shares; in Moghalu’s view, if the economy does well, such loans could be far from worthless over the long term. Amcon’s projected lifetime is 10 years and it could go on for longer, says Moghalu.
But share collateral has been erased by the three bank nationalizations, and Nigerian stocks still linger at around 40% of their March 2008 value. By mid-October, MSCI’s Nigeria index had fallen more than 20% this year.
If there is a more dramatic drop in the oil price as a result of the Western sovereign debt crisis, Nigerian stock prices will be even less likely to recover, as government spending will have to contract. The collateral of loans backed by petroleum products will similarly fall and the guarantee to Amcon’s bonds will also look less stable.
Nigerian banks are to contribute to a sinking fund for Amcon, which Moghalu reckons could amount to some N1 trillion over 10 years. But Amcon still faces refinancing risk.
Research by Chapel Hill Denham states that banks will pay 0.3% of their total assets into the fund on an annual basis, starting 2012. However, assuming annual sector growth of 15%, this will amount to only N143 billion by December 2013, when Amcon’s first N1.15 trillion in bonds are due. Asset sales, interest and dividend income, and loan recoveries might not be enough to meet the shortfall.
Nigeria’s government budget depends almost entirely on oil revenues. The state has continued to deplete oil savings during the past two years – a time of much higher oil production, and with oil prices having rebounded after the initial, oil-price crash that followed the collapse of Lehman Brothers.
"When oil prices reverted and when we had peace in the Niger Delta, we started tightening [the monetary policy rate] and we started calling on fiscal authorities to also exit the fiscal stimulus," says Sanusi. "Unfortunately, that hasn’t happened." Due to the lack of reserves, the governor has had to continue hiking rates recently to stem pressure on the naira. This hurts intervened banks and discourages borrowing.
Sanusi has introduced a cap on banks’ margin lending at 10% of total loans, but the root causes of the bubble are still there: abundant liquidity yet chronically insufficient national capacity in electricity, oil refining and ports, as well as bad roads and the dangers of robbery and sabotage.
As Sanusi says: "The banks have the capital, liquidity and the ability to lend, but how do you lend to a manufacturer who does not have regular power supply? How do you lend to a tomato farmer if half of his stock is going to be wasted between the farm and the market?"
see also:
A deal a day
Banks rush to close universal banking models
Nigeria must tighten fiscal flows, says CB governor
