BANK FAILURES, MERGERS AND ACQUISITIONS IN NIGERIA.PAPER BY FRANK ONWU, CHAIRMAN FIRST IDEAS LIMITED AS CONTRIBUTION TO THE SPECIAL CENTENARY PUBLICATION TITLED “55 YEARS OF CENTRAL BANKING IN NIGERIA.

 BANK FAILURES, MERGERS AND ACQUISITIONS IN NIGERIA.

PAPER BY FRANK ONWU, CHAIRMAN FIRST IDEAS LIMITED AS CONTRIBUTION TO THE SPECIAL CENTENARY PUBLICATION TITLED “55 YEARS OF CENTRAL BANKING IN NIGERIA” BY ASHER GLOBAL TREASURES LIMITED.

BANK FAILURES, MERGERS AND ACQUISITIONS IN NIGERIA

Colonial Period Banking:

Banking in Nigeria commenced in 1892 with the establishment of a branch in Lagos by African Banking Corporation of South Africa. This was followed by the British Bank of West Africa (now First Bank of Nigeria Plc) in 1894, Barclays Bank DCO (Dominion, Colonial and Overseas) in 1925, National Bank of Nigeria Ltd in 1933, Agbonmagbe Bank Ltd in 1945, African Development Bank in 1948 and British and French Bank for Commerce and Industry in 1949. These banks were established pre independence and before the banking ordinance of 1952. The first Central Bank of Nigeria Act was promulgated in 1958. Post- independence banking legislations include Banking Ordinance of 1969, Nigeria Deposit Insurance Act of 1988, Banking and Other Financial Institutions Act of 1991 and Central Bank of Nigeria Act of 2007.

The period preceding the Banking Ordinance of 1952 has been described as the period of free banking. The first record of bank failures in Nigeria however occurred between 1952 and 1958 when 21 out of the 25 indigenous banks collapsed. In the absence of deposit insurance, depositors and other investors in these institutions lost all their investments and savings. The pre independence banking failures were attributed to weak management, insider dealings by owners, directors and management, overtrading, undercapitalization and unfair competition from better capitalized foreign competitors. The bank failures caused undue hardship to depositors and led to a loss of confidence in the ability of Nigerians to manage financial institutions.

Banking Deregulation Period and return of Private Indigenous Banks

Banking in the first 20 years post- independence was dominated by foreign banks and few State owned indigenous banks. This period coincides with the period of Nigerian civil war (1966-1970) and oil boom (1973-1980). The period of banking deregulation commenced in 1986 after the introduction of the Structural Adjustment Program by the Nigerian Government and licensing of new private indigenous banks. 70 Commercial and Merchant Banks were established between 1986 and 1991. Banking profitability during this period was driven by arbitrage opportunities in foreign exchange as banks benefited from the wide gap between official exchange rate and market rates. The massive devaluation that followed the introduction of the Structural Adjustment Program and very high interest rates however impacted negatively on most borrowers who were not able to pass on higher input costs. This led to sharp increase in non-performing loans of banks. Many of the banks established during this period had fictitious capital funded from short term commercial paper repaid from depositors funds.

The second era of banking failures commenced in 1992 with the takeover of 6 banks by the National Deposit Insurance Corporation (NDIC). 36 banks in Nigeria failed between 1994 and 2003. Reasons adduced for the bank failures include undercapitalization, high non-performing loans, high interest rates, inappropriate use of stabilization securities and withdrawal of government deposits. Most hit by government policy were the Merchant Banks who lent long to government promoted projects and funded primarily by government deposits and institutional placements. All but one of the major Merchant Banks in Nigeria failed during the period.

2005 Bank Mergers

New banks                                                          constituent members ……………………………………………………………………………………………………………………………………………

Access Bank Nigeria PLc  –  Access Bank Marina Int’l Bank and Capital Bank International Plc

Afribank Nigeria Plc        –  Afribank Plc and Afribank Int’l (Merchant Bankers)

Bank PHB Plc                  –  Platinum Bank Limited and Habib Nigeria Bank Limited

Diamond Bank PLc          – Diamond Bank and Africa Int’l Bank (AIB)

Equatorial Trust Bank Plc – Equatorial Trust Bank Ltd and Devcom Bank Limited

Fidelity Bank PLc              – Fidelity Bank, FSB Int’l Bank and Manny Bank

First Bank of Nigeria Plc  –   First Bank Plc, MBC Int’l Bank and FBN (Merchant Bankers)

First City Monument Bank Plc – First City Monument Bank, Coop Development Bank, Nigeria-

                                               American Bank and Midas Bank

 First Inland Bank Plc      – First Atlantic Bank, Inland Bank (Nigeria) Plc. IMB Int’l Bank Plc                          

                                          and NUB I nt’l Bank Plc

IBTC Chartered Bank Plc   – IBTC Chartered Bank Plc and Regent Bank Plc

Intercontinental Bank Plc – Intercontinental Bank Plc, Global Bank Plc, Equity Bank of Nigeria Ltd,

                                         Gateway Bank of Nigeria Plc

Oceanic Bank International Plc – Oceanic Bank International Plc and International Trust Bank

Skye Bank Plc                           – Prudent Bank Plc, Bond Bank Limited, Reliance Bank Limited,

                                                Cooperative Bank Plc and EIB International Bank Limited

Spring Bank Plc                   – Citizens International Bank, ACB International Bank, Guardian Express

                                            Bank, Omega Bank, Trans International Bank and Fountain Trust Bank

Sterling Bank Plc                – Trust Bank of Africa Limited, NBM Bank Limited, Magnum Trust Bank,

                                            NAL Bank Plc and Indo-Nigeria Bank United Bank for Africa Plc

United Bank for Africa Plc,    – Standard Trust Bank Plc and Continental Trust Bank

Union Bank of Nigeria Plc       – Union Bank of Nigeria Plc, Union Merchant Bank Limited,                                                                     

                                                 Broad Bank of Nigeria Ltd and Universal Trust Bank Nigeria Plc

Unity Bank Plc                     –  Intercity Bank Plc, First Interstate Bank Plc, Tropical Commercial                

                                            Bank Plc, Centre-point Bank Plc, Bank of the North, New African Bank,   

                                            Societe  Bancaire, Pacific Bank and New Nigeria Bank

Wema Bank Plc                   –   Wema Bank Plc and National Bank of Nigeria Ltd.

Banking Consolidation Period and Mergers and Acquisitions

The third wave of banking failures was primarily regulator induced when the minimum capital requirement for existing banks was increased from N1 billion to N25 billion in July 2004. Banks were given up to the end of 2005 to comply. The first set of banking mergers and acquisitions occurred during this period as a compliance method for a number of banks that could not raise funds independently. 13 banks that could not meet the compliance deadline failed in 2006 while 69 banks merged, acquired or were acquired to form 19 new banking groups. The number of banks in Nigeria reduced from 89 in July 2004 to 25 in December 2005. The number of licensed banks was further reduced to 24 after the merger of IBTC and Stanbic Bank Limited. The consolidation period witnessed very intensive fund raising and broadening of ownership of banks in Nigeria. It was also the golden age of mergers and acquisitions in Nigeria. Banks subsequently scaled up in 2007 in a second round of fund raising aimed at meeting the N100 billion target for consideration as managers of Nigeria’s external reserves.

Post Consolidation Period

The fourth wave of banking failures was the period following the Global Economic Meltdown of 2008 resulting from the subprime crisis in the United States of August 2007. The subprime crisis led to Global recession in 2008, tightening of credit and collapse of some major Global Financial Institutions. In Nigeria, the impact was felt from March 2008 when foreign investors started to divest from the Nigerian Stock Market leading to a collapse of the Stock Market and banks called in their margin loans. The collapse of the Stock Market had a major negative impact on the balance sheet of banks because of the large exposure to margin loans and proprietary positions in the Stock Market. Banks also had large exposures to heavily indebted Oil Marketing Companies who were adversely affected by the currency depreciation and tightening of credit. The Central Bank of Nigeria had to intervene in 8 banks in July 2009 to inject N620 billions of liquidity in the banks and replace management. The CBN also guaranteed the deposits, interbank and foreign credit obligations of these banks to avoid a run and restore confidence.

Five of the eight banks were successfully acquired by new banks/investors in 2011(intercontinental Bank Plc by Access Bank Plc, Finbank Plc by FCMB Plc, ETB Plc by Sterling Bank Plc and Union Bank Plc by private equity investors led by Capital Alliance Nigeria Limited). This process was assisted by the Asset Management Corporation (AMCON) which injected N1.379 trillion into the five banks. The remaining three banks that were unlikely to meet the September 30, 2011 deadline set by the CBN for recapitalization were taken over by Nigeria Deposit Insurance Corporation (NDIC) in August 2011 which acquired their assets, deposits and specified liabilities under the bridge bank method. The bridge banks were subsequently acquired by AMCON which injected N1.012 trillion into the banks. The pending sale of the bridge banks in 2014 will conclude the resolution of the Nigerian banking crisis of 2009. The bridge banking option insured the protection of depositors but total loss for shareholders in the three intervened banks. The prosecution of the managers of the eight intervened banks is on-going.

The key causes of the 2009 banking crisis include:

 Failure of corporate governance in the banks, insider dealing and criminal diversion of depositors’ funds.

 Poor regulatory oversight

 Deliberate misrepresentation of the financial position of the banks and accounting fraud.

 Bubble capital. 30% of the share capital of Intercontinental Bank and 35% of Oceanic Bank were reported to be funded from depositors’ funds while Afribank Plc was reported to have used depositors’ funds to purchase 80% of its 2007 public offer.

 Very high proportion of non-performing loans, exposure to margin loans and proprietary positions in quoted stocks and oil marketing sector

 Illiquidity and large exposure to CBN borrowing window

 Pressure on banks to deliver high returns to shareholders following the rapid expansion of their capital base post consolidation.

Conclusion

The future of Nigerian Banking is bright with the full implementation of the latest banking reforms. The acquisition of non-performing loans of the banking system by AMCON has significantly strengthened the banks with non- performing loan ratios declining below 3%. This is however not likely to be the last banking failures in Nigeria as the banks continue to grapple with challenges of cost, profitability and inconsistent government policies including policies and directives of the CBN. Some of the recent CBN policies such as the significant increase in the Cash Reserve Ratio for public sector deposits need to be reconsidered in the light of previous experience of bank failures. The recent weakness in the performance of banking stocks in the stock market is a reflection of more benign outlook for the sector. A more profitable banking sector is in the interest of the economy. The new Banking Model also requires further review in the light of failure of Merchant Banks in the 1980s. There might also be need to mitigate losses of retail investors in the bridge banks from excess proceeds of the sale of the banks and recoveries from the previous managers.

The current disposition of the CBN towards corporate governance, mergers and accommodation will mitigate the impact of future bank failures in Nigeria.

Frank Onwu

January 14, 2014

About the Author

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First Ideas Limited is an investment and financial advisory company established in 1994 to provide advisory services to high net worth individuals, trust funds, financial institutions and medium sized companies in growth sectors.

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