Of First Bank and Bad Debtors; A System’s Throbbing Headache

4


Friday, April 30, 2021, 07:40 PM / by
TheAnalyst, Proshare Research / Header Image Credit: 
EcoGraphics

 Proshare Nigeria Pvt. Ltd.

With
the recent decision of the Central Bank of Nigeria (CBN) to remove the Boards
of
FBN
Holdings
and FirstBank and replace them with
newly constituted alternatives, several issues creep behind the facade of
finicky corporate ethics. The banking windowpanes appear clear behind dusty
operational curtains. The revelation by Nigeria’s Central Bank Governor, Mr.
Godwin Emefiele, that FirstBank had been under a regime of forbearance since 2016
and was peppered with problems of recovering insider-related loans was an
admission of regulatory fogginess. Indeed, bank analysts have noted that this
was one of the clearest examples of what industry professionals call ‘
adverse selection or a situation
where assistance or preference is given to the least qualified person or
institution based on sentiments rather than evidence-based governance and
logic, especially where, for example, a regulator like the CBN has more
information than investors, depositors and the general public.

 

Emefiele in his announcement
concerning the dissolution of the Boards of
FBN
Holdings (FBNH)
and FirstBank on Thursday 29 April 2021, noted that “As you may be aware, FirstBank is one of the systemically important banks in the
Nigerian banking sector given its historical significance, balance sheet size,
large customer base and high level of
interconnectedness
with other financial service providers, amongst others. By our last assessment,
FirstBank has over 31m customers, with deposit base of N4.2trn, shareholders
funds of N618bn and NIBSS instant payment (NIP) processing capacity of 22% of
the industry. To us at the CBN, not only is it imperative to protect the
minority shareholders, that have no voice to air their views, also important,
is the protection of the over 31m customers of the bank who see FBN as a safe
haven for their hard-earned savings.

 

The
bank maintained healthy operations up until 2016 financial year when the CBN’s
target examination revealed that the bank was in grave financial condition with
its capital adequacy ratio (CAR) and non-performing loans ratio (NPL)
substantially breaching acceptable prudential standards.”

 

The CBN Governor continued by
observing that “The problems at the bank were attributed to bad credit
decisions, significant and non-performing insider loans and poor corporate
governance practices. The shareholders of the bank and FBN Holding Plc also
lacked the capacity to recapitalize the bank to minimum requirements. This
conclusions arose from various entreaties by the CBN to them to recapitalize”.

 

According to Emefiele “The insiders
who took loans in the bank, with controlling influence on the board of
directors, failed to adhere to the terms for the restructuring of their credit
facilities which contributed to the poor financial state of the bank. The CBN’s
recent target examination as at December 31, 2020 revealed that insider loans
were materially non-compliant with restructure terms (e.g. non perfection of
lien on shares/collateral arrangements) for over 3 years despite several
regulatory reminders. The bank has not also divested its non-permissible
holdings in non-financial entities in line with regulatory directives”

 

ReadCBN
Governor’
s Statement on the Purported Management Change
at the First Bank of Nigeria Ltd

 

This
was consistent with the concerns of
Debtors Africa as far back as 2019 when in a report
prepared for the organization by Proshare it was noted that the old paradigm of ‘naming’ and ‘shaming’ delinquent debtors into repaying loans was ineffective
noting that it would be difficult to shame the ‘shameless’ particularly in an
environment where the perception of wealth was more important than the
substance of character.

 

The
CBN Governor pointed to the fact that the regulator had over the past five
years been watching FirstBank with an eye on re-establishing sustainable
business growth and resolution of sticky loan assets. Indeed, the Governor
pointed out that the regulator had extended forbearance to FirstBank since 2016
when it approved the appointment of Dr. Adesola Adedutan to succeed the bank’s
erstwhile Managing Director, Mr.  Bisi Onasanya.

 

In
granting forbearance to FirstBank, the Governor noted that before major board
decisions such as replacement of directors was taken the board would have of
necessity had to engage in a discussion with the regulator to ensure a smooth
transition and the sustenance of the bank stability objective. This was not
done and the backroom manouverings of core shareholders of the bank that
doubled as senior board members made the act of replacing FirstBank’s Managing
Director who still had eight months left in his five-year tenor unacceptable to
the regulator, especially since the regulator felt comfortable with the balance
sheet turnaround supervised by the management team led by the Chief Executive
Officer (CEO).

 Proshare Nigeria Pvt. Ltd.

Headaches

While
Emefiele’s swift action to remove the Boards of FBNH and FirstBank was
understandable, it threw up issues that run deeper than the simple substitution
of personnel and speaks to the heart of the stability and integrity of
Nigeria’s financial system.

 

Forbearance

In
the Governor’s speech, the regulator mentioned that FirstBank had enjoyed
financial forbearance from the CBN for five years since 2016. Analysts that
have reviewed the Audited Annual Accounts of the bank have noted that the CBN
forbearance programme was not disclosed anywhere in the bank’s accounts over
the past five years. By not mentioning this material fact that it was
under regulatory forbearance, the bank had misled the financial market in
general, and the stock market about its state of financial health, thereby
resulting in a situation where its traded share price on the floor of the
Nigerian Exchange Group (NGX) did not reflect the bank’s intrinsic value
.
This was a breach of best global governance practice which created a problem
economists refer to as an ‘
asymmetric information‘ or information failure’ problem where one set of investors have
superior knowledge of the state of financial health of a listed company than
another set of investors or where a bank’s insiders (management and directors)
know more about the financial status of an institution than its owners or
shareholders.

 

While
FirstBank’s Board members knew about the CBN’s forbearance programme, investors
in the bank’s holding company (FBNH) were pretty much in the dark. This throws
a crooked wrench in the CBN’s Governors statement of initiating the removal
action against the FBNH Board to protect FirstBank depositors and shareholders
from loss because of failed corporate governance. The fact that neither the
FBNH Board nor the CBN management deemed it necessary to inform the investing
public of the fiscal affairs of the bank with both parties remaining silent
over the forbearance granted FirstBank by the regulator over the last
half-decade throws any argument of a moral or professional high ground of the
regulator under the bus. The conspiracy of silence in not providing material
information related to a company quoted on the NGX could be seen as a breach of
market integrity and fidelity.

 

Of
Cooks and Broths

The
irony here is that FirstBank is known to be the clearing bank to other banks
presently under the CBN’s forbearance arrangement. These banks have presented
noticeably negative shareholder funds in their 2020 financial statements with
these funds being negative north of N250bn and even where shareholder’s funds
have turned up positive, the banks’ statement of financial positions (balance
sheets) represent artful accounting aerobics in which negative equity is turned
positive by introducing misty accounting practices such as  ‘share premium
accounts’ into the books of entities that are neither listed on a public
exchange (to determine actual market price) or produce regular statements of
intrinsic value based on globally accepted accounting guidelines (IFRS and
GAAP).

 

The
FirstBank matter goes well beyond the mere underhand removal of a bank Managing
Director by an allegedly compromised board and a heavy-handed dominant
shareholder, and raises questions as to how far the public can trust the
integrity and representation of the annual financial statements of banks
monitored by the CBN. For example, how do banks with serial negative
shareholder’s funds (in other words they have no share capital) continue to
operate in a properly governed financial system? With respect to FirstBank, how
does a bank under forbearance provide clearing house functions to other banks
under forbearance? Is this a case of the blind man lending his legs to the
lame? Why are the forbearance statuses of banks listed on the NGX not made
public to guide rating agencies, investors, and other prospective creditors of
the institution on a fair value assessment of a bank’s assets and liabilities?

 

While
Emefiele and the CBN’s management may have done the financial system a world of
good by preventing a powerful insider from short-circuiting a carefully
orchestrated process of supporting the resurgence of the fortunes of FirstBank,
in doing so, the CBN has also demonstrated a willingness to bend too far
backwards in allowing insider transactions in banks to unravel before applying
the needed cudgel. The CBN’s indulgence permits deposit money institutions to
carry large and dubious risk assets on their loan books for extended periods
without the appropriate levels of impairment provisions thereby overstating
bank earnings and understating their non-performing loans (NPLs).

 

The
alleged tolerance of the banking sector regulator may have created distortions
in the market price discovery process of the NGX, where many banks may be
discovered to be worth much less than their most recent market prices. 

 

The
supposed clever cooking of financial statements by banks may have begun to give
a foul odour as the FirstBank Board problem exposes a need for a new approach
to both insider and outsider loan management processes and a review of the
CBN’s overall bank intervention strategy.

 

Princes
Do Not Fight as Slaves 

The
Board replacement at FBNH and FirstBank may have been expedient but may not
have required public drama. In dropping the gauntlet by both the former Board
members of FBNH and the CBN, the Nigerian banking system has become more
fragile as elements of doubt concerning the professionalism and integrity of
the system comes into consideration by both foreign and local observers.

 

The
dustup between the erstwhile Chairman of FBNH, Oba Otudeko, on the one hand,
and the Governor of the CBN, Mr. Godwin Emefiele, on the other has left both
gentlemen badly bruised. The CBN governor’s matured request for a meeting with
Otudeko and his pursuit of a conversation within the time worn best practice of
backdoor conversation was commendable, but his emotional response to Otudeko’s
alleged rebuff was unnecessary. Otudeko himself breached the codes of the
Ijebu, from the Southwestern part of the country who sing songs that suggest
that a prince does not fight battles like a slave (
see
illustration below
). 

 

Illustration FirstBank; the 28 April
2021 Decision Matrix

Proshare Nigeria Pvt. Ltd.

 

In
sorting out the various conflicted positions Otudeko could have adopted a less
belligerent approach to making his point and establishing the reason for a
change of guards at the bank. Clawing at quicksand is not the best way of
coming out of the mud. From the perspective of governance oversight the CBN may
have wrongly overplayed its hand by showing preference at a time emotions were
high and alternative solutions may have been explored. Otudeko may have been
guilty of the same mood swing and emotional reaction to a tense situation. In
the battle of egos nobody wins, and most things are lost. The CBN may urgently
need to reassure Nigerians and foreign investors and bank customers that the
FirstBank saga was an aberration rather than an unfolding rule and that going
forward the regulator would put a tighter rein on insider transactions and hold
directors to the highest standards of Board governance practice. 

 

The New Way, the Superior Way

At
Access Bank’s
recent 32nd Annual General Meeting (AGM), the banks Managing
Director, Mr. Herbert Wigwe, decried the incidence of powerful and influential
Nigerians taking loans from banks with no intention to repay. While he admitted
that there were a few Nigerian business persons with strong governance codes,
he nevertheless, suggested that most supposedly wealthy and successful Nigerian
business persons were repeated loan defaulters some of whom had the capacity
but lacked the willingness to repay loans collected from banks for business
purposes.

 

This
point was highlighted in the 2019
Report of Debtors Africa where it was noted that “
The poor
repayment culture of large debtors who tend to prove more recalcitrant than
their smaller counterparts has given birth to a burgeoning debt factoring and
loan repurchase business. To be sure, analysts have argued that private debt
factors and loan purchasers are the natural successors to the AMCON after the
completion of its sunset period scheduled for June 2020. The opinion of some
reviewers of the local loan industry landscape is that the application of
private, incentive-based recovery models would prove more effective than the
AMCON-supervised arrangement that still has to resolve N5trn of outstanding
bank assets”
.  

 

AMCON
is not likely to rollup anytime soon as the sunset clause referred to in the
report was based on a template of recovery expectations and was not necessarily
part of the statute setting up AMCON as an asset resolution institution.
However, with the unfolding FirstBank story playing up the need for stronger
loan recovery oversight a need
for a new approach to lending based on digital intelligence has become
pressing.

 

NPLs
and Other Issues

TheAnalyst in the NPLs & Bad Debtors section of the 2019 DebtorsAfrica
Report
estimated a rise in NPLs of Nigerian banks as a
result of economic downturns caused by the novel coronavirus which had a severe
impact on businesses especially the oil & gas (O&G) sector. As crude
oil prices tanked in 2020, most banks highly exposed to the O&G sector were
hit especially in the Q2 and Q3 financial period of the institutions.

 

However,
the FY2020 result of most listed banks played a different tune in NPL
performances. Although, Fidelity Bank and Stanbic IBTC both recorded growth in
NPL ratio as expected by ThAnalyst.

 

Union
Bank had the highest Y-o-Y percentage decline in NPL, from 5.80% in 2019 to
4.0% in 2020. Union bank’s FY2020 result shows retail accounted for 29% of the
total NPL of the bank. Also, the NPL of the O&G sector increased
significantly in 2020, accounting for 4% in 2019 to 25% of NPL in 2020.

 

Fidelity
bank recorded the highest Y-o-Y percentage growth of
+15.15%
in its NPL ratio in 2020 when compared to its peers. According to its financial
statement, the Transport sector accounted for the highest percentage in NPL
ratio with 31.2%. The NPL ratio of the O&G downstream sub-sector declined
notably in 2020, from 35.3% in 2019 to 6.7% in 2020 (see table below).

 

Table 1: Percentage Change in
Bank’s NPL Ratio















Banks

2020

2019

% Change

Access

4.30%

5.80%

-25.86%

ETI

7.60%

9.70%

-21.65%

FCMB

3.30%

3.70%

-10.81%

GTB

6.39%

6.53%

-2.14%

Stanbic IBTC

4.00%

3.90%

+2.56%

Sterling

1.90%

2.20%

-13.64%

Union

4.00%

5.80%

-31.03%

Unity

0.001%

Zenith

4.29%

4.30%

-0.23%

Fidelity

3.80%

3.30%

+15.15%

UBA

4.70%

5.30%

-11.32%

FBNH

7.70%

9.90%

-22.22%

Source:
Bank Financial Statement, Proshare Research

 

Between
2019 and 2020, FBNH and ETI both had high NPL ratios above the CBN’s 5%
threshold.

 

A
breakdown of First Bank of Nigeria Limited NPL ratio shows that the
Agricultural sector accounted for 16.9% of the Company’s total NPL in 2020,
while the O&G sector (upstream, services, and downstream) accounted for
15.2% of NPL by sector.

 

Unity
bank appears to have the strongest NPL index against its listed counterparts in
2020, with an NPL near zero (
see chart below). 

 

Chart 1: Bank’s NPL Ratio 2019
& 2020

Proshare Nigeria Pvt. Ltd.

Source:
Bank Financial Statement, Proshare Research

 

Views from the Upper Room

As
the FirstBank tale rages with decreasing loudness, the financial system must
reset and address a few compelling issues:

  • The
    powers and responsibilities of significant insider interests in banks must
    be scaled down to avoid boardroom brawls amongst blocs of larger investors
    to the detriment of minority interests
  • The
    level of independence of bank boards in the light of large bloc
    shareholder influence must be ascertained.
  • The
    loan recovery framework within banks must be regularly subjected to stress
    tests.
  • The use
    of technology as a tool for monitoring, recalibrating, and initiating the
    loan recovery process must be explored expeditiously e.g., the maintenance
    of a digital register of recalcitrant
    and delinquent lenders such as DebtorsAfrica,
    with archival and retrieval features including records of the nature and
    amount of a loan facility outstanding and the attached collateral assets.
  • The
    issue of making public the forbearance status of banks. While exact
    amounts and details of the forbearance programme may be held confidential
    between the regulator and the bank, the fact of forbearance should be
    included in the annual financial statements of lending institutions,
    especially those listed on an organized exchange such as the NGX, FMDQ and
    NASD.
  • The
    Exchange on noting that banks listed on its Exchange have forbearance
    arrangements with the CBN must seek and obtain clarity on the nature of
    the forbearance and place the stocks of banks in this category on technical
    suspension until the matter has been resolved in the interest of minority
    and other shareholders
  • The
    Securities and Exchange Commission should liaise with the CBN over the
    material nature of the forbearance of banks listed on public Exchanges and
    must seek notification of material changes to the conditions of such banks
  • Banks
    with negative shareholders capital should have their stocks placed on
    technical suspension until a reversal of the adverse condition of their
    balance sheets has been established.
  • Corporate
    governance must be at the centre of regulatory consideration going
    forward and the bad behaviour of insider borrowers should receive less
    tolerance as bank directors navigate past avoidable Boardroom scuffles.

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