What a difference a year makes. This time in 2008, Nigerian banks were coming under fire from analysts for not being aggressive enough in expanding their loan portfolios. They were accused of hoarding the vast amounts of capital they had acquired through consolidation and successful forays into the capital markets, and not putting it to work effectively. Their cautious approach to accumulating assets was criticised by many, who felt average bank capital adequacy ratios of more than 20% reflected an inefficient system.
The situation in March 2009 could not be more different. Since last year, the Nigerian stock market has plummeted, losing 60% of its value and casting a dangerous shadow over the sector. To add a blow upon a bruise, the price of oil – by far the country's biggest export earner – has tumbled from almost $150 per barrel to just about $40 as The Banker went to press.
The Nigerian economy is facing a severe contraction in 2009, which will inflict untold harm on the country's nascent middle classes and damage the banks. Non-performing loan (NPL) ratios are expected to soar and average credit growth is expected to fall from 100% in 2008 down to 25% for 2009. According to one estimate, it shrank by 6% in December alone.
A sector that once represented the vanguard of Nigeria's new-found wealth and international respectability is facing its biggest test since the Central Bank of Nigeria (CBN) inspired consolidation process started in 2005. Nigerian newspapers warn daily of the dire consequences of a potential systemic collapse and many senior figures, including the director-general of the Nigerian Stock Exchange, Ndidi Okereke-Onyiuke, have called on the government to replicate the actions taken by the US and the UK by bailing out the banks.
A chief concern of those calling for a bailout is Nigerian banks' heavy exposure to margin lending. Many believe that the collapse in stock prices last year left the banks dangerously exposed to bad loans to financial speculators that will never be repaid.
Foreign capital flight
Professor Okereke Onyiuke told the National Assembly earlier this year that up to N555bn ($4bn) in foreign capital fled Nigeria's stock exchange last year, which contributed to a collapse that has wiped off up to N8000bn in the value of stocks since mid 2008.
This has led many to believe the bank sector cannot survive without state aid. The CBN estimates that the sector as a whole has a N1000bn exposure to bad debts as a result of margin lending. Add to this the banks' own losses through proprietary trading and the future looks bleak for Nigeria's post-reform bank sector.
Opposing voices
For the many voices that have called for a state-backed bail-out of Nigeria's bank sector, however, there is an equal number of voices that believe it is entirely unnecessary. They believe that the bank sector's strong capital adequacy ratios are more than enough to cushion the exposure to margin lending losses, and that any government attempt to pour money into the system will cause as much harm as it will good.
"Does Nigeria need to join the rest of the world in imitating this fiscal exuberance? My view is not really," says Ladi Balogun, managing director of First City Monument Bank in Nigeria. "Seven times out of 10, when you have more money than you know what to do with, you end up causing more problems than benefits."
He believes the government response to the crisis so far has been a fair one. "Some would like to see more in terms of action. But these actions need to be carefully thought out. We should not be shooting from the hip, especially in a country that does not have as robust institutions to implement policy as they have in the US or UK," he says.
Nwosu Okey, chief executive of Finbank, agrees no bail-out is necessary. He cites Nigerian banks' strong capitalisation, thanks to the consolidation process in 2005 that eventually saw the sector shrink from more than 80 banks to 24 today.
"The total exposure to margin lending [by Nigerian banks] is significantly less than the total capitalisation of the banks," he says. "Even if the capitalisation of the sector was cut by 50% today, the sector would still be able to support the total assets."
Banks still solvent
Figures from investment bank Renaissance Capital appear to support this. Esili Eigbe, an equity research analyst at Renaissance in Lagos, estimates that even if N1400bn in bad loans were written off, the average capital adequacy ratios of Nigeria's banks would remain at 15% – considerably higher than the global average and minimum Basel II requirements.
"They are solvent enough to mark these write-downs," he says.
The sector as a whole might survive the crisis intact, but individual banks will face huge challenges in order to remain solvent. According to Renaissance Capital, the credit environment is turning.
"As quickly as the good times came after the consolidation of the industry, so will the bad times, particularly if the back book of problem loans is not universally addressed," the bank said in a recent report. It expects the system's NPL ratio to double from 10% in 2007 to 20% in 2010.
The report suggests that the CBN should support the sector rather that directly bail it out, and has backed the federal government's proposal to form an asset management company that will buy NPLs at a discount to par. It goes on to call for a zero cost stabilisation vehicle that would allow banks to gradually recover or write off the bad loans.
According to analysts, in return for government support, banks should submit to an extensive national audit, improve quarterly disclosure, reduce dividend payments and increase retail lending. "Let the good, the bad and the ugly banks be revealed," says Lagos-based Kato Mukuru, analyst and the author of Renaissance Capital's latest report. "The Nigerian bank sector trades uniformly because of the limited ability of investors to differentiate between the banks. The good banks are trading at bad bank multiples because investors are not comfortable that they understand systematic risks and bank exposure levels."
CBN response under scrutiny
The man that most heads have turned towards in the crisis is CBN governor Chukwuma Soludo. His response to the problems in the Nigerian bank sector has assumed huge importance, and as a result, his every move has been put under the microscope.
Mr Soludo was heavily criticised in November after he allowed the naira to collapse by 20% against the dollar to protect foreign reserves as oil revenue dropped. He also instituted controversial currency controls that have effectively wiped out the interbank market in currency trading, a formerly lucrative source of revenue for banks.
Mr Soludo defended his actions by assuring everyone that the steps were only temporary and a direct response to unusual times. "It will end once we are able to restore confidence in the market and get back flows of foreign exchange on a sustainable basis in the market," he said at the time.
Not everyone is reassured by the governor's actions. "The exchange rate controls have gone back to the way it was 20 years ago," one Lagos-based banker says. "The confidence that had been generated in the system is going to be affected and it will take time to get that confidence back."
Few in the market agree with this sentiment. Samir Gadio, financial economist for pan-African strategy at Renaissance Capital, believes the CBN did the right thing. "It was better to have a quick and sharp adjustment in the exchange rate, rather than to face the same situation in Russia where you have the erosion of currency reserves and the gradual depreciation of the currency with no end in sight," he says. "The problem was that there was poor communication at the early phase of the crisis. There was no clear direction. But now it seems to be more or less well managed."
Victor Osadolor, group chief financial officer at UBA in Lagos, agrees. "The initial shock was out of anxiety both on the part of regulators, who were not used to this kind of regime having had a very stable run for four to five years, as well as the market operators," he says. "Also bear in mind that since 1999 there has been a steady liberalisation of the foreign exchange market. We've moved from a tight regime to a situation where banks could speculate and take positions."
Most financial professionals The Banker spoke to for this article were broadly supportive of the CBN's response to the crisis and felt Mr Soludo's decision to extend the CBN's discount window, in particular, was essential to stabilising the system.
This has allowed banks to borrow on a short-term basis from the CBN in order to meet the shortages of liquidity in the system. As access to capital from both domestic and international markets has dried up, this has become a critical lifeline to banks.
Sunshine in the rain?
Nigeria's banks face an uphill struggle if they are to survive the crisis intact. The growth in retail lending will inevitably be put on hold as they struggle to navigate their way through the crisis.
"There is no right way anymore, you have to do whatever is necessary," says Tayo Aderinokun, managing director of GT Bank in Lagos. "These are tough times. At best, we just hold steady this year. If anyone is going to make money it's going to be through reducing costs. If you can hold onto what you did last year, you are a hero."
He is, however, optimistic for the longer term. "It is a temporary situation. The gains made over the past few years will be sustained; this is just an interregnum. The middle class is coming gradually. Income levels have risen. Consumer purchasing power has improved dramatically. After the rain there will be sunshine."
That sunshine could come in the form of increased interest from overseas investors. Already this year George Soros's $20bn hedge fund has paid a visit to the country, sniffing out some potential value in Nigeria's heavily deflated stock market. "They are bargain hunters. Our price/earnings ratio is one of the lowest in Africa today. You can not do better than that," says UBA's Mr Osadolor.
One issue the downturn has thrown up, more than any other, is the pressing need for more transparency in the system. In future, banks will need to open up their books, publish their results in tandem on a set date and comply to International Financial Reporting Standards if they are to reassure potential investors such as Mr Soros.
Ultimately, however, what the recession has shown so far is that Nigeria's banks have become more resilient to financial crises. Whatever criticism bankers reserve for the policies of president Umaru Yar'Adua or Mr Soludo, few of them would advocate a return to the policies of the early 1980s, which led the country into deep recession and eventually saw the overthrow of the civilian government by a military junta.
For Mr Balogun, one need only look at the facts to judge the new-found stability of Nigeria's banks. "In the past year, Nigerian institutions have been the beneficiaries of quite a significant amount of credit from funds and overseas banks and there hasn't been a single default," he says.
"When you compare that to other emerging markets and even developed markets, you would say that, from a credit perspective, Nigeria's credit rating should have been higher than Iceland's."
