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”
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).
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.
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
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
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
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.