The need to correct the mistakes of rapid physical expansion of the banking industry in a non-growing economy has been felt since the early 1990s. The proliferation of banking licences under the pretext that the economy was under-banked — the mantra of the period — proved wrong headed. Since the early 1990s, macro-economic indicators had been signalling that the real sector was declining and that the economy was stagnating. The population of banks leapt in an economy in which 70 per cent of industrial capacity lay fallow.

Much of the difficulties facing banks reflect the inability to achieve stimulatory growth in the real sector as domestic output remains subdued and aggregate demand continues to thin down. This warranted heavy dependence by banks on government business in confirmation that private sector business is insufficient to support all the banks in operation. The stunted growth in the real sector resulted in significant credit losses for the banks as loan repayment difficulties impaired asset quality conditions severely. In response, banks shifted to money market trading and self-liquidating transactions as opposed to core banking activities.

The number of players continued to grow to compete for a shrinking market share, leading to excessive competition in the industry. Ethics and decency were thrown overboard as bank executives set tough revenue targets at all levels of workforce, requiring workers to achieve or quit.

In the bid to meet high revenue targets out of a virtually stagnant economy, bank workers were groomed to discard commitment to honesty in banking. Many banks introduced various types of client cheating ‘innovations’ that greatly belittled a once noble profession. Under intense pressure to win deposits, unethical marketing practices became the norm for many banks.

As the competitive struggle for survival intensified, marginal banks resorted to excessive risk taking and rampant breaking of regulatory rules. Then followed the bitter experiences of financial distress, banking closures and liquidations. Despite financial distress resolution measures applied, the banking system remained vulnerable to a number of risks and serious concerns about the soundness and stability of the Nigerian banking system had remained.

It was naturally expected that considering the Central Bank’s solemn responsibility of depositors’ protection for which it has in its command an unlimited array of bank regulatory instruments and options, the bank’s new management would initiate far-reaching measures to address the critical situation of the banking system. Well before Professor Charles Soludo, the Central Bank’s governor came out with the N25 billion minimum capitalisation requirement, there had been strong expectations that the N2.0 billion capital requirements would reinforce consolidation in the banking industry. There were a good number of small banks that by their volume of business would be over capitalised if they complied with the N2.0 billion share capital. Rates of return would be too low to justify such a huge injection of new money.

Banking consolidation is therefore a policy whose time has come but which requires to be carefully implemented alongside a number of fundamental economic policies. To the extent that the problem of slow economic growth is the major factor strangulating banks, banking industry consolidation will require to be supported with a whole set of macro economic measures stimulatory to the economy.

Shaping up for consolidation
Having overcome the initial shock and having found all negotiation doors shut; banks have set down to work out strategies and options towards meeting the Central Bank’s prescribed capitalisation. Presently, five main options are under consideration. These are:

• New capital raising programmes through the stock market
• Private placements
• Foreign equity participation
• Group consolidation
• Outright mergers and acquisitions

In all of the above considerations, banks are out in search of new money either to meet the new capitalisation requirement on their own or to shore up existing capital base preparatory to merging with other banks. This will involve drawing much of the money in the economy into the banking industry but the reform is not addressing the other elements of bank healthiness.

In a post recapitalised banking industry therefore there will be highly capitalised banks but adequate capitalisation will not make up for the other equally important indices of measuring the soundness of a bank.

Recapitalisation may raise liquidity in the short-term but will not guaranty a conducive macro-economic environment required to ensure high asset quality and good profitability.

In the process of consolidation, banks are looking out for compatibility in terms of vision, corporate culture and value system of prospective partners. Not much has been thought about the compatibility of the various information technology platforms deployed by the merging banks. It will take a lot more time and effort to get the information base of various banks dovetail into one functional databank. If the transition is not carefully planned and sufficient time allowed for data consolidation it may result in a lot of customer inconveniences with serous disruptions of financial transactions.

In the emerging banking industry, the oligopolistic nature of the industry is bound to change to a market structure where a few large players control the entire market. Market shares will change and the presently leading banks will face a reinforced competition. The biggest threat to market shares of existing big banks will come from the newly consolidating groups of new generation banks that are well known for their aggressive marketing push.

The consolidating banks are likely to sustain a higher growth rate than the present market leaders such that in the next three to four years a new set of industry leadership in terms of asset base and branch network will emerge from the new generation banks now adding size and low cost advantages to superior marketing skills and service quality. The large banks may appear comfortable at first, being under no pressure to reinforce the operating capacities and that complacency is not helping them prepare for the upcoming battle for industry leadership. Their prized competitive advantage has been safety of depositors’ funds, which is linked to their large size. Now, that advantage will be countered such that quality service and marketing competence will become the decisive factors in who wins the business.

The post consolidation banking environment is therefore likely to be one of a level playing field where equals would be out to compete. All banks are likely to become settlement banks and the Central Bank is already reworking the settlement banking policy. Consolidating banks are expected to roll out new banking institutions large enough to significantly alter the structure of competition in the industry.

The consolidation policy is expected to have some positive impacts on the Nigerian economy. These include:

• Improved capacity of local banks to finance major projects such as in the oil and gas sector
• Raise confidence in the banking sector by finally curing the system of the prolonged financial distress
• Improve retaining capacity of financial capital through the promised retention of external reserve in banks, which could encourage the return of flight capital
• Healthy competition in a level playing field and reduction in regulatory abuses and operating malpractices
• More operating discipline and responsible behaviour of banks by curtailing excesses of owners/managers of small banks.

Structuring mergers and acquisitions
Mergers and acquisitions are a useful tool to management in business restructuring and repositioning for the purpose of ensuring survival, using existing resources and opportunities more effectively and building a sustainable competitive position. The bases in the current situation in the banking sector are industry overcapacity and under capitalisation relative to the Central Bank’s stipulated minimum capitalisation. For successful mergers and acquisitions to happen expert structuring and execution are the basic ingredients.

Several studies and experiences from active merger and acquisition markets overseas show that there has been a high failure rate. Failures are defined in terms of both the completion of the process and the success of the new entity in achieving the corporate purpose. Notable key elements that have often led to failures are worthy of note.

• Incompatibility of managements of the parties and operating cultures is the most common feature.
• Excessive pricing of assets beyond their market value.
• Inadequate financial resources on the part of the acquiring company.
• Discovery of constraints to achieving targeted synergy after the deal is consummated.
• Failure to appreciate the complexities of mergers and acquisitions.
• Insufficient attention and follow up efforts to post-merger implementation of the deal programme.

Specific merger steps
There are important merger steps that must be systematically followed to ensure a successful deal. Step one is planning, which defines the overall corporate strategy and shows how merger or acquisition fits into the overall framework. It identifies the essential characteristics to look out for that qualifies the candidate to fit into the picture. Those characteristics should then be developed into screening criteria specifying quantitative and qualitative factors with which a preliminary screening of target banks is conducted. This exercise will produce a list of high potential banks on which due diligence is then conducted to determine how their strengths and weaknesses fit into the overall strategic purpose. The prospective candidate[s] should emerge from the second round screening.

The second stage starts with detailed investigation of the prospective candidate[s] that proceeded from the first stage. The investigation provides the basic information for evaluation, deal structuring and negotiation. It could be the full purchase investigation and audit where all the unwanted candidates have been eliminated or less detailed if more than the number of candidates required are still present at this point. The final stage of investigation is detailed valuation studies at the end of which all the necessary details for structuring specific deals would have been assembled.

If there is serious interest and meeting of the minds, the parties proceed to the level of deal structuring. This typically involves:

• negotiating and agreeing a purchase price;
• deal structuring to specify payment terms, incorporating accounting and legal basis of the transaction;
• financing the transaction;
• negotiating the operating terms of the emerging company such as the main integration plan, employee benefits, among others;
• drafting the acquisition agreement and
• closing the deal.

The final stage is the implementation of the merger or acquisition deal, which is the practical integration of the merging corporate cultures. It calls for skills to combine products and services, assets and liabilities, streamlining of organisation structures, marketing and customer service orientation, rebuilding the board and reconstructing the management team and the whole body of staff. Considerable changes will also most likely occur in policies and procedures, accounting systems and data processing technology.

This stage is critical in that the practical implementation of the paperwork deal is bound to meet with daunting challenges. A coordinating team is required to ensure compliance with the implementation plan, resolve operating hitches and manage staff resistance to the changes. A proper orientation of staff is a key aspect of a successful implementation programme.

Three key lessons worthy of note are:

• The senior partner in the deal must seek to fully explore the strengths of the junior party and put those strengths to use rather than have them diluted by its own weaknesses that were meant to be remedied by the merger or acquisition.
• The Central Bank’s policy as structured will tend to put junior parties at ‘a take it or leave it’ disadvantage and misplace the objective of merger or acquisition on building business size rather than securing a competitive advantage. That will expectedly reinforce the preference often by large banks to acquire and absorb the small banks, which will make the deals more difficult to pull through.
• In view of (2) above, the senior partner often adopts a condescending attitude that soon creates friction in the workplace. Consequently the new organisation begins to record high turnover of quality people from the junior partner – the very strategic edge for which the senior partner had sought the deal.

The facts are there; unprecedented and ground-breaking — N48.39 billion, 288,780 subscribers, 454.91 per cent over subscription, multi-lateral subscription base including Nigerians spread across 36 states, offshore investors and institutional investors, largest return of excess monies, all these four and a half decades unequalled records and many others within 25 working days. This was the story of the success of Initial Public Offering (IPO) of Zenith Bank Plc. What could have gravitated such epoch-making contribution of monies from established investors and neophytes?

Investors, all over the world, are taken as “the highest breed of homo-sapiens” due largely to their shrewd concerns about risks and returns.

Ponderous, analytical, cautious, aggressive and borderless, investors possess essential attributes that even the “big fool” theory could not discountenance. On another level, there are two divergent views on the depth of a capital market. While some attributed the depth to existing records and generalise such as window of assessment, many others simply put the depth — the extent of funds in a market, to the quality of each instrument.

In Nigeria, the former view was reigning alongside masked apathy for private unquoted investment. The opinion about the market depth was also not too savoury. Shareholders’ base for the entire market was put at about two per cent of the Nigerian population. Foreign portfolio investments were too meagre for annual official record.

But within 25 working days; between July 1 and 29, 2004, the coming of Zenith Bank Plc changed all these. It changed our market, perceptions, ideas, aspirations, ratings and set new theories for us, most importantly the new theory of: the instrument is the depth; the abundance theory.

How and why did a 14 years old, personified private limited liability bank reshaped our market, thinking, ideals and aspirations as individual and as a group? There is unanimous agreement on the roles played by the quality of the brand, strong fundamentals and pre-designation.

Incorporated as a private limited liability company on May 30, 1990, the then Zenith International Bank Limited evolved a unique brand known for high-end ideals in the areas of human resources, customers, products, technology and other choices. These translated quickly into results and thus started the secondary brand strengthening waves — industry, local and international ratings. Triple ‘A’ (Aaa) ratings from rating agencies indicating “strong, excellent and impeccable financial condition,” Most efficient Bank Clearing House, 2001; Bank of the Year 2003; Business Times; Institute of Chartered Accountant of Nigeria (ICAN) Merit Award for outstanding contribution to the growth of industry and commerce, as well as the accounting profession; Best Service Excellence Bank in Lagos, 2002; Best Customs Duty Collection Bank 2000-2002; Best Bank Website, 2002 and 2004 by Phillips Consulting, Most Outstanding Duty Collection Bank, 2001 by Central Bank of Nigeria and many others heralded the metamorphosis of the private bank into a record-breaking public company.

Zenith Bank is known as a full services universal bank with unique services and products and strong bias for top-tier customers. The composition of its brand includes assessable elements such as strong and consistent earnings record, solid capital and liquidity position, large and quality assets base, a service culture woven around professionalism, quality board and management, technology-driven services, and strong market share.

Zenith Bank was licensed as a commercial bank on June 20, 1990 and commenced banking operations on July 16, 1990. Right now its infancy, year-on-year growths have placed the bank among most-successful companies in Nigeria; as third most profitable and fourth largest bank with the lowest risk rating. The performance of the bank during the past five years is quite indicative. Gross income rose by 238 per cent from N7.07 billion in 2000 to N23.93 billion in 2004. profit before tax of N1.36 billion in 2000 stood at N6.40 billion in 2004, an increase of 244 per cent. Profit after tax grew by 214 per cent from about N1.66 billion to N5.19 billion. Gross dividend for the period totalled N4.95 billion while contributions to Nigeria’s socio-economic developments in forms of taxes stood at N3.32 billion.

Alongside these, shareholders’ funds grew by 225 per cent from N4.82 billion to N15.67 billion. Total assets of about N40.76 billion in 2000 stood at N193.32 billion in 2004 indicating growth of 374 per cent.

Deposit base, the strongest primary indicator of public confidence rose by 424 per cent from N25.03 billion to N131.09 billion. At the last count, its non-performing loans/gross loans ratio was 1.1 per cent as against indicating average of 18 per cent. On the basis of its ratios, the bank is rated “Aaa” by Agusto & Co. and Pharez Rating while it is rated “Aa” by Fitch Rating. “We believe Zenith Bank is a financial institution of impeccable financial condition and overwhelming capacity of meet obligations as and when they fall due;” Agusto & Co. summarised the findings of rating agencies.

Technically, the conversion of Zenith Bank into a public company in May 2004, its IPO in July, 2004 and listing on the Nigerian Stock Exchange (NSE) on October 21, 2004 opened a new vista of assessment.

The unparalleled success of the IPO had been highlighted. The Zenith Bank stock which was listed at N10.90 per share within a period of 14 trading days hit a high of N20.70 per share, about 90 per cent growth, arguably the quickest rise by any listing. Suffice to note that the daily maximum allowable percentage shift in share price on the NSE is fixed at five per cent. The benchmark All Share Index, a value-based overall index that gauges share price movements of all equities, during this period merely grew by 5.53 per cent. The stock combines capital appreciation with high liquidity. Zenith Bank was the third most-active stock last week and accounted for 16 per cent of turnover in 32-stock banking sub-group, 13 per cent of aggregate turnover on the two tiers of NSE consisting of 205 companies.

Looking forward, the success of the IPO, banking sector reform, established performance-drivers and new growth plan all combined to pre-designate Zenith Bank with a sustainable leading roles in the post-2005 banking sector and in the entire financial markets. With equity base of N36 billion, a new strategic business development plan that encompasses branch network expansion, information and communication technology (ICT) upgrade and increase in working capital would definitely strengthen the bank ahead of competition despite envisage emergence of many mega-banks after the on-going consolidation in the industry. As against initial plan of an N8.26 billion expansion plan, more than N19 billion would finance an enlarged business development plan due to the overwhelming over-subscription.

Directors of the bank project profit before tax of N7.82 billion and N9.97 billion in 2005 and 2006 respectively. Already the forecast for 2004 had been surpassed. Actual profit before tax for 2004 stood at N6.4 billion as against forecast of N6.1 billion. First quarter report show that the bank was on course. Gross earnings rose by 58 per cent from N5 billion to N7.9 billion while profit after tax grew from N1.2 billion to N1.3 billion in 2004.
Overall, for Zenith Bank, the going is great.

At N41.6 billion First Bank of Nigeria Plc has an equity capital base equal to 166 per cent of the Central Bank’s new minimum capitalisation requirement of N25 billion. It is therefore sure to still be around in the post consolidation period of Nigerian banking. But that will not be enough for the bank as it needs to shape up to defend its industry leadership with the expected emergence of more youthful banking giants. The bank’s paid-up capital of N1,751 million will increase to N2,000 million with the capitalisation of additional reserves in 2004.

The bank’s earning capacity is impaired by the general loan repayment disability of the business sector. The bank’s gross lending portfolio of N126.3 billion contains N46.3 billion [36.7 per cent] of non-performing loans, N37.6 billion or 81 per cent of which is classified lost. Classified loans are also excessive at 111.5 per cent of equity base. The bank requires the skills of those banks that have maintained a track record of excellent credit quality standard to pull down its mountain of bad debts and add back that big money to earning assets. It also needs to add to itself the marketing expertise of the new generation banks to prepare adequately for a new type of competition under which its market share is sure to be attacked. If it can finally put behind it the debilitating episodes with its former chief executive Bernard Longe and its unwise telecom lending, it should still be the bank to beat. But it should watch out for Zenith, Guaranty Trust Bank (GTB) and a Union Bank that remains the sleeping giant.

Union Bank of Nigeria Plc
Union Bank of Nigeria Plc overtook its closest rival, First Bank in terms of asset volume in 2004 to become Nigeria’s largest bank. It grew asset base by 14.2 per cent to N418,728 million. With additional reserve capitalisation, the bank now has a paid-up share capital of N2,237 million while its shareholders’ funds stood at N39.7 billion as at March 2004.

The bank’s key advantage is its low cost structure. It continues to save revenues through a significant moderation of interest expenses. That enabled the bank to lower its average cost of funds further in 2004 with an average of 3.8 kobo interest per naira of outstanding deposits, down from 4.1 kobo in 2003. The bank is also strong in the money market and earnings from that source constitute its largest single source of revenue. But its operating cost margin is high, which is responsible for the marginal growth in profit.

The bank also showed some improvement in the overall credit quality standard in 2004. The proportion of classified loans moderated from 25.4 per cent to 23.8 per cent over the period though the volume of classified loans grew by 29.9 per cent. The quality of classified assets improved with a significant shift of doubtful assets to substandard but the N26 billion in its classified portfolio remains a large number. But the bank’s 44.8 per cent expansion of the net lending position was neutralised by the decline in interest rates such that interest earning from loans and advances fell by 10.6 per cent. The bank needs to equip itself for a new competition based on committed and clear-headed leadership, product innovation, aggressive marketing and resource utilisation efficiency. It especially needs to work on its IT system which remain antediluvian and to shed the excess weight in staffing.

That the bank is gearing up for competition is evident in the plans to shore up its capital base by at least another N50 billion.

United Bank for Africa Plc
United Bank for Africa Plc is working towards meeting the Central Bank’s new capitalisation requirement as well as the international capital adequacy standard. With reserve capitalisation in 2004, the bank now has share capital of N1.53 billion and an equity base of N19.5 billion. It has gone ahead to raise its authorised share capital from N2.0 billion to N6.0 billion and is expected to raise paid-up capital to a maximum of N6.0 billion through its capital raising programme now in process. It is targeting a capital base of N35 billion in 2005 and N50 billion by 2006.

The bank appears to be taking steps to position itself for a post consolidation operating environment. It has effected a risk asset portfolio clean up that has given it one of the highest credit quality standards in the banking industry. The volume of classified assets fell by 46.2 per cent in 2004 to stand at N2.2 billion or 3.9 per cent of the gross portfolio.

Management said it now has in place the process automation required to achieve first class risk management quality.

The bank’s other operating advantages are its low and declining cost of funds, rapidly growing revenue and consistently improving net profit margin. It is paying an average of 2.0 kobo interest per naira of deposits, growing income ahead of the banking industry average and the ability to convert revenue to profit has improved for the third year running. The bank’s operating cost margin is quite high. It also needs to find itself after the haemorrhage that led to the forced exit of its erstwhile chairman Hakeem Belo-Osagie who, it is reported, is now planning to sell his shareholding in the bank.

It does not appear that the bank will be able to retain its number three position in the banking industry through a single handed recapitalisation effort. At the very least, it needs to acquire a medium sized bank with superior marketing skills and cost management efficiency to reinforce its sound fundamentals.

Afribank Plc
Afribank Nigeria Plc, with a balance sheet size of N86.7 billion, is already in the market to raise N17 billion through the issue of 2.5 billion shares at N6.8 per share. With the present capitalisation of N8.6 billion, the bank is expected to have a post offer capitalisation that crosses the N25 billion benchmark. The bank has the advantage of low cost of funds, robust liquidity and a large branch network. It needs to add strength in the areas of asset quality, high operating cost and service quality. Nearly one-third of its N30.5 billion gross loans and advances are classified, representing 113.4 per cent of equity base and about 66 per cent of gross revenue is claimed by operating cost. The needs to accelerate growth and raise efficiency ratios or else it would be pushed down the ladder of giants by the emerging consolidated banks.

Guaranty Trust Bank Plc
Guaranty Trust Bank has an equity base of N11.6 billion as at the beginning of its current financial year in February 2004. Its capital raising project which was 82.76 per cent oversubscribed has put an additional N21.2 billion to its use. That gives the bank a post offer equity base of close to N35 billion, making it one of the top four banks in Nigeria by volume of equity resources.

With an asset base of N119.7 billion, the bank’s strength lies in its high credit quality standard. It has one of the highest quality credit portfolios in the banking industry. This is reinforced by the bank’s high corporate reputation built on a track record of high corporate governance standards. It also shows an all-round growth in revenue that defies the present industry trend. Not many banks can show the balanced growth of revenue from core lending activity, treasury operations and transaction income that is seen in GTB. Its weakness is relatively high cost of funds that undermines net interest margin. The bank will benefit by adding to itself Inland Bank, now in process, which has good branch network coverage in low cost liability generating areas in the north.

Platinum Bank
From the rubble of an insolvent merchant bank, Platinum Bank Limited emerged in 2000. Within the short span, it has etched its name as a stable promising bank. Average annual percentage growths in the past two years for gross earnings, profit before tax and profit after tax were 33.5 per cent, 146 per cent and 136 per cent respectively. Total assets rose by 57 per cent from N8.45 billion in 2001 to N13.30 billion in 2002 and thereafter to N20.15 billion in 2003, an increase of 51 per cent on the previous year.

Total assets currently stands at N25.03 billion, 24 per cent above 2003 position. This gives a three-year average annual percentage growth of 44 per cent. Strong fundamentals quality brand, respectable board and management have secured an image of a well-run private bank for Platinum Bank. With the on-going banking reform, Platinum Bank has initiated a three-pronged internal and inorganic growth plan that would transpose the bank into the top six banks league. These include injection of new equity funds and merger and acquisition. For Platinum Bank, the future is bright.





Diamond Bank Limited

Diamond Bank Limited with an equity base of N6.5 billion and an asset base of N73 billion is raising additional capital through private placement to place it on a comfortable footing as a first leg approach. This would be followed by a conversion to a public company and get listed in The Nigerian Stock Exchange (NSE) by December 2004. The bank has the strength of a sizeable branch network, low cost advantage and relatively high credit quality standard. It needs to add to itself a bank that has the expertise to remedy the problem of a downward dip in credit quality and cut back the high and rising operating cost margin.

To beef up its capital base in line with the Central Bank of Nigeria (CBN) mandate for banks satisfy a minimum capital base of N25 billion, Diamond Bank seeks to hit about N15 billion through private placement of funds before the end of November.

Subsequently, the target is to grow the fund to over N18 billion by April, 2005 and through an Initial Public Offering (IPO) meet the target before the expiration of the CBN deadline.

Early birds:
First Consolidated Bank Plc
First Consolidated Bank Plc, a fore runner in the consolidation process, has been formed by a group of four banks. These are Hallmark Bank, Universal Trust Bank, Gulf Bank and Lion Bank. The group is pooling together an initial capital base of about N26 billion, expected to rise to N30 billion by its take off time next year. It is targeting a capitalisation base of N50 billion by the end of 2005. To achieve that, the bank will get listed in The Nigerian Stock Exchange and raise new money using the market facilities. The banks are also pooling together a branch network of 300 to increase to 350 by the end of next year. The vision is to give the global financial market a Nigerian-originated bank of international competence — or so say the promoters.

For observers of the banking industry and even the regulators, Central Bank of Nigeria (CBN) and the Nigerian Deposit Insurance Corporation (NDIC), the move portents a remarkable sign of willingness and humility given that the characteristic family ego and ethos, of banking in Nigeria was discarded.

The banks at presence have shareholders’ fund in excess of N25 billion required by the CBN as minimum capital base for all banks and currently aim at over N40 billion before December 31, 2005.

The strength of the group lies on its branch network estimated at above 200 at presence and given the fact that they are well spread across the six geo-political zones in the country.

The synergy according to a statement from the bank immediately puts the mega project in the top three bracket in earnings, deposits, assets and balance sheet size in the country.

However, there are indications that the constitutent banks are set to prove critics of the banking reform wrong with the current speed of implementation of the merger programme.

The group plans to take off date of January 2005 as the KPMG auditors conducting due process in the five banks are scheduled to conclude by December 2004.

Meanwhile, breakdown of the performance of the banks int he group as at 2003 revealed varying strengths.

For instance, shareholders’ fund of Gulf Bank Plc topped the group with N5.54 billion, a proof that it was the most diversified as regards equity base while Hallmark Bank Plc followed on the ladder with N4.64 billion.

Lion Bank Plc, the middle belt ally in the group has N3.61 billion in its coffers as at March 31, 2003 while Universal Trust Bank Plc (UTB) in the period recorded N3.45 billion.

Hallmark Bank Plc, however, was the leader as regards total assets as at the reviewed period with N40.27 billion, followed by AllStates Trust Bank Plc, N37.69 billion; UTB, N32 billion; Gulf Bnk, N18.86 billion and Lion Bank being the least with N13.76 billion.

Though AllStates Bank accrued more money than the others in 2003, Lion Bank retained better profit.

Gross earnings of AllStates Bank was N14.54 billion but profit after tax was negative at (N42.16 million), while Lion Bank posted a profit of about 470 million from a gross earnings of N2.77 billion.

Hallmark Bank, from gross earnings of N7.41 billion squeezed a net profit of N1.02 billion representing about 13 per cent of total income while Gulf Bank declared N780 million as profit from a gross earnings of N5.25 billion.

UTB’s profit however represented only five per cent of its earnings as at March 31, 2003.

But given the seemingly resolute stance of member banks in FCBN to consumate the merger talks after the conclusion of due process by KPMG and the pledged support of the regulatory authorities, most especially the CBN to help make the project work, analysts are optimistic that the industry may record the first successful merger soon.

Intercontinental Group
The signing of a memorandum of understanding (MOU), a fortnight ago, by members of the Intercontinental Group, may have put the most credible seal of approval on Professor Charles Soludo’s banking sector reforms.

Whatever doubts had lingered about the workability of the N25 billion capitalisation requirement for banks were dispelled as the group and family comprising Intercontinental Bank Plc, Equity Bank of Nigeria Limited, Gateway Bank Plc and Global Bank Plc served notice of their desire to merge in response to the on-going consolidation plan in the industry.

Present at the latter ceremony were the chairmen and managing directors of the consolidating banks with Vice Chairman and chief executive of Intercontinental Bank, Dr. Erastus Akingbola declaring that the board and directors of the respective banks had opted for a merger into a single entity subject to obtaining all necessary approvals.

While waiting for these, he said, “the group shall continue to pursue the various business expansion plans that will ensure the realisation of the full potentials of the envisaged new mega bank while perfecting the existing group synergy.”

To this end, there would be focus on achieving a significant growth in branch network of individual group members to cater for wider segments of the economy.

As at end 2003, the four banks had a combined total of 148 branches, the preponderance of which is carried by Intercontinental Bank, at 55. Equity Bank had 40, Gateway, 29, and Global Bank, 24. However, the group projects no less than 200 branches by the end of 2004.

According to Akingbola, the second leg of the expansion plan would address the beefing up of I.T framework for cutting edge service delivery. The vision is for the emerging bank to become the largest online real time network at post consolidation.

Thereafter, attention would shift to beefing up the capital of the emerging bank. While as at 2003, the group posted total shareholders fund of N16.6 billion.

Subsequently, this and other indices would be given a boost to make the emerging institution a “truly mega bank.”

The group’s total asset, also as at 2003, was N152 billion, projected to hit N200 billion by end 2004, while total deposit, actual and projected, are N103.8 billion and N160 billion for the two years respectively.

The group does not foresee any problem in management when the mega bank emerges. According to Ralph Obieri, Chairman of Intercontinental Bank, the current chief executive officer of the bank (and the group by extension) Dr. Erastus Akingbola has not indicated willingness to step aside, “and even if he does so, we shall not agree.”

The group, he stressed, is blessed with tested and capable hands as chief executive officers of the individual banks, each of whom can creditably perform at any given level.

For the Intercontinental Group, there is not likely to be any leadership problems, as the obvious choice may likely be Akingbola as the helmsman. The chairmanship post cannot for now, be z`ascertained, but for the other managing directors in the group, their scope of duty is not likely to be diminished in any form but in nomenclature only.

• Intercontinental Bank Plc, with a total capitalisation of N10.1 billion, accounts for 64 per cent of the total assets of the group. Its operating strengths include attaining the highest credit quality standard in three years in 2003 and moderation of operating cost, loan loss provisioning and interest expenses. From close to one-quarter of the gross lending portfolio in 2002, classified loans fell to 15.4 per cent in 2003. With reasonable growth in low cost liabilities as well, the bank saved revenues from loan loss provisioning and interest expenses.

The improvement in credit quality and the significant expansion in lending volume however did not translate to improvement in earnings from loans and advances in the year, which is in line with the new trend in the industry. Average earnings yield per naira of outstanding loans and advances fell to about one-half of the yield rate in 2002. Earning from money market trading made up for the slacken performance and provided the spur in revenue growth in the year. The bank therefore converted more revenues to net profit at 15.4 per cent than the 13.6 per cent profit margin achieved in 2002.

• Equity Bank of Nigeria Plc, the second in rank within the Intercontinental Group, is working to enhance its capital base from N2.3 billion presently to N8.0 billion – the required platform for the merger. The bank has already raised its authorised capital from N2.0 billion to N4.0 billion and has secured shareholders’ approval to issue 3.1 billion shares by way of private placement.

• Gateway Bank Plc has embarked upon a capital raising programme to shore up its own capital base preparatory to the merger. Through its rights issue of 1.2 billion shares at N1.75 per share, it expects to raise about N2.1 billion to bring its equity base to N4.3 billion in the first instance.

Astra Bank
Astra Bank Plc is another consolidating group coming out of the proposed merger of four banks. The banks are Assurance Bank, First Atlantic Bank, Guardian Express Bank and Manny Bank. The group is targeting to raise a minimum capital base of N25 billion by March 2005.

They have signed a memorandum of understanding to merge into a mega bank of international standard. They are pooling together an asset base of N71 billion, deposit liabilities of N48 billion and a branch network of 120. They presently have a combined equity base of N11 billion and are targeting a capitalisation base of N40 billion by the end of 2005. This, they expect to raise through public issue by the new bank after listing it in The Nigerian Stock Exchange. The ultimate target capitalisation that would put them in a comfortable competitive footing is N50 billion. Individual members of the group are to raise additional capital separately through rights issues and private placements.

As a visuality Astrabank, plans to be in the top league in 2006. With post consolidation capital base of N50 billion branch network coverage of 120 strategic locations including all CBN settlement Bank locations, deposit base of N60 billion, and total assets in excess of N71 billion, the new entity would leverage on synergies from the merger to emerge among the top three in the new banking industry.

The partners expect that their shared vision and mutual understanding, core expertise, leading products and services, quality board and management and human resources would provide veritable impetus for emergence of a world class financial institution.

The vision of Astrabank is grand. This however, makes the union more challenging. Even with the fusion, equity base of the emerging entity is still under-middles-point of the required minimum capital base.

Altogether, shareholders funds of the four banks totalled N11 billion, 56 per cent below the minimum industry standard with effect from January 2006.

Latest audited reports and accounts of the partners show a long windy journey to the grand status of the top five visualised for the new entity.

• Assurance Bank has just wiped off negative shareholders’ funds through its restructuring efforts, and has just N47.6 million to show as equity capital. It has raised its authorised capital from N2.0 billion to N10 billion. The bank’s main assets are the N3.2 billion of cash-based resources, the N2.8 billion treasury bills and the N1.1 billion loans and advances. The bank’s operations are funded by the N8.1 billion public deposits. It is offering its group the advantage of good branch network, low cost liabilities, rapid growth rate and a niche in retail banking.
• First Atlantic Bank is evidently the strongest of the merging banks. Basic fundamental indicators place it ahed of other partners and the quality of its brand as a technology-driven bank would be added advantage to the group.

At the last count, First Atlantic Bank has the biggest equity base, total assets deposit base, profit and the largest branch network. Gross-earnings for 2003 stood at N2.83 billion, profit before tax was N609 million, total assets stood at N20.9 billion, equity resources totalled at N3.8 billion while deposit base stood at N14.35 billion. The audited report for 2004 billed to be released soon is expected to show improvements on earlier figures. The highest priced of the two quoted partners, the First Atlantic Bank stock recorded the highest capital appreciation, more than 115 per cent, in the capital market in October, 2004. It has also, on the strength of its consolidation plan and the impending release of audited report and accounts, been one of the most active stock.
• Guardian Express Bank: Audited report and accounts of the bank for the year ended April 30, 2004 showed outstanding growths with deposit base growing by 129 per cent. Total assets rose from N10.28 billion in 2003 to N19.46 billion indicating a growth of 89 per cent. Deposit base stood at N14.8 billion compared to N6.5 billion in 2003. Shareholders funds rose by 45 per cent from N1.60 billion to N2.32 billion.

Gross earnings grew by 56 per cent to N3.01 billion as against N1.93 billion in 2003. Profit before tax grew by 23 per cent to N583.5 million compared to N475.6 million in 2003. Profit after tax stood at N422.08 million, 37 per cent above N307.22 million recorded in 2003.

Sterling Bank Plc
Sterling Bank Plc is the fourth consolidated banking group with a membership of five banks. These are Prudent Bank, Magnum Trust Bank, NBM Bank, EIB International Bank and Trust Bank of Africa. They are pooling together a capital base of over N15 billion with combined assets of more than N100 billion. Each bank is expected to attain a minimum equity base of N5 billion before the merger is consummated. The new bank is expected to be listed in The Nigerian Stock Exchange before the end of 2005.

Prudent Bank leads the group with shareholders’ funds of N5 billion and a balance sheet size of almost N26 billion. The bank has strong expertise in credit administration with core lending competence in strategic industries. Its high credit quality standard has sustained a healthy growth in interest income.

The audited financial statements for the year ended March 31, 2004 showed the tendency of a company heading for greatness if more attention is given to its management.

For instance total assets grow by 24 per cent from N20.93 billion in 2003 to about N26 billion, while deposits in addition to other current accounts also surged by about N4 billion in 2003 to N20.91 billion.

Profit after tax (PAT) in the reviewed year represents 11.6 per cent of the gross earnings of the bank which grew to N5.25 billion from N4.33 billion in the prededing financial year.

Meanwhile, the growth recorded in gross earnings and net profit impacted positively on shareholders performance measuring indices.

Thus earnings per share (EPS) rose by about six per cent in 2003 to 20.02 kobo while net assets almost hit the N1 mark at 96.88 kobo. But bonus par ordinary shares of the bank remained fixed at 10 kobo in 2004 compared to the pay out in the preceding year.

Meanwhile, management of the Prudent Bank need pay more attention to the cost of doing business as cost in 2004 represents about 47 per cent of the total income, much higher than 39.5 per cent incurred in the cause of operation in 2003.

Magnum Trust Bank with a capitalisation of N3 billion and an asset base of N24.5 billion as at December 2003, boasts of strong retail banking expertise. It will be raising fresh capital from existing and potential investors to meet the terms of the consolidation agreement.

NBM Bank is bringing into the group international technical support and an offshore credit line window through its membership of the Fortis Group in Belgium.

EIB International Bank, which has an equity base of N1.8 billion has strength in the public sector and will be contributing about 30 low cost retail outlets to the group. It is looking out to shore up its capital base to N5 billion. Trust Bank of Africa with an equity base of N1.2 billion is contributing the tenacity of its marketing force, professionalism and expertise to the group. It is exploring rights issue and private placement options to raise over N3 billion required to attain the qualifying capital requirement for the merger.

Wema Group
The fifth consolidating group is made of three banks, Wema Bank, Fountain Trust Bank and Lead Bank. The group has an estimated total capitalisation of N14 billion and is aiming at a post consolidated position of one of the top five banks in Nigeria.

Wema Bank Plc plans to raise new money through the issue of five billion shares before consolidation time. It presently has an equity base of N8 billion and a balance sheet size of N71.4 billion. With a deposit base of N55 billion, it is offering the group the advantages of a large, low cost deposit liabilities, a good quality risk asset portfolio plus a highly liquid balance sheet.

Fountain Trust Bank has an estimated equity base of over N2 billion with a small risk asset portfolio of about N4.6 billion close to one-quarter of which is non-performing. The bank also has the advantage of a liquid balance sheet, a good interest yield on loans and advances and low average interest cost at 7.1 per cent. Operating cost is high at more than one-half of gross revenue and loan loss provisioning is sucking revenue.

Lead Bank is giving the group its investment banking expertise, low operating cost advantage and a high interest yield on risk assets. But its credit portfolio, having a sustained decline in quality will not be adding strength to the group. With its investment banking orientation, it carries a high cost of funds disadvantage.

Other key players
Chartered Bank Plc has core competence in credit administration and has a very healthy credit portfolio to show for it. It is one of the few banks growing asset quality by reducing non-performing loans. Earning from core lending operations therefore represents its main revenue line, the growth of which is being undermined presently by the slide in interest rates. The bank is however preserving margins by lowering average cost of funds and the operating cost margin. The bank will benefit from merging with banks that can preserve its credit quality, low cost advantage and profit margins but which can add strength in the area of income diversification and market share enhancement.

Investment Banking & Trust Company Limited boasts of a capital base of N7.8 billion of which N2.0 billion is paid-up. Top management quality is the biggest asset of the N31.6 billion bank and this will be in high demand in a consolidating industry. The options open to the bank include private placement, going public, foreign equity participation and merger with other banks. The bank will either change focus into become a full-fledged commercial banking or retain its niche focus in investment banking but without a banking licence.

NAL Bank Plc
The bank is operating on an equity cushion of about N5 billion and an asset base of N32 billion. Preparatory to raising its capitalisation, the bank increased its authorized share capital to N1.5 billion last year. Its main source of income is its high quality N11.1 billion loans and advances portfolio that accounts for 58.4 per cent of gross earnings. Profit volume and margin have made an impressive recovery in 2004 to beat industry average growth levels. The bank’s only constraint is interest cost, which claimed as much as 52 per cent of gross revenue in 2003. This is a reflection of the bank’s merchant banking orientation where term deposits constitute the main source of funding.

Access Bank Plc is presently raising N8.7 billion from the capital market through offer for subscription of 3.0 billion shares that is likely to be oversubscribed. Its plan is to achieve a capital base of N11 billion as a platform to conclude a merger arrangement latest by September 2005.

The bank has shareholders’ funds of about N3 billion and an asset base of N31.3 billion. It is aiming at emerging one of Nigeria’s top five banks in a post consolidation environment. The bank shows the strength of high credit quality, low cost of funds advantage, good management quality reputation and improving profit margin.

Fidelity Bank Plc has announced a recapitalisation programme under which it is raising new capital through private placement. Its strategy is to raise shareholders’ funds from N3.5 billion to N10 billion in the first phase by December 2004. To achieve this, the bank is offering 450 million shares at N1.25 on rights issue and 2.0 million shares at N1.25 through private placement. It plans to get listed at The Nigerian Stock Exchange by the first quarter of next year and to become a member of the top five group of banks by 2010. The bank has an asset base of N27.6 billion, a deposit base of N20.6 billion. It shows a comfortable growth in earnings and business volume and realized gross revenue of N5.5 billion in its 2004 financial year.

Citizens Bank Limited is following a three-pronged approach to recapitalisation. The first is a rights issue planned to raise capital base to N6 billion. The second is a private placement and the third in an initial public offer. These initiatives are expected to enable the bank raise its capital base from N3.5 billion to N11 billion and subsequently acquire a medium sized bank. The bank is also talking with foreign investors and is highly desirous of preserving its identity. The bank needs to add to itself new strength in credit administration and build capacity in marketing.

Broad Bank of Nigeria Plc
The bank made further progress in rebuilding its reserve account through retention of the entire after tax profit in 2004. The bank is employing rights issue and private placement options to attain a higher level of capitalisation. It has improved the strength of its balance sheet position, showing impressive growth in earning assets by 134 per cent to represent 88.3 per cent of total assets and a 15 per cent reduction in other assets. These have improved revenue and asset quality and also minimised provisioning requirements. The liability generating ability of the bank was also strengthened with over 145 per cent expansion in the deposit base.

Ecobank Transnational Inc is raising authorised share capital from N2 billion to N6 billion. It plans to offer by subscription 8.6 billion shares through the stock market. It is also negotiating with local and foreign banks for the purpose of consummating a merger/acquisition deal. The bank has a low cost advantage but needs the expertise of other banks that are strong in credit administration to lift it from sustained credit quality down grade. It also needs a high growth bank to speed up revenue growth, achieve product diversification, raise market share and improve profit margins.

MBC International Bank Limited has shareholders’ funds of N2.5 billion, total deposit liabilities of N9.3 billion and a balance sheet size of N14.4 billion. The bank has a track record of performance in private banking, investment and institutional banking and structuring of large financial deals. It carries a gross loan portfolio of N4.5 billion of which less than 8.0 per cent is classified. With a branch network of nine, the bank has a relatively high cost of funds disadvantage. The bank’s strength of professionalism will blend very well with a low cost, large retail bank.

ACB International Bank Limited is pursuing recapitalisation using three strategic steps. The first is to re-list in The Nigerian Stock Exchange. The second is to run an initial public offer a few months later and finally consolidate accordingly. It has raised authorised share capital to N15 billion and empowered directors to issue a combination of rights and offer for subscription as necessary to meet the minimum capitalisation requirement. The Bank will like to preserve its identity if it can find the capital. It is appealing to the sentiments of the Igbos within and outside the country to identify with the bank. A likely positive response to the call to save ACB is expected to give the bank more than the capital it is looking for. It has a tiny equity base of N419 million after having wiped off negative capitalisation in 2003 and an asset base of N11.3 billion as at June 2003.

National Bank of Nigeria Limited is adopting a multi-faced recapitalisation plan. It has resolved to raise capital base to N7.5 billion as a first step through rights issue. It will dispose surplus physical assets and capitalise the profit. It is also talking with three other banks for a merger option.

Bond Bank Limited, the newest kid on the block is taking a stand alone bold step. It is in the process of privately placing 13 billion units of its shares being offered at N1.9 per share. Its shares are denominated in minimum units of five million and multiples of 500,000. It expects to raise N24.7 billion to add to its existing N2.0 billion capital base. It has a balance sheet size of N13.4 billion as at January 2004 and earned gross income of N3 billion last year. It shows a strong management capability, excellent credit quality and high efficiency ratios.

City Express Bank Limited is working on a four-phased plan to hit the N25 billion recapitalisation mark. In the first place it has split the par value of its shares from N1 to 50 kobo. It has increased its authorised share capital to N20 billion units and six billion shares are to be issued through private placement. It has commenced talks with other banks on a consolidation plan.

New Nigeria Bank Plc has increased authorised share capital to N10 billion as a build up to recapitalisation. It will raise new money through rights issue and public offer and has also commenced negotiations with other banks on merger/acquisition options.

First City Monument Bank Limited has already undertaken private placement and would follow up with negotiations with foreign investors. It expects to get listed in The Nigerian Stock Exchange by way of introduction and subsequently come up with an initial public offer.

Equitorial Trust Bank Limited, with an equity base of N8.4 billion is looking forward to standing alone as a private bank. The bank shows strength in converting revenues to profit due to low operating cost margin but needs to reinforce credit quality and lower cost of funds.

Union Merchant Bank’s sterling performance in a relatively short period when it emerged from the ashes of a near distressed Citi-Trust Bank demonstrates what strong and clear-headed leadership can do to an institution. It is today one of the leading banks that handles capital market issues. Its future is assured in this consolidation era, as it could operate as an investment banking division of the parent bank or stand alone as a mega investment bank which the economy needs.

Nigeria International Bank Limited, after initial hesitation, has initiated plans to raise its equity base in compliance with the minimum capitalisation requirement. This is expected to get the bank shift from its peripheral interest to a deep rooted player in the Nigerian economy. The bank’s operations in Nigeria have been significantly undermined by the slow growth of the economy and the accompanying credit losses that have forced the otherwise first class credit quality bank sink to below industry average in asset quality standard.

In each of the years since 1998, the bank admitted more risk assets into the problem loan portfolio than it grew good loans. The bank however remains unmatched in its ability to convert revenues to profit despite a considerable incursion of loan loss provisioning on revenue.

Management has cut down on new lending and the bank therefore has a predominantly liquid balance sheet. It is reinforcing its risk management capability, fine-tuning lending strategy to the middle-tier market and rebuilding liability generating products.

Implementing the consolidation policy
The Central Bank should give good consideration to the following issues that affect the health of banks but which are not yet being sufficiently addressed under the consolidation policy:

• Unstable and adverse macro-economic conditions
• Radical shifts in economic and financial policies
• Gross deficiencies within the board of directors and management of banks despite screening and approvals of regulatory authorities
• Excessive risk taking and resort to non-core banking activities as the real economy continues to falter
• Efforts to keep up rates of return from banks which stifle the growth of loans and advances in a low interest rate regime.
• The Central Bank can only persuade and influence through incentives the resource allocation decisions of banks and not impose them. Such operating and regulatory incentives are presently not in place.
• Inadequate supervision and enforcement of prudential guidelines
• The Central Bank is placing too much emphasis on lending to the real sector and not adequate protection of depositors’ funds. That is why banks end up with frightening loan/deposit ratios and many of them carry classified loan/equity ratios in excess of 100 per cent and are still growing risk asset volumes.

The Central Bank should avoid a rushed implementation of the policy and allow a reasonable length of time for such a radical policy to be implemented with thoroughness and minimum hitches. A phased implementation of the new capitalisation requirement should be considered in order to minimise fallouts, particularly given that the true picture of many banks may take time to emerge in an industry not famous for rendering reliable returns.

A comprehensive economic policy approach is required in addressing the loan repayment difficulties facing banks. Significant credit losses have led many of the operators to grow very cautious in growing risk asset volumes. The asset structure of banks will therefore most likely continue to wear a short-term maturity profile with a lower proportion of deposits going into loans and advances in the absence of regulatory support.

The banks have for many years been complaining that the existing legal framework is frustrating their debt recovery efforts. Their demand for special courts that will handle cases of loan defaults and credit fraud with dispatch needs to be considered in the present banking policy reforms.

The requirement for more bank lending in a slowly growing economy needs to be supported with appropriate mechanisms to facilitate loan recovery.

The industry’s average classified loan ratio is about 20 per cent but that ratio could be deceptive because the biggest lenders have ratios up to twice the simple average. Many of the banks that have improved credit quality are able to do so by growing good loans ahead of the bad. That means there has been no appreciable progress towards recovering the huge problem loans of banks. Since loans and advances made by a bank are subject to losses arising out of customers’ repayment defaults, they represent the major avenue, in fact, the easiest route through which depositors’ funds could be lost.

The Central Bank should avoid the crowding out effect on the private sector of the government’s plan to sell new debt instruments to the public. By so doing, government will be withdrawing further from the already thin resources of the private sector to overgrow the size of a non-productive unit. This is missing the appropriate fiscal path it ought to follow — which is reducing the size of government to prop up private sector activity. Drawing more resources from the private sector into government sector amounts to stifling productive operations. Also in view of the dominance of the government sector in the economy, it is not an appropriate policy to withdraw government related deposits from banks. Since money outside the private sector is sterile, the Central Bank is doing nobody any good by locking up good money in the treasury and coming back to a cash strapped private sector to borrow more funds.

A comprehensive macro-economic policy approach is required in matters of interest rate policy. Dealing with inflation is key in pursuing the single digit interest rate objective because the policy as it is being implemented now is discouraging new lending. The Central Bank cannot sustain a low interest rate environment as long as government’s fiscal taps keep running and the Central Bank’s policies remain accommodative.

Since money itself is a commodity, it cannot be singled out for cheap pricing in an inflationary environment. It is desirable that short-term interest rates come down to allow the critical shift to long-term productive investment. But this requires working through the market fundamentals rather than an interventionist regime. The rising inflation is the critical issue to tackle in attaining the low interest rate objective of the Central Bank.

The justification often given for low interest rates is to reduce the cost of borrowing. The problem with this is that policymakers seem to be forgetful that there are two sides to deciding the price of money. Lowering interest rates against rising inflation has the capacity to erode bank deposits from two angles.

The first is the natural outflow of financial capital in search of positive real rate of return and this can go as far as stimulating capital flight. The second is the tendency for savers to consume their capital as rising cost of living squeezes the people’s ability to save. The point is that in the long run, there will be nobody willing to stand still in an inflationary economy to subsidize the price of money and reducing interest rates isn’t as simple as pulling down the officially dictated minimum rediscount rate.