Whether it is the implosion of small lender, Skye Bank, or the naira’s surprise resilience amid an emerging market currency rout, there are five reasons, as subjective as they are, why 2018 will not be forgotten in a hurry in Africa’s largest economy.
Goodbye Skye bank, hello Polaris
How Nigeria’s eight largest lender, Skye bank, went from acquirer to acquiree in the space of three years left many scratching their heads after the bank was handed over to a new suitor in Polaris Bank, by the Central bank in September.
Skye’s collapse marked a dramatic turnaround for a Bank that had only acquired another local lender, Mainstreet Bank, in 2015.
The Bank’s eventual implosion started off July 2016 when the CBN stepped in to replace the chief executive officer, chairman and 10 others, following the lender’s consistent breach of cash and liquidity ratios.
The new board then engaged KPMG and PWC to carry out a forensic audit to ascertain the financial position of the struggling bank which last filed a financial statement in 2015.
The result of the audit was ugly.
It revealed that the bank had a negative capital position of N690 billion as of December 2016, after which it worsened some 5.8 percent to N730 billion as of June 2017.
“The major reasons for the negative capital position were impairment of loans to the tune of N529 billion and transactions in suspense to the tune of N280 billion, relating to balance sheet and profit and loss manipulations from 2006 to 2016, and direct and apparently fraudulent cash withdrawals by certain individuals,” the audit note read.
On receiving the report from the forensic audit, the bank’s board set up a special Investigation Committee to look into circumstances surrounding the N280 billion in “suspense.”
This was in order to identify possibility of recoveries and to recommend appropriate sanctions against culpable individuals.
The amount was linked to some N29.5 billion spent in acquiring Mainstream bank in addition to a purchase price of N126 billion, manipulation of the bank’s accounts, and some N7 billion disbursed to individuals and corporates without due process.
Godwin Emefiele, the CBN Governor, and Umaru Ibrahim, managing director of NDIC would later conclude that some N786 billion will be injected into the bank by the Asset Management Corporation of Nigeria (AMCON) and that a bridge bank, Polaris, will take over the bank’s operations.
The regulators ensured that depositors didn’t lose their funds as they were covered by the Nigeria Deposit Insurance Corporation (NDIC) and the CBN’s cash injection.
The biggest losers from Skye bank’s collapse were equity investors who lost about N10.6 billion, given that the bank had a market capitalisation of same amount at close of trading the Friday afternoon the announcement was made.
Skye bank was up 60 percent year to date at the time, as investors piled cash into the struggling bank despite obvious signs of trouble.
Investors have a right to feel hard done by, as regulators having being made aware of the dire state of the bank after the audit should have suspended trading on the shares.
Perhaps it is these investors who will struggle the most to put 2018 behind them.
US$8.1 billion fine on MTN and eventual reversal
MTN Nigeria’s regulatory clash with Nigeria in August was one that sent chills down the spines of many a foreign investor and cost shareholders of the Johannesburg-listed company millions of dollars in eroded market value.
MTN was facing an uphill battle to convince investors that it would not succumb to an order from the Central Bank to refund some $8.1 billion, alleged to have been illegally exported out of the country at various times between 2007 and 2015.
The CBN argued that MTN, along with four banks who were fined N5.87bn, violated the country’s foreign exchange monitoring and miscellaneous act of 1995 and the 2006 foreign exchange manual.
That sparked a crisis home and abroad as foreign investors started to question if the CCIs they had obtained in exporting or importing money into the country were genuine. And why not, when a little over 80 percent of foreign transactions done on Nigerian shores involved at least one of the four banks which include Standard Chartered, Citi Bank, Stanbic IBTC and Diamond bank.
MTN proceeded to seek a court injunction against the CBN as it claimed no wrong doing. Analysts and investors held the view that the punishment being dished to the Telco by Nigerian authorities was excessive and one that almost signalled an intention to kill MTN, the country’s largest non-oil investor. Investors took every opportunity with a Nigerian official to seek clarity over the matter which had left a bad taste in their mouth. Nigeria’s acting finance minister, Zainab Ahmed, would later say the collision with MTN was a mistake.
However, on December 24, the CBN virtually reversed its order when it said that on the basis of fresh facts submitted by MTN, the telecommunications giant was being let off with a “notional” reversal of the repatriation involving the private placement that will compel it to pay a difference in value of about N30 per dollar and amounting to $53 million.
This was after the apex bank said it established a technical error involved in the issuance by banks of the CCIs relating to the repatriation of proceeds of a private placement conducted by MTN in 2008 and which allowed its original shareholders to sell about 10% of the shares of the company to Nigerian investors.
MTN shares rallied some 9 percent as investors heaved a sigh of relief over the settlement. The resolution is positive for Nigeria which is struggling to attract foreign direct investment to act as catalyst to grow its economy which remains in troubled waters despite having emerged from a devastating recession.
Diamond Bank weds Access
Access bank’s merger with Diamond bank was as unexpected.
Diamond Bank said Access emerged the preferred bidder in an auction which saw the latter acquire the entire issued share capital of Diamond in exchange for a combination of cash and shares in Access Bank that amounted to N72 billion (about $200 million). The merger, which remains subject to certain shareholder and regulatory approvals, will create Nigeria and Africa’s largest retail bank by customers, the banks claim.
Moody’s Investors Service said the merger between the two lenders will be “credit positive” for the overall Nigerian banking system.
This is because, according to the global ratings agency, the merger would limit the threat of contagion of Carlyle-backed Diamond bank’s relatively weak credit profile to the banking system of Africa’s largest economy. The two banks expect the transaction to be completed in the first half of 2019.
Buhari holds off on signing PIGB
A lot of Nigerians expressed outrage when President Muhammadu Buhari refused to assent the Petroleum Industry Governance Bill (PIGB) over concerns that it whittled down his powers.
Considering the slow crawl of governance by the Buhari administration, analysts have said it was better to have an imperfect law that can be amended later than to waste the efforts and resources spent in developing the bill when the 8th assembly comes to an end next year.
The PIGB proposes fundamental governance reforms providing that the Minister of Petroleum Resources cannot longer unilaterally award oil blocks vesting the power in a regulator, the Nigerian Petroleum Regulatory Commission (NRPC).
The PIGB also splits the NNPC into three commercial entities providing for the incorporation of two entities to be known as the Nigerian Petroleum Assets Management Company (NPAMC) and the National Petroleum Company (NPC), which will be vested with certain liabilities and assets of the NNPC.
The failure to pass the petroleum industry bill for the past 17 years prompted its splitting into four namely, a fiscal, governance, revenue management and host community aspects. But controversy has always dogged the law due to concerted efforts by various groups to preserve their interests. That’s despite the immense gains the bill holds for fresh investments in the oil and sector.
Many had expected President Buhari to be one person to assent the bill, but it wasn’t to be, at least not during his first tenure. Buhari seeks a second term at the next year’s poll.
Surprise naira stability
Investors could not believe their luck with the Nigerian naira in 2018. The surprise exchange rate stability in Nigeria rewarded foreign portfolio investors with real dollar returns for the first time since 2015.
Emerging market currencies from the Russian Rubble to the South African rand all took a beating this year alongside other emerging market currencies thanks to rising interest rates in the US which has trigged fund flow reversals. The Mexican Peso, Indian rupee and Turkish lira also suffered.
It was not the case for the Nigerian naira which did not budge amid the currency rout in emerging markets, thanks to the Central Bank’s interventions. That naira tightly traded between 360 to 364 naira per dollar at the Investors and Exporters window, established in 2017 by the CBN to cater to dollar needs of foreign portfolio investors and exporters.
Higher oil prices, a current account surplus and fatter external reserves, put the Central bank in a better place to defend the naira this time compared to 2016.
However, the naira’s stability in 2019 is being threatened by falling oil prices and a supply cap on the country’s oil production by the OPEC. Brent crude has fallen to as lows as $55 per barrel late December from a peak of $75 per barrel less than four months ago.
In another potential blow to oil revenue- which accounts for a good chunk of dollar inflows, Nigeria’s production will be limited to just 1.7 million barrels daily next year. In its 2019 budget, Abuja targets an oil price of $60 per barrel and production of 2.3 million barrels daily. This implies that the country may be faced with significant revenue shortfalls if oil prices don’t recover. Even if they do, the government has the production cap to worry about.
These factors threaten the naira stability as falling oil revenue limits the CBN’s firepower in defending the currency.
Faced with low oil prices, a current account deficit, and thinning external reserves- which would go on to hit a record low of $28 billion), the central bank tried in vain to keep the naira stable in 2016.
While the local currency has scope to end gains amid expectations over the Federal Reserve- the US equivalent of the CBN- taking a pause on rate hikes this year, the upside is also likely to be limited by falling crude oil prices.
Whatever happens in 2019, the naira punched well above its weight this year and foreign portfolio investors would remember that.
LOLADE AKINMURELE
