September 14, 2009

CBN considers 3 sales options for 5 banks


LAGOS — THE management of the Central Bank (CBN) is considering three options to recapitalise the country’s five troubled banks.

The banks are: Intercontinetal Bank; Oceanic Bank; Union Bank; Finbank and Afribank.
CBN Governor, Sanusi Lamido Sanusi, had said that the CBN will not sell the banks to foreign investors and that the N420 billion injected into the banks which he initially said, in his letter to the banks, was tier two capital was now long-term loan from the expanded discount window to the affected banks to be paid back over a long period of time

Option 1: Rights issue

However a CBN official who spoke with Vanguard said that “The Central Bank is considering three local options aimed at acquisitions of the five troubled banks following the seeming collapse of its offshore investment mission.

The three options which the apex bank is considering are: Rights Issue — in which the apex bank hopes to execute a rights issue, converting the tier two capital (the amount injected) to 80 per cent stake in the affected banks’ shareholding, leaving the other shareholders with 20 per cent.”

This will mean converting the N420 billion injected into the five banks into equity holding. But there is a division in the CBN ranks regarding this option because of its legal implication, moreover, CBN does not have the legal backing to execute a rights issue.

Government lawyers are said have advised the CBN against this option.
Insider sources say most of the more experienced Deputy Governors and Directors of the apex bank have also kicked against this option, pointing to the legal loopholes inherent in the current exercise which has attracted criticisms from some quarters.

“The argument here,” the CBN official said, “is that as a result of huge non-performing loans in the five banks, their capital has been eroded and so new investors hold greater share through fresh capital. But with the aggressive loan recovery, this may not stand the test of time as the positions of the banks have been highly enhanced.”

Option 2: Scheme of Arrangement

The CBN management is said to be considering the alternative of getting the Securities and Exchange Commission (SEC) and the Nigerian Stock Exchange NSE, to do a “Scheme of Arrangement”. The thinking in the CBN is that this option is the most viable now and if applied, it will involve a legal means of bringing shareholders of these banks to an extra-ordinary General Meeting to agree to a merger or acquisition arrangement.

According to the officials, only SEC and the NSE have the statutory power to initiate and enforce this option. It was learnt that the apex bank will, this week, commence discussion with other financial regulators on how to implement this arrangement.

Option 3: Acquisition

CBN insiders also told Vanguard that if the first two options fail, the apex bank would then go for the third option which is acquisition.

This involves nominating a bank in the country to acquire any of the five banks and then backing the action with statutory powers.

The implication of this new initiative is that for now, the ‘foreign investor’ route appears to have been jettisoned by the CBN.

It will be recalled that the CBN Governor, on August 14, said that “the huge provisioning requirements of the five banks have led to significant capital impairment. Consequently, all the banks are under-capitalised for their current levels of operations and are required to increase their provisions for loan losses, which impacted negatively on their capital.

“Indeed one is technically insolvent with a Capital Adequacy Ratio of (1.01%). Thus, a minimum capital injection of N204.94 billion will be required in the 5 banks to meet the minimum capital adequacy ratio of 10 per cent.

“The five banks were either perennial net-takers of funds in the inter-bank market or enjoyed liquidity support from the CBN for long periods of time, a clear evidence of liquidity.

In other words, these banks were unable to meet their maturing obligations as they fall due without resorting to the CBN or the inter-bank market. As a matter of fact, the outstanding balance on the EDW of the five banks amounted to N127.85 billion by end July 2009, representing 89.81% of the total industry exposure to the CBN on its discount window while their net guaranteed inter-bank takings stood at N253.30 billion as at August 02, 2009.

Their Liquidity Ratios ranged from 17.65% to 24% as at May 31, 2009. (Regulatory minimum is 25%).
“Consequently, the CBN is injecting a total of about N420 billion into these five banks with immediate effect in form of Tier 2 Capital to be repaid from proceeds of capitalization in the near future. This injection is sufficient to resolve and stabilize all the institutions and enable them continue normal business.

The injection of fresh capital by the CBN is a temporary measure as government does not intend to hold the shares for long and shall divest its holdings as soon as new investors recapitalise these banks”.

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