Insight: Five well-kept secrets of Nigerian banks

Nigerian Banks have always had a problem with fully disclosing their state of affairs.  There has been a slight improvement with the emergence of conference calls, investor relations teams and IFRS reporting.  I have looked extensively at the financials of African Banks from North to the South of the continent, I can say without a doubt that Nigerian banks have a lot more information to provide (and can provide) to the investing public and have not yet done so.  I will mention a few:

The same pitfalls of 2007-2009 are rearing their ugly heads again.  Lending skewed to the oil & gas sector and government and now in addition the power sector post privatization.  Interestingly enough, the power sector is actually closely intertwined with the oil & gas sector beyond a cursory look.  Some oil & gas exposures have now been referenced under services to reduce the sense of exposure of the bank to this “ever tempting sector.”  Government loans have been restructured with longer tenors.

The details are shrouded in secrecy outside of the banks, government and the Central Bank.  NPLs are rising beyond what the banks are telling us and IFRS, with its black or white loan quality judgment call as against the prudential guidelines assessment is giving banks more wiggle room to keep labeling some loans already in payment default as performing.  It took a stress test in 2009 to reveal the actual state of asset quality in the Nigerian banking industry.  Public relations may just nip any idea of this happening again in the bud now or in the near future.

Nigerian Banks outstanding shares are bloated and is part of the reason why stock prices are very low absolutely and relative to other African Banks.  Instead of Nigerian banks to buy back their shares to reduce the dilution effect, more rights issues are in the works as Nigerian banks continue to blaze through capital like it is going out of fashion.  Meanwhile only three Nigerian banks are on course to potentially hit the 20% ROE mark for 2015 out of 15 that are listed.

 Nigerian banks remain continually fascinated with lending to assets and not ideas.  This is in a country where the Land Use Act has not been repealed yet, which puts ownership of all land ultimately in the hand of the government.  SMEs and MSMEs continue to sputter with many losing their going concern status before they even get going, because Nigerian banks remain fixated on lending to those that are already at the top and not those at the bottom with great ideas to get to the top.  Nigerian banks will lend to a Senator on name recognition alone than lend to a poultry farmer with fixed assets on the farm to back the loan.

 Few branches carrying the burden of many other branches that are making losses and still the banks seek approval to open more branches.  Only Zenith and  First Bank generated more earnings per branch than Standard Chartered Bank Nigeria in 2014 which has less than one-sixth of the total branch count of either bank (the gap was narrow.)  A bank’s reach should always be about maximizing efficiency and not public relations.  Size should never be a liability for any bank if properly managed.

So, what time is it for Nigerian Banks?  It is time for transparency, more focus on managing the business of lending and related activities, not shareholders orjournalists and to plug the self-inflicted leakages in the financial system.  Nigerian banks have raised more capital collectively over the past eight years than any other African country.  Nigerian Bank employees are the highest paid on average among African banks.  No other country in Africa with a double-digit MPR (or local equivalent) has a lending rate double or more than the MPR except Nigeria.

What do investors get in return?  Single-digit PERs below 5X in most instances that have refused to budge and only one bank sure of crossing the 20% ROE mark for the 2015 fiscal year.

*Jude Fejokwu blogs at: The same pitfalls of 2007-2009 are rearing their ugly head again