http://www.ngrguardiannews.com/moneywatch/article01//indexn2_html?pdate=281009&ptitle=Shares of troubled banks: Are they worthless papers?Wednesday, October 28, 2009

Shares of troubled banks: Are they worthless papers?
By Enitar Ugwu

THESE are not the best of days for shareholders of the troubled banks in the county. A look at the current scenario especially as regards the shape of the banks whose managements were removed by the Central Bank of Nigeria recently, will be shocking. This is because during the consolidation era, shareholders had invested in these banks, and as the boom era set in, they made quite lot of profits.

Those days, some even pointed at these shares as their retirement funds.

All these were before the pronouncement by the CBN Governor Sanusi Lamido to the effect that the shareholders in those banks have lost their investments.

It is very hard to take. Owing to this, The Guardian decided to sample the opinions of shareholders in the affected banks.

Speaking, Patrick Okure, who claims to be a shareholder of one of the affected banks, had this to say: "I invested so much in that bank, together with my wife. We believed in them, but now, not only that the value of the share is nothing to write home about, but also the CBN is saying we have no hope getting anything out of the entire investment. Where do we go from here?"

His is not an isolated case, as The Guardian discovered that most of the recognisable shareholders' associations have been meeting since the pronouncement by the CBN boss over the weekend.

The essence of the meeting, The Guardian gathered is to fashion out an informed response to the pronouncement.

A leader in one of the associations said that after the series of meetings, "we will come out with a statement.

He said that, even though the shares of most of the banks have depreciated in value, to lose the investment entirely, is another kettle of fish.

According to the apex bank, shareholders of the eight banks recently taken over by the Central Bank of Nigeria have automatically lost their investments in the banks.

The CBN Governor, Lamido Sanusi disclosed this while speaking at a policy dialogue organised by the Nigerian Economic Summit Group.

The banks - Union Bank of Nigeria Plc, Oceanic Bank Plc, Intercontinental Bank Plc, Afribank Plc, FinBank Plc, Bank PHB Plc, Spring Bank Plc and Equatorial Trust Bank Limited - were found to be in a grave condition after the CBN's audit of the 24 banks in the country, prompting the injection of N620 billion into the affected institutions by the Reserve Bank.

He pointed out that the result of the audit in the eight banks indicated that the non-performing loans of most of them exceeded their share capital, which resulted in a situation whereby their balance sheets had a negative networth.

"Their shareholders' funds were eroded from the provisioning for loan losses, leading to an erosion of their investments in the banks," the governor explained.

He said the sacked bank executives and shareholders that went to court challenging their removal and alleged take-over of the banks, failed to realise they are no longer shareholders of the banks going by the books of accounts of the institutions.

"It is the government (or rather, the CBN) that has provided the bailout that has a claim on the investments. But any other shareholder can emerge after the debts of the banks have been recovered.

"That is what the aggrieved shareholders and former CEOs don't seem to understand, which is why they even kicked against our debt recovery efforts that ordinarily will favour them," he explained.

He said the other set of people with claims on the banks are depositors and creditors, whose interest he said the CBN was doing everything to protect by not allowing the banks to fail.

"As far as I know, the so called key shareholders and bank executives that ruined these banks do not deserve a place again in the institutions but should find their place in jail or even be shot dead," said Sanusi in an emotionally laden voice.

He pointed out that the shareholders have been affected by the grave situation the banks were plunged into.

Sanusi said for some of the banks, the percentage of non-performing loans to total loans was nearing 50 per cent and that these represented loans tied to the capital market that has lost about 70 per cent of its value.

The CBN governor disclosed that one of the banks had non-performing loans of over N300 billion and that the CEO of a particular bank wired £13 million to himself without any transaction to back it.

He, however, regretted that the audit was belated, adding that because of it the economy has been deeply affected by the negative consequences that has manifested in an acute credit crunch.

"The problem started as far back as October last year when some banks became permanent customers of the Expanded Discount Window, which was a symptom of a deeper problem.

"Any risk manager that didn't see that as a sign of a big problem is not worth being called a risk manager.

"The situation necessitated the audit of the banks when I became governor, and it was discovered that five banks accounted for 90 per cent of the borrowings from the expanded discount window. The rest is now history.

"What the CBN is after now is how to make the banks recover and perform their role of financial intermediation for economic growth and development," said Sanusi.

With the foregoing, the only hope for the shareholders appeared to hinge on the ability of the CBN appointed management teams in these banks, to turn them around for profitability.

It is only then that the shares of these banks may begin to appreciate thereby giving shareholders profits in their investments.

Sanusi is right.

He said the sacked bank executives and shareholders that went to court challenging their removal and alleged take-over of the banks, failed to realise they are no longer shareholders of the banks going by the books of accounts of the institutions.

"It is the government (or rather, the CBN) that has provided the bailout that has a claim on the investments. But any other shareholder can emerge after the debts of the banks have been recovered.

"That is what the aggrieved shareholders and former CEOs don't seem to understand, which is why they even kicked against our debt recovery efforts that ordinarily will favour them," he explained.

He said the other set of people with claims on the banks are depositors and creditors, whose interest he said the CBN was doing everything to protect by not allowing the banks to fail.

When a bank is a situation like this, the people that get paid first are the creditors. The people who borrowed banks money (in this situation, the foreign banks and the CBN) after that the depositors. Then after that we can start talking about shareholders. From the information out there this bank spent shareholders fund as result there is nothing in the kitty for shareholders.

If a local or foreign investor want to buy this banks they will evaluate the value of these banks (the value will include debt they owe), and when you look at this banks who have been cooking their books you will realize their value is not what the banks are claiming it to be.

It is not the CBN's job to protect shareholders, it is the job of the SEC .