ON LIQUIDATED BANKS--REJOINDER PART 2

[Nathaniel Cole]

CONTINUED FROM PART 1

At 10:51 AM 1/20/98 -0600, Caleb Oriade wrote:
>> More worrisome is the list of merchant banks which includes Continental
>>Merchant Bank (with its imposing Ikoyi Headquarters building)and ICON that
>>are among the pioneers in the business. From the look of things, I don't
>>think the prospect of liquidating any of the "big 3" (First Bank, Union
>>Bank and UBA) is as remote as we think.

The Continental Merchant Bank was the former Chase Merchant Bank based on
Awolowo Road in Ikoyi, Lagos. This fine bank (under Chase) was taken over by
the government when Chase withdrew out of Nigeria years ago. Once the
takeover took place, of course !!! it meant a political spoil for government
patrons who now took over the bank and like the other government owned banks
it too eventually was badly managed and hence the result of the liquidation.

As for the "big 3" the prospect of liquidating them is very remote, too
remote that it would not bother me if they loose millions. It will take a
lot for the big three to fold. This is because they are now managed in most
instances by professionals. Though the government still has some influence
in I believe two of them, they are however also privately owned by
Nigerians. I believe either UBA is now controlled by a smart
Nigerian/Harvard graduate by name Bello-Osagie. He runs a tight ship and
with no government influence, he is doing great! from what I was told. His
control of the bank is a test book lesson for us and the government
sycophants are still trying to come up with laws to be used in taking back
the control of the bank. The guy reshuffled the bank and many old and tired
bankers were replaced with new and energetic younger bankers. This initially
met with a lot of hue and cry, but hey!! it is his bank now along with other
Nigerian shareholders and the support of the foreign investors who together
now control the bank and not the government.

Most of the big three that used to be government controlled banks, but not
anymore, now are going through a big rationalization exercise. First Bank is
re-trenching like crazy in an effort to reduce waste and bloated bureaucracy
in the bank. Now, I was recently informed First Bank for example, do not
have any contract with the powerful bank union. This means issues relating
to higher wages and fringe benefits are now on the back burner so the bank
could concentrate its efforts in operating efficiently. In as long as the
big three are no longer controlled by the government, they should do fine
like some of the newer banks that are making billions as a result of
efficient services and less waste. So, when we look at the underlying
factors, the big three are in a very strong position and their demise is
very remote IMO.

One of the things that we need to consider is also the assets based of the
banks. For example, the 26 banks to be liquidated have a combined fixed
assets base of about N1.69 billion naira and they had a total of N26.268
billion naira in loans. This represents 15,000% of the fixed assets base. We
all know that the ratio of fixed assets to loan outstanding of 1 to 15 is
too high. Most of the other big banks ratio are not even remotely close to
this ratio. All these lend credence IMO that it will take a lot for such
distress to show up as these banks other big banks including the big three
all have a high assets to loans base.

To demonstrate the fact that government ownership was to be blamed for a lot
of the poor performance of those known and pre-IBB banks days, I will use
the International Merchant Bank (IMB) example that prior to 1993 was a
government controlled bank. IMB was having problems and it was plagued with
abysmal performance and bad management despite being one of the premier
merchant banks in Nigeria. In 1995 the current government promulgated the
new foreign investment decree 17 of 1995, this removed the restrictions
against foreigners participation in Nigerian companies including banks. At
that time it was rumored that Merril Lynch, Golden Sacks and Chase Merhattan
investments banks all of New York recommended to some of their clients to
purchase IMB shares. In this regard, Blackstone Assets Management Trust
Company and Petrocarbon Technology, both of the United Kingdom and Blue
Marine and Union Limited of the US both sought to buy or bought 40% at that
time or 60 million of IMB's 150 million naira public offer.

In June 1996 IMB poor performance was turned around and profits after tax in
1996 increased by about 2,186% over the previous 18 months when it was
controlled by the government. The privatization of IMB and the appointment
of Mr. Edwin Chinye in 1994 ( who I knew when I used to supervised the
audit of Savannah bank in the eighties where he used to be part of the
bank's senior management) now resulted in the banks improved performance
despite the provision of over N1.00 billion naira in bad debts. This goes to
show that the inefficiency of most government parastatals also affect the
banks owned by the government in most cases but once the shackle of
government ownership was dropped the bank performance increased in most of
the previously government owned banks.

At 10:51 AM 1/20/98 -0600, Caleb Oriade wrote:
>>With the maximum indemnification of 50,000 naira (about US$650) for lost
>>deposits by NDIC, how will you convince risk-averse investors to consider
>>Nigerian banks?

It is true that the NDIC will pay a maximum of N50,000.00 out of the
insurance fund to each depositor regardless of the amount on deposit. This
is obviously inadequate and could also be said to be a fraudulent act by the
government owned NDIC. Please note that the N50,000.00 is supposed to be the
initial refund not final refund, because the proceeds received in
liquidating the distressed banks assets are required to be paid out again to
depositors. In a lot of cases the disposed banks assets and collection of
some of the outstanding receivables or loans makes it very possible that the
insurance fund will be repaid fully and the balance used to pay the
depositors. Nigerians have not been aggressive in ensuring that the NDIC
complies with this, otherwise what will the NDIC do with the excess funds
collected from disposals etc. after it has already reimbursed itself of the
initial N50,000.00 naira??. I must say that to the best of my knowledge I
recalled the NDIC paying additional proceeds to the depositors of some of
these failed banks after the liquidation exercise sometime last year or
thereabouts (not sure exactly when)

Anyway, this maximum indemnification would only mean that you spread your
risk around. though I must say that it is rather too small and must be
changed in order to reflect the current economic reality. In this regard,
the sum of N400,0000.00 - 500,000.00 should be the minimum. I discuss this
issue of the premiums paid by banks to NDIC in one of my previous discussion
on the net and if I am able to locate it, I may refer to it in my next
contribution if at all possible.

Shalom, Shalom!!!

Nat Cole