Troubled banks consider mergers and acquisitions

The Nigerian banking industry is ripe for another era of mergers and acquisitions, finance experts say, but they are not so sure that foreign investors will find the bailed banks viable enough to buy as the Central Bank of Nigeria (CBN) hopes. Renaissance Capital, an investment, corporate advisory, solutions and derivatives firm which assessed Union Bank recently concluded that Mergers and Acquisitions (M&A) is the way forward for the bank. According to the RenCap's report, "We think M&A is the most logical way forward for Union Bank of Nigeria (UBN). Of the big banks that failed the audit, we regard UBN as by far the most attractive because of its strong local brand and its large pool of cheap retail deposits. While this could encourage M&A speculation around UBN, we note that, even (somehow) ignoring the ?120bn it owes the CBN, UBN is now trading at 1.56 multiplied by its post-audit book value." Heavily impaired capital The finance firm raised concerns over the bank's present capital level, but stated that its total asset has increased. "Union Bank's capital looks heavily impaired. Post the Central Bank's audit, Union bank has ?59bn of equity (50 per cent of its Financial Year (FY) ?08 level and 45 per cent of its nine month ?09 level). Its FY ?09 (post-audit) equity-to-asset ratio is five per cent." According to RenCap, Union Bank's financial year figures (to March) for 2009 indicate a full-year loss of ?73bn and a book value of ?59bn. "Net exceptional items came in at ?24bn, which is significantly lower than we had expected. Although this is a net figure, we doubt there have been ?174bn of recoveries. Union Bank's pre-tax loss of ?67bn suggests an operating loss (post-risk charges) of ?43bn. UBN's balance sheet looks resilient, with total assets having increased 10 per cent YoY, to ?1, 239bn, despite a difficult environment over the past year," the report stated. A top official of Union Bank however, said the bank was not aware of the source of Rencap's information, stating that it had just released its 2009 balance sheet. "We should be careful about reports from sources that are not authenticated. I do not know where their facts are coming from so I cannot speak on their conclusions. We just released a copy of our balance sheet so we don't know the particular document they are working with," he said. Bismarck Rewane, an economist and Managing Director, Financial derivatives Company Limited, a finance firm, explained that there are strong possibilities of induced mergers in the industry. "There is a likelihood of induced mergers or schemes of arrangement with survivors of the stress test. Investors will continue to hold back until the ongoing confusion in the banking system is resolved. The Central Bank will issue a statement on the process for disposing of banks under administration," he said. Awaiting acquisition directives Although the Central Bank stated that investors are already showing interest in these banks, it declined giving details. However, there are indications that some local banks are desirous of acquiring a number of these rescued banks. A Reuters report, on Wednesday, stated that Fidelity Bank, one of the local banks that scaled the Central Bank's audit, is interested in buying one of the nine rescued banks. The report stated that the Chief Executive Officer of the bank, Reginald Ihejiahi, confirmed that the bank is speaking with consultants to the Central Bank, and awaiting guidelines on how a bid would be executed, but declined to state which of the banks. Fidelity's interest The Central Bank has stated that it had a number of options available to stabilise the bailed out banks. According to its head of corporate affairs Mohammed Abdullahi, there are three options. "The first is for foreign investors coming to invest in the banks and buy them up. The second is to encourage acquisition and mergers by strong local banks in Nigeria. The third option is the one that government would acquire equity shares and then sell to the public at a later date, which is not nationalisation" he said. Sanusi Lamido Sanusi, the CBN Governor said in August that his preferred option for the first five banks rescued would be for them to be purchased by other financial institutions, foreign or local. Nine Nigerian banks: Afribank, FinBank, Intercontinental Bank, Oceanic Bank and Union Bank, Wema bank, Bank PHB, Spring Bank and Equitorial Trust bank are presently seeking investors to recapitalise them after being indicted by the Central Bank for high non-performing loans, poor corporate governance, lax credit administration, failure to meet prudential ratios such as liquidity and capital adequacy, high level of loan concentration to the capital market and oil and gas sectors.