Sanusi at NSE: I am surprised people are selling bank stocks

• Sanusi Lamido Sanusi PHOTO: Gbenga Olajobi

The Governor of the Central Bank of Nigeria (CBN), Mr. Lamido Sanusi, last week had a town hall meeting with stockbrokers and members of the capital market community. Business Hallmark's OKEY ONYENWEAKU and OBINNA CHIMA present some of the issues highlighted by the Governor.

Introduction
We requested this audience so that we can address you directly and explain to you the background of the action taken by the CBN, where we are today and how we see the banks going forward. I want to assure that we have very optimistic views of the economy and of the market and that we hope to work together with the Council and Management of the NSE to find a solution to the problem that the economy is facing at the moment. But we must understand that there would be short term difficulties, however, the medium to long term outlook remains very positive.
The global financial crisis has been felt in Nigeria through low oil prices, a slump in capital inflow, pressure on foreign exchange reserve amongst others. The gross mismanagement and governance failure created another quality and liquidity problem among banks, exposing weaknesses in certain specific banks.
Previously in this country, banks distress was resolved by license revocation, followed by bank failure, leading to losses by depositors and shareholders. But I think it is extremely important for us to bear this in mind. We had institutions that were failing. What would have been done previously was to hand them over to the Nigerian Deposit Insurance Corporation (NDIC) and liquidate them. But what the CBN has done this time is to be proactive and anticipatory, representing a change in ongoing institutional reform efforts.  Our over-riding objective in embarking on reform in the banking sector is to promote a banking system that is sound, stable and efficient that would ensure a sound foundation for promoting sustainable economic activities. We need to do these by ensuring sound governance and management, adequate liquidity and robust Capital Adequacy. The five banks, in which we intervened, had a combination of all three. It wasn't just a case of being short of capital in which case you would just put in capital or give them time to increase capital. It wasn't just a case of liquidity problem in which case you give them liquidity support. It was a combination of lack of capital, lack of liquidity and lack of governance and therefore the institutions were in a grave situation.
The market
The capital market remains extremely important and central to the economy and nexus between banks and capital market in Nigeria in particular is very tight. Banking stocks make up over 67% of the stock Exchange's market capitalisation, which, in fact, is a major risk to the stock Exchange itself. In other parts of the world, the financial services account for about 25% of the market capitalisation. So, when you have one industry accounting for 70% of capitalisation, then when the industry sneezes, the rest of the market catches cold. Improved governance, transparency, disclosure and assets quality, are critical to the long-term growth and resilience of the capital market and we keep emphasizing these because people say these actions may shake confidence. In fact, these actions are the actions that would restore confidence. This is because confidence is installed when you have transparency, disclosure, ethics and professionalism. The capital market continues to play a major role in banking reform and the actions we have taken have provided a platform for the restoration of confidence and are in the interest of the sustainability and growth of the capital market. Our priority as the CBN in all our actions following our mandate naturally would be to safeguard the interest of depositors and creditors. But having said that, all stakeholders, including shareholders, would be treated in fair and transparent manner. The CBN would achieve its objective by acting within the boundaries of the Nigerian law. No action would be taken without having been reviewed appropriately. And we intend to reform the banking system in order to prevent a similar crisis from occurring in the future.
Banks' audit
The first phase of the examination was on 10 banks. There was already obviously a process of selection and these five had to be in the first batch. The 10  was not a magic number, it was the number we could handle because we had examiners from CBN and NDIC and we had to do a thorough job. These five banks were found to be in a grave situation and the CBN has a regulatory responsibility to place the banks on life support giving the potentials of systemic risk to protect the financial system. The result of the second phase of the remaining 14 banks would be announced shortly and we hope to announce our results by early October. I would say that the result of the 14 is much better than the result of the 10, which is much I can say. If a big bank has a problem and you don't take it out of the market, it would bring down other banks because the big bank, even if it is weak, is able to take market share from a small bank. What would happen is that the big bank would force a number of second- tier, first-tier banks into crisis because they have the clout to take away their market. They could offer higher rate of interest and they have the connection to take away the customers. 
Full disclosure
You know we talk about these margin loans. However, you structure them, we basically have two options. We can go the way the rest of the world has gone; if you have an exposure to the capital market and it has lost 70%, recognise the loss, capitalise the institutions and move forward. The second option is the Japanese option. And we all know what happened to Japan between 1989 and 1990. they had an assets bubble, the bubble burst, the banks did not pick the loss and Japan remained in recession for 20 years. Whether or not we like it, if there is a loss in the balance sheet, there is a hole in the balance sheet. It is bad news, but the earlier you recognise that this is bad news, come out with the worst case scenario, the better for the system and the more quickly we would come out of it. That is why the United States and Europe are coming out of recession now. They took the heat in October last year and if we had done this then, we would be talking about a different story today.
The new Managing Director/ Chief Executive Officers
The CEOs we have appointed are not appointed to liquidate the banks. They are appointed to turnaround the banks and turnaround the banks to profitability. Actually, I am surprised that people are selling those shares. If I were a shareholder in those banks, I would be buying more. We have replaced the CEOs of the five banks with competent Managers with experience and integrity. The mandate that they have is not to slow down or to liquidate, but to build and correct. We re-affirm the guarantee of local interbank to ensure continued liquidity for all banks, we guaranteed foreign creditors and correspondent banks' credit lines to ensure confidence and maintain important correspondent banking relationship. Don't believe any newspaper that says foreign banks are shutting down lines to Nigerian banks. Not a single correspondent bank has shut its line to a Nigerian bank. The CBN has no intention of nationalising the five banks or any other bank. If we had taken ordinary shares in those banks, we would have wiped out existing shareholders. We did not. In everything we did, we were looking at the long term. We did not want to address a short-term problem, and then come back later to deal with the long-term issue. Let me again clarify something; the CBN is not micro managing these banks. They have a Board, a Management and we are assisting them. We are giving them every support, but they are being managed by the CEOs and they have been given all the powers to run the institutions and bring them back to profitability. We have an ongoing correspondence with an international audit firm, to quantify the extent of the problem and the fact would be presented to stakeholders in due course.
Once more, I repeat, the CBN has not offered the banks to any one, the CBN has not discussed with any investor about these banks. Our priority is to make sure that these banks are safe, sound and strong and then ultimately, we can go to the next stage later.
However, the CBN would not allow these banks to go back to the same one- man structure that led them to where they are. So we would look for, and would advise the banks to look for appropriate core investors; local or foreign that would bring in the governance, system and the skill that would preserve the long term values of shareholders by building an institution. We must redesign the architecture of the Nigerian financial system. There is no bank CEO who should see it that he has a guaranteed job and can do what he likes any more.
Going forward, all banks licensed in Nigeria and continue to exist in Nigeria, must gear their minds towards turning themselves into institutions and not sole proprietorship. It is not enough for people to say they are bringing in money. We already have money in the banks; we are not looking for money. You must bring in governance, skills, ethics, and trusts and convince us that you can run an institution. That applies to these five banks and every other bank going forward.
If this economy is going to recover, we must understand that it is not just about money. Money is a simple matter, because, as you know, we print money.