Of CBN's stress test and Nigerian banks

The newly appointed governor of the Central Bank of Nigeria (CBN) appeared to have recently sent shivers down the spine of the nigerian banking society through comments he made in an interview granted to the financial times of London. He apparently 'fired' warning shots when he expressed his concern on the asset quality of some Nigerian banks and how he intends to make Nigerian banks disclose their exposure by the December common year end. As a student of the market, I have previously expressed my fears and disbelief about the figures Nigerian banks declare in their balance sheets as assets. It therefore did not come as a surprise when a recent world bank report revealed that half of the assets claimed by nigerian banks are questionable.

Most analysts have previously decried the reckless 'flirt' with risk most banks in Nigeria indulge in especially with regards to exposures to the stock market. We've had a bullish run in this country where banks purportedly gave loans to stockbrokers who speculated on the shares of these banks and consequently drove up the shares of these banks with no particular fundamental justification. We've seen the banks' exposure to the energy sector, particularly oil companies who are practically battling with the decline in global oil prices not to mention to NITEL-Transcorp deal that has recently being rescinded. A consortium of Nigerian banks financed that deal and their exposure to it runs into billions of naira. Yes, that reminds me. Some of our banks have Global Depository Receipts (GDRs) listed on exchanges in New York, London and Johannesburg not also to mention the loan deals some of them signed with foreign banks like Merril Lynch and the likes on Wall Street.

In what seems to appear as a deliberate means to hide their exposures, these banks keep declaring massive profits even during the heat of the stock market crash. For someone like me, their seem to be no form of consistence between rising bank profits and declining stock market fortune and to the dumbest student in a finance class that makes no economic sense. Our banks are quick to tell investors how much turnover they've made and by how much they've multiplied assets but make little or no disclosure as to their risk portfolio which is apparently the most sensitive part of a banks balance sheet. Foreign analysts have also decried the level of secrecy in our banking system and they've pointed that as one major deterrent of foreign investments. Carrying on with this theme, one could point out one of the many failures of the Soludo-led CBN

With a new leadership at the CBN, the CBN seems to have been alerted to its traditional regulatory function of ensuring transparency in the banking system as well as monitoring the risk profiles of banks. Really, bankers should expect nothing less from a man who is popularly known as 'Mr Risk Manager' and I must say at this point that the fear of Mr Risk Manager might be the beginning of survival for some struggling banks. Judging from his manifesto, this man is not ready to wind down the fiscal year with 24 banks under his supervision.

His newly lauched campaign of stress test across the banks is long overdue but it is better late than never. Although the campaign is geared towards making banks come clean on their risk portfolio and consequently 'wiping off' their sins by writing off those loans, it has some major economic implications.

The CBN stress test is already pulling some stress on the stock market and it might be a threat to the little recovery recorded so far. A business newspaper recently reported that banks have given instructions to their subsidiaries to offload their positions in certain shares and this provides some explanation as to why the market lost about N300 bn over the last two trading days. The banks will achieve two things through this: They'll reduce their exposures to the market and make their books clean in expectation of CBN examiners that will come checking soon. Second thing they'll achieve is to cash in on short-term profits of the market which will consequently improve the book value of their assets. But honestly, there is little this 'book patching' by banks can do given that most of the share in the market have not move full swing into a bullish run.

Expect a number of market-induced consolidation in the banking industry as well as with other non-bank financial institutions particularly stockbrokers and investment firms. Much more importantly, expect some banks to declare losses by the december common year end. Some banks might decide to come clean before then but whichever way, now is not the time to be bullish on nigerian banks.

As the CBN settles to reposition banking in Nigeria, there is no doubt that the center of gravity within our financial system is set for a paradigm shift especially with the open invitation given to the more experienced and more capitalized foreign banks.