Akwuobi Chinedu
Close watchers of the developments in the banking sector of late will attest to the fact that the wide speculation that all was not well with the sector is a sacred fact. Not a few analysts believe that the cause of the problem is from the industry operators who engage themselves in all manner of unethical, unprofessional practices such as a disregard for corporate governance, failure in risk management practices, profit inflation and other unethical conducts which has bedeviled the industry. However, analysts are yet to realize that the reason why our banks (those that survived) survived the consolidation exercise is the same reason why they are spending so much which has resulted in some industry players resorting to unethical practices that brought us to where we are today.
It is no news that during the recapitalization era, when the CBN mandated all the banks operating in the shores of Nigeria to recapitalize to the tune of 25billion, banks whose shareholders were unable to garner such amount resorted to the capital market through public offers and right issues. These banks flooded the primary market at regular intervals with their offers without proper appraisal of the long term cost implications of their actions. Hence the new shares which were created to raise enough capital is now taking a large chunk of the annual profit in the name of dividends. As though that is not enough, some banks, in a bid to satisfy their shareholders, declare bonuses on year on year basis which has lead to further cost implications.
Also, the manner in which these offers were raised was questionable. First, the prices were fixed arbitrary without an appropriate (if any) book building process. As well as a scenario where the NSE practically insisted that at least 80% of the issue must be underwritten which further guaranteed the success of these issues without recourse to fundamentals, which in ideal cases will form the bases for such “huge” success. As a result, these “successful” offers bloated the market capitalization of our banks to unsustainable heights.
TOP TEN MOST CAPITALIZED BANKS
S/No COMPANY VOLUME PRICE VALUE
1 First Bank 29,006,297,207 16.00 464,100,755,307.78
2 Zenith Bank 25,117,195,029 14.60 366,711,047,423.40
3 UBA 21,556,462,463 12.80 275,922,719,520.00
4 GT Bank 18,653,748,614 14.04 261,898,630,535.46
5 Ecobank 7,218,075,642 27.96 201,817,394,950.32
6 Union Bank 13,509,726,273 13.98 188,865,973,302.13
7 Stanbic IBTC 18,750,000,000 8.37 156,937,500,000.00
8 Oceanic Bank 22,221,369,213 6.27 139,327,984,965.51
9 IBPlc 18,860,014,978 6.45 121,647,096,608.10
10 Diamond Bank 14,475,243,105 7.97 115,367,687,550.04
Source: Nigerian Stock exchange
It is no news that during the recapitalization era, when the CBN mandated all the banks operating in the shores of Nigeria to recapitalize to the tune of 25billion, banks whose shareholders were unable to garner such amount resorted to the capital market through public offers and right issues. These banks flooded the primary market at regular intervals with their offers without proper appraisal of the long term cost implications of their actions. Hence the new shares which were created to raise enough capital is now taking a large chunk of the annual profit in the name of dividends. As though that is not enough, some banks, in a bid to satisfy their shareholders, declare bonuses on year on year basis which has lead to further cost implications.
Also, the manner in which these offers were raised was questionable. First, the prices were fixed arbitrary without an appropriate (if any) book building process. As well as a scenario where the NSE practically insisted that at least 80% of the issue must be underwritten which further guaranteed the success of these issues without recourse to fundamentals, which in ideal cases will form the bases for such “huge” success. As a result, these “successful” offers bloated the market capitalization of our banks to unsustainable heights.
TOP TEN MOST CAPITALIZED BANKS
S/No COMPANY VOLUME PRICE VALUE
1 First Bank 29,006,297,207 16.00 464,100,755,307.78
2 Zenith Bank 25,117,195,029 14.60 366,711,047,423.40
3 UBA 21,556,462,463 12.80 275,922,719,520.00
4 GT Bank 18,653,748,614 14.04 261,898,630,535.46
5 Ecobank 7,218,075,642 27.96 201,817,394,950.32
6 Union Bank 13,509,726,273 13.98 188,865,973,302.13
7 Stanbic IBTC 18,750,000,000 8.37 156,937,500,000.00
8 Oceanic Bank 22,221,369,213 6.27 139,327,984,965.51
9 IBPlc 18,860,014,978 6.45 121,647,096,608.10
10 Diamond Bank 14,475,243,105 7.97 115,367,687,550.04
Source: Nigerian Stock exchange
From the foregoing, it is clear First bank lead the rest with 29,006,297,207 shares outstanding, followed by Zenith, 25,117,195,029; And then Oceanic, UBA, and Intercontinental bank with 22,221,369,213, 21,556,462,463 and 18,860,014,978 outstanding shares respectively.
As at 2004, prior to the 2005 recapitalization exercise, UBA for instance, has 2.6 billion outstanding shares, a miniature of what we have today. First Bank, aside being the most capitalized, has a company policy of declaring bonuses and dividends almost on yearly basis which has impacted negatively on the company’s ability to retain a large chunk of earnings for investment purposes. Hence, looking at the financial risk and the competitive nature of the banking industry, it could get to a time when earnings cannot carry the shares outstanding.
Therefore, there is a need for a massive reduction in the floats of our banks if the current cost implications are to be averted. There is an urgent need for a massive share reconstruction which will not only create value for the shareholders by raising the value of their shares but also help to reduce cost in the long term. This could be achieved through share buy back (Repo), which, although in the short term appears costly but will invariably save huge funds in the long term, which will be hitherto used to service shares in the form of dividends.
While so many analysts will quickly disparage my opinion as anti growth, it is necessary to stress here, that, it is better to have a pair of shoe that is strong than to have two that can hardly be relied on.
The banking sector as has been stated many times accounts for up to sixty percent (60%) of the entire market capitalization of the NSE, which has lead to the industry exercising an over bearing influence in the stock market at the expense of other sectors. Hence a reduction in share volume will curb this anomaly and foster the growth of other sectors.
As at 2004, prior to the 2005 recapitalization exercise, UBA for instance, has 2.6 billion outstanding shares, a miniature of what we have today. First Bank, aside being the most capitalized, has a company policy of declaring bonuses and dividends almost on yearly basis which has impacted negatively on the company’s ability to retain a large chunk of earnings for investment purposes. Hence, looking at the financial risk and the competitive nature of the banking industry, it could get to a time when earnings cannot carry the shares outstanding.
Therefore, there is a need for a massive reduction in the floats of our banks if the current cost implications are to be averted. There is an urgent need for a massive share reconstruction which will not only create value for the shareholders by raising the value of their shares but also help to reduce cost in the long term. This could be achieved through share buy back (Repo), which, although in the short term appears costly but will invariably save huge funds in the long term, which will be hitherto used to service shares in the form of dividends.
While so many analysts will quickly disparage my opinion as anti growth, it is necessary to stress here, that, it is better to have a pair of shoe that is strong than to have two that can hardly be relied on.
The banking sector as has been stated many times accounts for up to sixty percent (60%) of the entire market capitalization of the NSE, which has lead to the industry exercising an over bearing influence in the stock market at the expense of other sectors. Hence a reduction in share volume will curb this anomaly and foster the growth of other sectors.
Akwuobi Chinedu
Dept. of Economics
Alvan Ikoku Federal College of Education
Owerri
IMO STATE
Dept. of Economics
Alvan Ikoku Federal College of Education
Owerri
IMO STATE
