Source: Guardian, Wednesday, November 11, 2009

GIVEN the current gale in the Nigerian banking industry, the Group Managing Director of Unity Bank Plc, Falalu Bello, spoke to ENITAR UGWU of The Guardian on wide-ranging issues. Particularly, he examined the yardstick used by the apex bank in its assessment of banks and submitted that the most important aspect is the corporate governance issue which banking is mainly about. Excepts:

SIR, how do you see the CBN stress test and its verdict on Unity Bank?

When the current Central Bank of Nigeria (CBN) governor came on board, he discovered that some banks had been at the expanded discount window for quite a while. To him, that was a signal that something was wrong and decided that a special examination should be conducted on the first 10 including those that had been on the expanded discount window for quite a while. Basically, three parameters were used, first is liquidity, then capital adequacy and finally, corporate governance. On the basis of their findings which were disturbing, the CBN governor called the banks chairmen and chief executives and informed them about their findings before going to the press to make it public.

Thereafter, he decided to extend the examination to the remaining 14 including the foreign banks since they are operating in Nigeria anyway. The same parameters were used to adjudge all of us and the verdict for the last batch which we belong came out and we had a conditional pass. Now, what was that conditional pass? Three parameters were used, in terms of liquidity, we were adjudged to be liquid and what liquidity we have to support our business activity? We were in a position then and now, to honour all our commitments to our depositors. I remember correctly that as at the cut off date which was June 30, 2009 we had a liquidity ratio of 40 per cent, which is 15 per cent higher than the 25 per cent which is required. This, to me is a pass mark with a wide margin.

The second test was on corporate governance and to my own understanding it (corporate governance) in this context is not just publishing yearly account I think it bothers on testing the integrity of the players in the market bearing in mind the exposition that has so far been made by the central bank and the Nigerian Deposit Insurance Corporation (NDIC) in terms of the multiple abuses that the system has been subjected to by we, operators and of course, the yearly account. Certainly, the main test here, in my view was that of integrity and whether we, as operators we kept with the rules and regulations of the system, that of our boards both internal and external. On that score, we did equally very well. Paragraph (G) of The CBN circular to us states that “the institution was adjudged to have insufficient capital for its current level of operation but was adjudged to have a healthy liquidity position but no indication of poor corporate governance practices.” That was the verdict. So as far as the corporate governance practices was concerned, we equally passed the test.

The third issue was capital adequacy and on that, the opening of that paragraph says we have inadequate capital adequacy ratio, so we failed that score. But then why did we fail and I think it about time that the public gets to know why we failed. We failed because of historical reasons. Unity Bank is a marriage of nine institutions, you know this institutions whether you are from Kano where Tropical Commercial Bank came from or from Delta where New Nigerian Bank came from, Minna where Intercity Bank came from, Osun State which was perhaps on of the bastion of Pacific Bank. These are the institutions that merged into one bank. They were not perhaps, the most profitable or well run banks at the point of the merger. They all had one problem or the other. So for historical reasons, at the point of merger, we took over banks that had issues and those issues became our issues. So practically when we are talking about making additional provisions based on this examination, a substantial part of it came from non-performing assets inherited from those banks. Over 80 percent of our non-performing assets came from legacy institutions. That is one of the reasons we failed the capital adequacy test. The second is the issue of Goodwill. From our shareholders’ funds of N42 billion as at June 30, 2009, N17 billion was discounted on account of goodwill.

Now, what is goodwill? Goodwill is the premium that you pay in the course of merging businesses. For example, Bank of the North, which was part of our own group, was established in 1959 and it has been there for almost 50 years at the point of consolidation, the bank had a lot of properties all over Nigeria . Certainly, it would have been unfair for the merging institute to give bank of the North book value for its assets, so we had to take those assets at market value. The premium we paid between the book value and the market value is what is called the Goodwill. We had N17 billion which was discounted from our shareholders’ funds of N42 billion.

The third issue was significant because, apart from the bad loans and goodwill, we had investment in subsidiaries. The bank did have as many as eight subsidiaries and four associate companies and most of them are equally historical like New Devco, a stock broking firm that we inherited from Bank of the North, Caranda, a management company we inherited from Pacific Bank, North Link, an insurance company we inherited from Intercity Bank. Their value was about N7.6 billion which this test equally took out of our shareholders’ funds. But for these costs, including the N17 billion, N7.6 billion and additional N19 billion, we would not have the problem of capital but the costs are purely historical and may be that explains why CBN did not say that we should be punished.

Why do you punish somebody for what he did not do? I, as the managing of this bank, was not responsible for the N17 billion goodwill; I was not responsible for the bad debts that the bank inherited. I was not responsible for most of the investments in subsidiaries and in any case almost all of them are running profitably but this is purely an issue of strict interpretation of the rules.

In summary, this is where we stand in terms of the parameters used by the CBN in the special examination. In any situation where you score two over three, that is 66 per cent and that by any standard, is a pass mark. Yes, the test was done, we have passed with a credit but we have the issue of raising capital and the most important thing for me and for Unity Bank is the fact that we passed the test on corporate governance well because banking to me is all about integrity, banking to me is all about trust because you are keeping people’s money. If people don’t trust you because you don’t have integrity, to me, you don’t have room in banking.

That we passed the corporate governance test was a good thing, although we have the problem of capital but that has been there since late 2005. We have been working towards going to the market but the important thing was doing the merger well and integrating properly, clean up our books, then we come to the market and call on people to buy our shares. I think we have done the merger well, we have done the integration well, we have cleaned our books and we are ready to go to the market. Since the merger, almost all the banks have gone to the market to raise capital except few of us, so it is time we do that.

Based on the CBN verdict on your bank, when are you coming to the market?
We are coming to the market by latest, February, next 2010. I need to tell you what we require and how we are going to raise the money. To meet the CBN minimum capital adequacy requirement, we need to have the sum of N32 billion. If I get N32 billion tomorrow, I would go to the CBN and tell them that I have met the minimum requirement but we want to raise more than that. We intend to raise between N60 billion and N70 billion; we would have raised more like some of our colleagues are doing but I believe there is a problem with excess capital as there is much problem with little capital but the important thing is to have an equilibrium. It is important to take the amount that is required for the kind of activity that one is doing. But sometimes we go and take too much money and we don’t know what to do with it; we have seen people taken too much money in this market and we saw they did with it but we don’t want to fall in that category. What we want to raise to meet the minimum capital, write off the N17 billion goodwill so that when you buy the shares today, I can pay you dividend next year and have enough working capital to finance our activities and expansion is something in the region of N60 billion to N70 billion.

Now, we will do that through three processes including rights issue of one for one to the existing shareholders who are holding about 15 billion of our shares. A substantial holders of our shares today are governments which spanned between the 19 Northern states, Edo State, Rivers State, Delta and Ondo who owned 70 per cent of the bank. The current regulation says they cannot buy the shares of banks, so if we are going to do rights issue, how do we overcome that? We are already talking to the governments, we have spoken to ten of them so far and we intend to talk to others to renounce their holdings in favour of their citizens. That is how we are going to overcome the public sector ownership of the bank and by doing that, we hope to rake in about N16 billion. Also, we will do a public offer and we hope to raise N19 billion from that exercise. We also intend to raise between N30 billion to N35 billion by way of debenture. These are the three things that are on the table in terms of capital raising and with these we hope to achieve the required N60 to N70 billion. I hope the whole exercise would be completed by February next year.

Did you take into consideration the offer timing and market downturn?
Yes, we have taken that into consideration. In fact, we have seen lately some banks coming to the market to raise N300 billion, some N500 billion by way of debenture but we are just looking at N35 billion, we are not looking at such a huge amount of money because we don’t want to raise too much capital, we want to raise adequate capital. We are looking at something that is moderate; we are looking at our own share price, guiding it against the price of other banks and examining that in the context of the CBN/NDIC examination because that evaluation is important to the you, the public and to everybody about banks in Nigeria .

I have said that banking is all about trust and integrity and we have been told by the highest regulators of banks in Nigeria that there was no indication of poor corporate governance practice in this bank. I think people should buy our shares because of this testimony. The ambience of a bank counts but it is not enough to judge a bank, it is people in that bank that do the banking and that has been proven in our case by this examination. Banking is not about noise making, banking is about trust and integrity and we have been proven as an institution that has that trust and integrity. That is one reason why people should buy our shares.

The second reason why I think the shares should be bought is the fact that the price is right because if you look at our price in the market, I think our price is fair and I, as an investor would buy the shares of this bank at the current price. Because of the price and because of the CBN testimony, I believe our shares would sell notwithstanding what is going on in the market. Besides, I think there is everything good in being modest and I think we are modest by the way we conduct ourselves and the way things are being done in the bank. We have the liquidity because people trusted us. As at June 30, 2009, we had 40 percent liquidity ratio and inter bank placement of about N48 billion. People trusted us not because we don’t have the best colour or the best buildings in Nigeria. Banking is not about wearing a Canali or Marks and Spencer suits, it is really what you do with people’s money.

Can it be said that because your bank was not liquid accounted for its refusal to grant margin loans?
I have just said that as at the cut off date, I had N48 billion with other banks. Who said I could not have lent that out if I wanted to? In addition, I had N16 billion worth of instruments I bought from other banks which I could have lent to the oil traders to go and build tank farms. Those who have said that we did not have enough funds to trade with are not fair. The simplest thing any banker can do is to give out loans, it is not that we did not have money, we had N160 billion in terms of loans and advances and N48 billion inter bank placement as at June 30. Some banks had excess capital and they did not know what to do with it, I did not have such capital, may be I would have been careless but what I had was depositors funds that they can call tomorrow and I had to protect their funds.

That is why I did not go looking for margin loans, it is not that we did not lend to the stock market but we had the least exposure.
There was a customer who wanted N1.5 billion to buy shares, I told him to give me a margin of 33 per cent and he brought N500 million cash, so I was going to get the shares of N1.5 billion in addition to N500 million cash, so when the market crashed, I recalled the N500 million deposit and he had made some payments which all together reduced the loan. Besides, without sounding immodest, I was mindful of who my lenders were. There was another customer who gave us the shares of another bank worth N2 billion in addition to N1.5 billion worth of shares he was going to buy with the money that we lent to him.

That means I have 100 per cent cover for that loan. We actually did margin loan in contrast to what people are saying. Of course, I did not finance tank farms but I financed oil traders and one of the biggest oil traders in Nigeria is my account holder. I did oil and gas but I financed only the trading aspect because I don’t have long term funds, no bank in Nigeria has long term funds and if you do an analysis on any bank’s balance sheet, you will discover that 80 per cent of their deposits would mature in one year. If I don’t have up to two years money why do I have to finance a five-year project? That is not prudent. Almost all my oil and gas account is doing well. Certainly, we cannot be insulated from the stock market downturn but we had the least exposure.

Now two important questions: Did Soludo give Unity Bank money and when last did the bank publish its yearly account?

I have read a lot about people saying that we have not been publishing our yearly accounts. Some have even come in form of advertorial in newspapers; I don’t know who they are and I don’t know their objectives. They are all liars because it is not true that the former CBN governor, Chukwuma Soludo gave Unity Bank any N70 or N75 billion. I have been the managing director of this bank from inception and I am not aware that Soludo gave this bank any money at any point in time. I have been in the banking industry for almost three decades and I have been chief executive officer of one bank or another in this country since 1994 and I am not aware of any fund in the CBN which the governor could give to any bank in terms of liquidity support; of course you can borrow from the CBN like any other bank but it has been shown that we were never at the Expanded Discount Window while borrowings were done. For anybody to come and say that we took N70 billion from Soludo or anybody is a lie and that can equally be verified from the current CBN governor.

The issue of published accounts is equally a lie. In fact our 2006 accounts was published in 16 Nigerian newspapers and we published our account for 2007. We have not published 2008 at the approval stage and once it is approved, we will publish. Besides, we have reported profits in all our accounts that had been published; so for anybody to take a space in the newspapers that we have not published, that is a lie.

Is Unity Bank a Northern bank?
Like I said before, Unity Bank is a merger of nine institutions which include Bank of the North, Tropical Commercial Bank, Intercity Bank Plc, New Africa Bank, First Interstate, New Nigeria Bank, Centrepoint, Societe Bancaire and Pacific Bank. All these are regional banks, not in terms of license or operations. For instance, Bank of the North was operating nationally but it was largely a northern bank. It was the same thing with Intercity, Tropical Commercial Bank and New Africa. From the South West, we had Pacific Bank from Osun State, we had First Interstate which was chaired by Mabogunje from Ogun State. From the South-South we had New Nigeria and from the South East we had Centrepoint in terms of the constituents of the banks that made Unity Bank, by design not by accident, they came from the six geo-political zones of Nigeria and you cannot say that is a lie. Indeed, the first name we took was First National Bank and National Bank took us to court and we decided to pick Unity. I am one of the architects of this creation because out of the nine banks, I was on the board of three.

I was on the NDIC/CBN appointed board of Bank of the North; I was the chairman of Intercity Bank at that time and I was on the board of first Interstate Bank. With respect to those from the other banks, these were the bigger banks in the merger and I was on their respective boards. We had said from the onset that we wanted to create a national franchise but with northern relevance. Of all the banks in Nigeria, we are the most national; if you look at our board today, it is one of the most national. My chairman is from Ogun State, I am from Kaduna; we have Felix Ohiwerei from Delta; Evans Woherem from Rivers, Deji Adeleke from Osun, Kunle Oyinloye from Kwara, Bola Shagaya from Kwara, Hamed Ibrahim from Borno, Ado Wanka from Bauchi, Lamis Dikko from Katsina; There is no bank in Nigeria that has such a composition on its board. Before this katakata started, I know of a bank where five directors came from the same village in Delta State and yet, some people referred to them as national and we are regional. The highest shareholder in this bank is Rivers State government with seven per cent, the next is Kano with four per cent. From consolidation, the architects of this bank wanted to create a national franchise and we have succeeded in doing that especially in terms of ownership, the board and management and in terms of branches. We have 34 branches in Lagos alone, so how does that make us regional?

Please, assess the on-going banking reform and let’s have your views?
The current development in the banking industry is a reform process and you cannot totally cut off what is going on from the consolidation exercise. The former CBN governor has done his bit while Sanusi is doing is to take the rot out of the system. We have been told to recapitalise our bank and we have to do it. What he is doing is to find out what is wrong with the system and try to correct it; so to me as an operator and a Nigerian, I believe what he is doing is right. He is definitely going to look at one or two things differently but overall, as far as I am concerned, looking at the banking industry and looking and what is needed to be corrected, he is taking the right step If he continues with this exercise by making sure that the stable is clean, the banking industry is going to be better of for it in the medium and long term. For the first time in Nigerian banking history, we are seeing losses which is not a negative thing because banking is just like any other business; there are good times and bad times; so to me, it is not a negative thing for the industry. A new driver has come on board, he is making the necessary adjustments so as to drive well, he sees something going wrong with what is going on and he is correcting it. In the short run, we are going to take some hit and for me what he is doing is a continuation of what we have been doing at Unity Bank because we have been making efforts to clean up our books even before the CBN directive that banks should make provisions for loans. For us we have cleaned our books and we can only move forward. What is happening is better for the industry; it is better for depositors and customers; it is better for the economy.

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