After injecting over N600 billion into the banks adjudged to be structurally weak, the Central Bank of Nigeria (CBN) has been cautioned to be wary of lining up more cash for the troubled banks.
Bank of America Merrill Lynch, the global leader in wealth management, private banking and retail brokerage, gave the caution in its evaluation of Nigeria’s banking sector. Although the report commended CBN for quick its intervention in the wake of emerging signs of systemic failure, it warned against further injection of funds which he says could further erode shareholders’ holdings in the banks.
The report was put together by John Storey, research analyst, Merrill Lynch South Africa. But the report took a swipe at what was regarded as double speak from CBN governor, Sanusi Lamido Sanusi who had expressed his preference to local ownership of the banks and “limiting market share to no more than 20 percent by a single bank.”
“This implies better potential for foreign entrants, in our opinion. However, at the same time he talks of preferring Nigerian ownership and that the ‘large banks’ will remain under Nigerian control. This seems somewhat contradictory to previous messages from the Governor and is a reminder of the challenges likely to be faced both operationally as well as on the regulatory fronts,” he said
The report said Nigerian banks could be carrying toxic assets of N9 trillion on their balance sheets, against which they have taken N1.5 trillion (net) in provisions/capital injections to date.
“We have maintained an out of consensus negative view on the banks since initiating on the sector in December 2008”.
This assertion contrasts sharply with figures posted by the CBN governor who put toxic assets in the neigbourhood of N1 trillion.
The report equally forecasts a tough 2010 for the sector that has been the focus of major structural reform in the past six months.
According to the report published last week and made available to BusinessDay, “concerns on asset quality were crystallised and we expect [a] tough 2010. Clearly the unwinding of the bad debt charge should be a positive driver for earnings but, in our opinion, asset quality is yet to trough and impairment charges will be higher than that seen in 2007/2008”.
Sanusi had recently allayed fears of the investing public on the toxic asset issue which he said the establishment of the Asset Management Company (AMC) will take care of.
The report observed that although some foreign banks like FirstRand, ABSA & Standard Bank have expressed a strong interest to acquire or further expand operations in Nigeria, mergers and acquisition will however be slow to materialise, adding that foreign interest and consolidation may be at risk.
He however presented three options of foreign available to foreign entrants to include, buying one of the larger distressed banks in Nigeria; buying one of the smaller distressed banks or buying one of the existing mid cap banks.
“In our opinion, buying a clean bank that has successfully come through the CBN’s special investigation would be the lowest risk option into entering the market,” the report said.