For most banks, the recently released financial results for the first quarter of this year have shown that the banking sector is yet to recover from last year’s crisis making majority of them to post losses in their annual reports.
Consequently, investors’ confidence in the sector on the Nigerian Stock Exchange (NSE) has remained on the ebb. The management of the exchange last week acknowledged that the weak momentum being recorded in the market could be attributed to “the not too impressive audited results released by some quoted companies,” especially the banking sector which dominates about three quarters of the entire market.
Virtually all the banks declared ‘stress-free’ by the Central Bank of Nigeria last year; Access Bank, Diamond Bank, Ecobank, United Bank for Africa, and Skye recorded a huge drop in profit after tax.
However, some finance experts said the results of these banks are ‘encouraging’ since the economy itself is yet to recover from the global downturn. They further noted that the usual trend of doctored financial reporting common in the banking sector is not likely to resurface again.
Competitive account
Egbo Amaechi, a finance analyst and an executive member of the Shareholders Association of Nigeria, said, “The performance of these banks during the first quarter should be commended going forward, even though investors are not too happy. Since the results posted to the general public were approved by the relevant authorities, we have to assume that they are real.” Commenting on “competitive financial reporting,” Mr. Amaechi said, “I don’t see banks in that kind of competition again. Don’t forget that this regulatory regime is quite different from the previous one. The Central Bank is strict this time.”
Indication of strength
In his opinion, Rasheed Ola Yussuff, chief executive officer of Trust Yields Securities Limited, a stock broking firm, said, “Given the scenario of the economy crisis with a situation where companies are still surviving and making little profits; while some are also paying dividend and declaring bonuses, I think most of the released results are encouraging.” “Over the months, these banks have taken the worst scenario and it can only be better from there on. Although an investor that is expecting a huge dividend we look at the result and get angry. That is understandable because the person is looking at his or her cash flow. But from the point of view of the company itself, it’s a mark of strength and not weakness. If you have a reserve that you are keeping aside and you are still making profit, then it means that you have more money within the organisation to use,” Mr. Yussuff, a former general manager of the old Eko International Bank Plc, said.
He, however, said that the usual trend of all-is-well financial reporting by banks was one of the reasons why the sector crashed.
“Today, that cannot happen again. You cannot say because everybody is declaring profit you want to follow the trend. If your bank is not doing well, your result will show.” “I think it’s a good thing that the banks are more transparent now. When a bank says its net profit is this amount, it means it made more than that but probably had provided for bad loans. And that should be commended because banks are simply saying we’ve cleaned up our books and there is no doubt about our health now. I believe those results are indications of strength. Tomorrow if they recover some of those bad loans, then it will become surplus for them. That is why some banks could post positive results in their first quarter result this year,” Mr. Yussuff said.
Improving performance Meanwhile, analysts at Financial Derivatives Company Limited, a business advisory firm, said the capital market “will remain positive on the strength of better-than-expected corporate announcements as the reporting season gets under way.” Subsequently, they added that some profit taking should occur as investors cash-in recent gains.
The proposed Asset Management Corporation of Nigeria is expected to further stimulate the capital market, as loans would be restructured to boost the balance sheets of banks and enhance the flow of credit to the economy.
The bond market is also set for a surge in activity, as the Federal Government takes the lead in financing the N1.5 trillion deficits in the 2010 budget, with about N800 billion of which is intended to be funded through local bond issues. Analysts also anticipate an increase in corporate bond issues in order to increase the tenor of liabilities to better fund longer term asset.
Shares as collateral
According to the NSE, another contributory factor for the wobbly performance at the capital market is “investors’ initial reaction to the Central Bank’s position on the use of banking shares as collateral for lending.” However, Rilwan Belo-Osagie, managing director and chief executive officer of First Securities Discount House Limited, said, “On bank rejecting shares as collateral, it’s a situation of once beaten twice shy. We went through an era where shares were readily accepted as collateral, and there were certain assumptions made by the banks; then the economic meltdown that crashed the capital market for about two years. Obviously, a natural reaction is that you first of all shy away from using shares as collateral
Source: NEXT
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