By Omoh Gabriel
The expected acquisition of Oceanic Bank, one of the rescued banks by First Bank Nigeria Plc has collapsed following the inability of both parties to reach agreement on the value of Oceanic Bank. The talks on the merger failed because both banks could not agree on terms of share price.
In a statement, the CBN-appointed management of Oceanic Bank said: “With regards to the discussions between Oceanic Bank and First Bank in respect of re-capitalisation plans, the board and management wishes to inform all stakeholders that both parties have amicably reached an understanding to discontinue further discussions. This position was reached after both parties were unable to agree on the terms of the commercial consideration for the combination of both organisations. Oceanic Bank, however, wishes to assure its various stakeholders that the bank is working at concluding other re-capitalisation plans and details of such will be unveiled in the next couple of weeks.”
The failure of the plans of both banks points to the fact that it will be difficult for the rescued banks to be sold at this point in time. Valuing the worth of these banks at a time when the capital market is depressed will amount to selling them for peanuts. In the opinion of foreign investors, Nigeria’s stocks at the moment are cheap by most metrics. “If we get through the elections, I think there’s reasonable upside, it does look cheap by most metrics on the equity side,” said Stephen Bailey-Smith, a London-based emerging market strategist at Standard Bank Plc. Nigeria is “pricing most of the bad news and not pricing much of the good news and what a post-election economy would look like is really where oil prices are,” he said.
No genuine investor will allow his investment taken off him for a loss. He would always like to sell at a premium to make some gains. Even in auctioning a property, there is always a reserve price below which the auctioneer will not bring down his bell. The fact that so far those willing to even discuss with the rescued banks are local investors not minding the smokescreen they come under, points to the fact that confidence is yet to return to these institutions and the nation’s banking system after the cental bank public bashing.
In a bid to sanitise the industry, the apex bank introduced a number of reform measures including the sack of executive management of eight banks and the injection of N620 billion bailout fund. The eight banks are expected to seek fresh capital injection which may be through a core investor or through merger and acquisition. It had been reported that Vine Capital will sign an agreement to buy Afribank Nigeria Plc and also being rumoured is that they want to buy Finbank, Access Bank Plc intends to invest in Intercontinental Bank Plc, while First Bank of Nigeria Plc will take a stake in Oceanic Bank International Plc. First City Monument Bank Plc plans to invest in Finbank Plc, and Capital Alliance plans to inject $750 million in Union Bank.
Capital Alliance is an institutional investor that does not take long-term position in any institution. It takes advantage of profit opening, puts in money, make gains and pulls off. Their plan to be core investors in Union Bank raises suspicion in the minds of existing investors that they may be smokescreen and a ploy to deprive them of their investment as there is no local investor in the bank that has more than five per cent of the bank’s total shareholding to resist the attempt.
Besides, it is now very clear that bank shares in Nigeria have become so cheap that whoever is buying into the banks is doing so at a give away price. Last week, an investment company in London said that “Clashes in the run-up to Nigeria’s elections that killed at least 200 people and the government’s bailout of banks have made the nation’s stocks so cheap that Mark Mobius, Standard Bank Plc and Renaissance Capital say it’s time to buy. Nigeria’s shares tumbled 11 per cent from this year’s peak in January, reducing the MSCI Nigeria Index to its lowest valuation compared with the MSCI Frontier Markets Index since December 2009. Bank shares trade 30 per cent below the average for lenders in Europe, the Middle East and Africa relative to assets, according to data from Renaissance Capital.
Mobius, who manages about $34 billion of assets as the executive chairman of Templeton’s Emerging Markets Group, said “Banks are the biggest things we have in Nigeria,” including Zenith Bank Plc and United Bank for Africa Plc. Zenith Bank, Nigeria’s biggest lender by market value, said last month that 2010 profit jumped 81 per cent, and Guaranty Trust Bank Plc, the third largest, reported a 62 per cent increase.
First City Monument Bank Plc, which ranks eighth for market value, posted a 12-fold surge in 2010 earnings and a decrease in non-performing loans to 5.5 per cent from 8.7 per cent of outstanding debt. “There’s fantastic upside at the moment,” Bo MacEwan, the head of trading at African Alliance Securities Ltd., a stock broker with offices in 12 countries on the continent, said. “We are engaging our clients to actually get stuck into the banks” he said, adding that Zenith and Diamond Bank Plc were the “best call.”
From the look of things, genuine foreign investors especially portfolio investors like Capital Alliance are looking the other way at the healthy banks not the rescued ones even when they see future opportunities in the banking sector in Nigeria. The reason is not far fetched, the rescued banks are in legal tussle with the CBN over its action in taking over the management of the banks. Many shareholders have dragged the apex bank before the courts seeking interpretation and the nullification of its decision that the banks were in grave situation when they were taken over. Any judicial reversal of the CBN decision will affect whoever has bought into these banks hence the hesitation of genuine investors in taking positions in these banks.
For instance, FirstRand, South Africa’s number two banking group, is in advanced discussions with Sterling Bank about making a strategic investment.”Injecting more capital into our business, that’s the only way we can expand,” Sterling Bank’s financial controller, Adebimpe Olambiwonnu told CNBC Africa Television.”With FirstRand, yes, discussions are ongoing. We are quite positive. They are still at the due diligence stage and more information will be given subsequently,” she said.
FirstRand Managing Director, Sizwe Nxasana said last year the South African bank was looking to invest “meaningful amounts of capital” in Nigeria and would fund any deal from its reserves. Banking sources said FirstRand preferred to enter the Nigerian market through a strategic alliance with a healthy local bank and would be looking to deploy around $300-$400 million to fund such an investment. The question is why not any of the CBN-pronounced ailing banks?
Banks comprise more than 30 per cent of Nigeria’s All Share Index. The 202-stock gauge rose less than 0.1 per cent, to 24,681.99, at the 3 p.m. close in Lagos, according to an e- mailed statement from the bourse. The MSCI Nigeria Index, which includes the eight biggest companies, is valued at 7.26 times profits, compared with the average of 15.66 times for the MSCI Frontier Markets Index, according to data compiled by Bloomberg.
“With supportive macro-indicators and continued reform of the banking sector, the likelihood that the equity market will deliver is high,” Olaleye Adekeye, an analyst at Renaissance Capital in Lagos, wrote in a March 29 report. “However, we postulate that the ride will not be a smooth one.”
What most investors and Nigerians are looking at is the outcome of the election and now that the elections are almost through and meet international standards, it remains to be seen what the President intends to do with the economy and the financial service sector.
