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The state of health of the Nigerian banks

Banks begin paying remittances in dollars to customers

OLUKAYODE AKERELE

The import of all the above is that assessors of banks’ health should be cautious in using loosely the terms  strong, satisfactory, shaken or stressed to describe the health of Nigerian banks in that each bank has its own area of strength, and weakness too
Globally, the importance of Nigerian banks in an economy cannot be over-emphasised. Apart from playing the intermediation role of moving funds from the surplus to the deficit sectors of the economy, they act as the barometer that measures the financial pressure of an economy. The banking industry is the largest provider of funds to both the private and public sectors of the economy; it also provides developmental support to the key sectors of the economy. Stakeholders are thus sensitive to whatever positively or negatively affects the banking industry.

It is from this background that one views the recent publication by The African Report classifying the Nigerian banks as strong (4 Banks), satisfactory (9 Banks). Shaken
(7 Banks) and Stressed (4 Banks).
The main aims of this write-up are to:
(i) consider some criteria for the assessment of the health of banks globally
(ii) comment on the qualification/integrity of the Rating Agencies.
(iii) comment on the global financial crisis
(iv) make an objective appraisal of the state of health of the Nigerian banks
(v) appraise the de-marketing and the rat-race phenomenon prevalent in the banking industry.

Read Also: Cash-strapped customers groan as long queues return to banks in Edo

The intention of all the above is to inform and caution the unsuspecting public as to the danger inherent in absorbing sensational news hook, line and sinker.
We would conclude by making some recommendations on the way forward.
Criteria for the assessment of banks globally:
Banks supervisory agencies are responsible for monitoring the financial conditions of commercial banks and enforcing related legislation and regulatory policy.
Although much of the information needed to do so can be gathered from regulatory reports, an on-site examination is needed to verify report accuracy and to gather further supervisory information. Much research has explored the value of this private information; both to the bank supervisors and to the public who monitor banks through the financial markets.
In Nigeria, the major supervisors of the banking industry are the Central Bank of Nigeria (CBN) and the Nigeria Deposit Insurance Corporation (NDIC) other regulators are the Securities and Exchange Commission, (SEC), the Nigeria Stock Exchange (NSE), the Federal Ministry of Finance (FMF) through adhoc circulars. By the Acts setting up the EFCC, ICPC and NDLEA, banks are required to furnish these government agencies with specific data periodically concerning their relationship with third parties.
The main regulatory authorities use CAMELS rating in assessing the condition (health) of banks.

These supervisory ratings are assigned at the end of examination and are directly disclosed only to senior bank management and to the appropriate supervisory personnel. CAMELS ratings are commonly viewed as summary measures of the private supervisory information gathered by examiners regarding banks’ overall financial conditions, although they also reflect available public information.
The general consensus in academic literature is that the private supervisory information contained in CAMELS ratings is useful in the supervisory monitoring of banks. Furthermore, to the extent that this information filters out into the financial markets, it appears to affect the prices of bank securities. Thus, private supervisory information in CAMELS ratings also appears to be useful in the public monitoring of banks.

What are CAMELS ratings?
During an on-site bank examination, supervisors gather private information, such as details on problem loans, with which to evaluate a bank’s financial condition and to monitor its compliance with laws and regulatory policies. A key product of such an examination is a supervisory rating of the bank’s overall condition, commonly referred to as a CAMELS rating.
The acronym CAMEL refers to the five components of a bank’s condition that are assessed: Capital adequacy, Asset quality, Management, Earnings, and Liquidity. A sixth component, a bank’s Sensitivity to market risk, was added in 1997; hence the acronym was changed to CAMELS. The bulk of the academic literature is based on pre-1997 data and is thus based on CAMEL ratings. Ratings are assigned for each component in addition to the overall rating of a bank’s financial condition. The ratings are assigned on a scale from 1 to 5. Banks with ratings of 1 or 2 are considered to present few, if any, supervisory concerns, while banks with ratings of 3,4, or 5 present moderate to extreme degrees of supervisory concern.
All examination materials are highly confidential, including the CAMELS. A bank’s CAMELS rating is directly known only by the bank’s senior management and the appropriate supervisory staff. CAMELS ratings are never released by supervisory agencies, even on a lagged basis.
While examination results are confidential, the public may infer such supervisory information on bank conditions based on subsequent bank actions or specific disclosures. Overall, the private supervisory information gathered during a bank examination is not disclosed to the public by supervisors, although studies show that it does filter into the financial markets.

CAMELS ratings in the supervisory monitoring of banks
Several academic studies have examined whether and to what extent private supervisory information is useful in the supervisory monitoring of banks. With respect to predicting bank failure, Barker and Holdsworth (1993) find evidence that CAMEL ratings are useful, even after controlling for a wide range of publicly available information about the condition and performance of banks. Cole and Gunther (1998) examine a similar question and find that although CAMEL ratings contain useful information, it decays quickly. For the period between 1988 and 1992 in the U.S they find that a statistical model using publicly available financial data is a better indicator of bank failure than CAMEL ratings that are more than two quarters old.
Hirtle and Lopez (1999) examine the usefulness of past CAMEL ratings in assessing banks’ current conditions. They find that, conditional on current public information, the private supervisory information contained in past CAMEL ratings provides further insight into bank current conditions, as summarized by current CAMEL ratings. The authors find that, over the period from 1989 to 1995 in the U.S the private supervisory information gathered during the last on-site examination remains useful with respect to the current condition of a bank for up to 6 to 12 quarters (or 1.5 to 3 years). The overall conclusion drawn from academic studies is that private supervisory information, as summarized by CAMELS ratings, is clearly useful in the supervisory monitoring of bank conditions. Flowing from the above is that it is only the major supervisory agencies that can categorically assess and judge the overall financial condition of any bank. In Nigeria, these supervisory agencies are the Central Bank of Nigeria (mainly) and the Nigeria Deposit Insurance Corporation.

The Role of Credit Rating Agencies
Generally, Rating is a system of assigning letters to security issues indicating the perceived default risk associated with that class of issues.
A credit rating agency (CRA) is a company that assigns credit ratings for issuers of certain types of debt obligations as well as the debt instruments themselves. In some cases, the servicers of the underlying debt are also given ratings. In most cases, the issuers of securities are companies, special purpose entities, state and local governments, non-profit organizations, or national governments issuing debt-like securities (i.e., bonds) that can be traded on a secondary market. A credit rating for an issuer takes into consideration the issuer’s credit worthiness (i.e., its ability to pay back a loan), and affects the interest rate applied to the particular security being issued. In contrast to CRAs, a company that issues credit scores for individual credit-worthiness is generally called a credit bureau or consumer credit reporting agency.
The value of such ratings has been widely questioned in the U.S after the 2008 financial crisis when the Securities and Exchange Commission submitted a report to Congress detailing plans to launch an investigation into the anti-competitive practices of credit rating agencies and issues including conflicts of interest.
Credit ratings are used by investors, issuers, investment banks, broker-dealers, and governments. For investors, credit rating agencies increase the range of investment alternatives and provide independent, easy-to-use measurements of relative credit risk; this generally increases the efficiency of the market, lowering costs for both borrowers and lenders. This in turn increases the total supply of risk capital in the economy, leading to stronger growth. It also opens the capital markets to categories of borrower who might otherwise be shut out altogether; e.g small governments, startup companies, hospitals, and universities.
CRA ratings are also used for other regulatory purposes as well. The US SEC, for example, permits certain bond issuers to use a shortened prospectus form when issuing bonds if the issuer is older, has issued bonds before, and has a credit rating above a certain level. SEC regulations also require that money market funds (mutual funds that mimic the safety and liquidity of a bank savings deposit, but without FDIC insurance) comprise only securities with a very high rating. Likewise, insurance regulators use credit ratings to ascertain the strength of the reserves held by insurance companies.
Under both Basel II and SEC regulations, not just any CRA’s ratings can be used for regulatory purposes. If this were the case, it would present an obvious moral hazard, since an issuer, insurance company, or investment bank would have a strong incentive to seek out a CRA with the most lax standards, with potentially dire consequences for overall financial stability. Rather, there is a vetting process of varying sorts. The Basel II guidelines (paragraph 91), for example, describe certain criteria that bank regulators should look to when permitting the ratings from a particular CRA to be used. These include objectivity, independence, transparency, and others. Banking regulators from a number of jurisdictions have since issued their own discussion papers on this subject, to further define how these terms will be used in practice. The web’s biggest credit risk modeling resource list sixty seven (67) globally accepted credit rating agencies as at March 2008. These rating agencies include Agusto & Co Ltd (Nigeria); Fitch Ratings Ltd (Uk /USA), Standard and Poors (US), Global Crediting Rating Co (S/Africa), Bank Watch Ratings S.A. (Equador a Fitch Affiliate), Agence d’ Evaluation Financiere (ADEF) France-(already absorbed by Standard and Poors). From the long list of 67 rating agencies, the paris-based Groupe Jeune Afrique, the publisher to The African Report that recently carried the sensational classification of the Nigerian banks could not be located.
Fitch Ratings we know as a leading global rating agency committed to providing the world’s credit market with independent, timely and prospective credit opinions. Built on a foundation of organic growth and strategic acquisitions, Fitch Ratings has grown rapidly during the past decade gaining market presence throughout the world and across all fixed income markets.
The non-inclusion of the paris-based Groupe Jeune Afrique in the list of internationally- renown rating agencies lends credence to its unpopularity, hence, any pronouncement from such a rookie publisher should be discountenanced!

State of Health of the Nigerian Banks
The current global economic crisis is unprecedented in terms of scope and severity. The crisis started from the United States of America principally due to mis-match and over-exposure of banks to the mortgage industry and the capital market. The crisis spread to
other parts of the world because of the internationalization of the dollar to which many counties assets are tied. In the word of the immediate past governor of Central Bank of Nigeria, which can be taken as one of his valedictory speeches on 30th march, 2009 at the Eko Hotel and Suites, Victoria Island: global capital flows have frozen; credit crunch persists despite massive global liquidity injections; global aggregate demand fallen sharply (about $50 trillion value lost through capital markets housing, etc); Commodity price collapsed with global coordination failure. Major industrial countries and rich developing countries designing trillions of dollars stimulus packages
The above have been reproduced to drive home the point that the meltdown effect is not limited to Nigeria
The Central Bank of Nigeria has risen to the challenges by putting in place a lot of measures to manage the situation. Recently the CBN made some policy moves in the following areas:
Reduction of monetary Policy Rate (MPR) from 9.75% to 8.00% and now to 6%, reduction of Liquidity Rate from 30% to 25% and cash Reserve Requirement from 2.00% to 1.00%. The latter two will boost the effect of the reduced MPR which in itself ought to lead to reduced lending rate. But this is not to be so as banks have to be forced to peg their lending rates. We expect inflation to reduce despite the increase in liquidity because the 2009 budget deficit has the potential to make interest rates upward sticky. Reduced lending rate will make bank credit accessible to more propective borrowers one of the pressure points for banks in Nigeria is the potential toxic assets due mainly to capital market lending ( share-backed loan and margin account)
This ran into over N800 billion at the beginning of 2009. The apex banks has approved the renegotiation of these balances by banks (lenders) with their customers (borrowers) instead of being fixated with the application of CBN Prudential Guidelines on loans and advances.
Fitch Rating Agency (US) and Agusto & Co (Nigeria) conducted a survey on the Nigeria Banking industry as at the end of year 2008. The two Agencies released their reports in June 2009.
Extracts from the two reports are as contained in Appendices 3, 4, and 5. The two reports show consistency in the assessment of the selected banks. Whereas Fitch Ratings assessed eleven banks, Agusto & Co assessed twenty two out of the twenty four Nigerian banks that made their financial statements available to the company. Each report took a summarized outlook on the events of the year 2008 before taking a position. The variables considered in assessing the condition of the affected banks are: Tier 1 Capital, Deposits, Total Assets, Loans and Advances, Earnings, Expenses and pre-tax Profits. Apart from Management, each of these variables can be affixed to the contents of the CAMEL ratings
A careful look at Appendices 3,4 and 5 reveal the following:
(i) No single bank is strong in all the facets of the variables used for the assessment.
i.e, the strength of any bank should be related to a particular variable
(ii) Some of the banks adjudged strong by The African Report (see Appendix 1) could not make the top ten as per Tier 1 Capital assessment as per Appendix 4
(iii) Some of the banks adjudged shaken by The African Report are among the top ten as per Tier 1 Capital criterion in Appendix 4.
The import of all the above is that assessors of banks’ health should be cautious in using loosely the terms  strong, satisfactory, shaken or stressed to describe the health of banks in that each bank has its own area of strength, and weakness too.
Quantifying Management Quality
The quality of a bank’s management is critical to its long-term survival. But does it require an on-site inspection? Barr, Seiford, and Siems (1993) (BSS) develop a methodology for quantifying a bank’s managerial quality using only publicly available financial information. Their approach (indicated in figure 1 below captures the efficiency of bank management with a transformational efficiency model described by six inputs and three outputs. The model uses data envelopment analysis (DEA) to gauge a bank’s performance relative to others.
As shown in Figure 1, BSS model a bank as a transformer of six inputs into three outputs. A bank’s (DEA) efficiency score which results from the BSS model should be a good proxy for managerial quality. Overall, bank managers must integrate policies and techniques for transforming inputs (resources) into outputs, i.e., for managing the money position, providing liquidity, lending profitably, and investing rationally into a practical asset/liability management framework. The most efficient banks do this by controlling operating expenses, managing interest rate sensitivity, utilizing risk management techniques, and strategically planning for the bank and its future markets{Siems (1992)}
The empirical results of the BSS study confirm that the quality of management is crucial to a bank’s survival. Scores for surviving institutions are statistically higher than the scores for failed banks.

Furthermore, banks that are nearer failure are found to have lower efficiency scores. These results are significant in that banks that survive can be statistically differentiated from banks that fail based on the management quality scores generated by the DEA model.
All told, Fitch Rating and Agusto & Co return a verdict of good health on majority of the Nigerian banks during the year ended 31 December, 2008.
De-Marketing/ Rat Race Phenomenon in the Nigeria Banking Industry
De-marketing is the unethical and unprofessional practice of spreading false rumours or negative information about rivals in order to acquire their customers and deposit. Rat-race is a fierce and unending competition for success or wealth. The two are intertwined, but it appears that the former is a strategy for the latter.
De-marketing is not a recent phenomenon in the Nigeria banking industry, the tempo has just increased. Both strong and weak banks practice it. The government and regulators encourage it
One of the four banks prided as strong by the African Report has been accused of tactical- de-marketing. Several people who desire to open new checking accounts run into a stumbling block at this bank’s non-release or confirmation of duly completed referee letters. They alleged that the bank is one of those that deliberately withhold the referees, letters, in most cases refusing to confirm it on flimsy reasons, all in a bid to check the customer base of competitors in a manner that observers dub tactical de-marketing (please check the website of M2 online- a Marketing and Business Intelligence Resource)
De-marketing also includes out right black mail capable of bringing about a loss of confidence in the bank(s) targeted. For the period that this de-marketing has been on, the source of the negative information is not discernible. Only conjectures have been made, yet, no one can clearly point out who the arrowheads are.
The Central Bank of Nigeria was accused of not providing a level playing field during the period of bank consolidation. Rev. Agbetuyi (the than chairman of Owena Bank) accused the CBN authority of making vital information/data relating to the consolidation exercise available to some bank chief executives prior to their official disclosure thus placing such banks at an advantage over their peers. The accusation was never rebutted.
The Federal government action, and in some cases, inaction, promotes tactical de-marketing The N200 billion Agricultural intervention fund was initially concentrated in one bank for disbursement before another bank was allowed to join. One of the first generation banks that has consistently won the CBN prize on agricultural financing is conspicuously omitted. One would have expected the government to allow the top five or the top ten banks to handle the jumbo package. One of the negative effects of all these tactical de-marketing is to stampede the system into a crisis where none exists and where none is likely.

Conclusion and Recommendations
The global financial crisis has been hitting hard on world economies, with the banking sector at the receiving end. In Nigeria, the negative impact on the banking sector has been colossal with about N5 trillion in bank equities reportedly lost so far in the stock market.
The CBN has risen to the challenge by putting in place measures (short-to-long term) to combat the menace and protect the banks from crisis. These measures range from Liquidity management to forex management and tightening of regulation and supervision framework. The measures also include interest rate management and confidence building.
Bank management is risk management. The dynamics of risk management are so much that there is the need for the regulator and operators to continuously review its application in the banking industry. The success of these measures calls for concerted efforts. Policy sumersault, uneven playing field and de-marketing (tactical or strategic) will be antithetical to the timely realization of banks weathering through the financial crisis.