In the past week, the Central Bank of Nigeria (CBN) announced its approval of the merger of two Banks, Unity Bank Plc and Providus Bank Limited, throwing in a 20-year, N700 billion loan to make the transaction work.
On the surface, the question will be, why is the CBN doing this? What may seem like a favour done to the shareholders of these two Banks, is actually no favour at all.
The transaction is an innovative solution that solved many problems, creating a more viable Banking entity, to help stabilise the Banking system, protect depositors, and also save jobs. Those who structured this transaction should be praised. I personally will nominate it, for the Investment Banking transaction of the year, for the very thoughtful structuring of the transaction.
Unity Bank plc, has been a basket case, and a risk to the Nigerian Banking system, since it was created, after Soludo’s “CBN” induced Banking consolidation. Unity Bank came out of a collection of 9 Banks, most of them already failing. The Balance sheets of some of those Banks, had negative balances with loan books, that were never going to be recovered. Unity Bank started life as a shaky entity, and has not stabilised ever since. So, from the start, it was not a solid Bank and was a risk to the Banking system, but the CBN found it difficult to liquidate, because of the possible systemic convulsion it may trigger. Apart from the political undertones that created Unity Bank, in the first place.
It was the entity that collected all the failing Northern Banks at the time, only 4 of the Banks which included, Intercity Bank, and NNB International Bank, were the only viable Banks amongst them, at consolidation. Unity Bank brought together all the branches and customers of these 9 (nine) Banks, resulting in a large Branch network, with a very broad Customer base, spread across many regions. It was also unique for the cash deposits that kept coming into the Bank, despite its shaky Balance Sheet.
The old branches of “Bank of the North,” Kano Co – operative Bank, Kaduna Co- operative Bank, “Tropical Commercial Bank,” and their customers, for example, just keep pouring their deposits into the new Unity Bank. Liquidating this Bank will affect so many, in terms of branch closures, customers, and number of employees that would be affected. Liquidating it, was therefore complicated, and may create more problems than it will solve. This is probably why the CBN has kept it in the system, and remained a risk to the Banking system. The new lifeline, and merging it with a more viable Bank, to create a new entity altogether, has solved that problem and has also stabilised the Banking system as a whole.
Providus Bank, on the other hand, is one of the newer banks, with a good balance sheet, solid management, and good technology.
In the emerging banking environment, after the announcement of new capital requirements by the new Cardoso (led) “CBN,” there are questions about whether Providus Bank can properly compete or be able to raise the required capital to become a national bank. The new arrangement scales the emerging entity into a top-10 bank with 231 branches across Nigeria and N2.8 trillion in assets. The new entity will be a more stable bank to serve its many customers while contributing to the stability of the Nigerian banking system.
The wonderful thing about this transaction, is that, though the CBN has provided this N700 billion loan. No new money is leaving the CBN. Most of the money will be spent to clean out the Bad debts already in the books of the CBN (N51.7 billion, Anchor Borrower scheme loan from the CBN , N135 billion (NIRSAL ) Nigeria Incentive Based Agriculture Risk Sharing System, also a CBN loan, both loans already bad in the books of the CBN and part of the money will also go to pay off the N92 billion Unity Bank exposure, to First Bank plc, that was more or less unrecoverable. This will provide First Bank, new money to lend and earn, while reducing their Non performing Loans . Part of the loan will also go to provide a safety net for Unity Bank depositors, while the balance of N392 billion from the N700 billion loan, will be invested in a FGN 20 year Bond, with the CBN. This will be an Asset in the books of the New Merged Bank, as 2nd Tier Capital. The FGN Bond investment will be for 20 years, the same tenor as the CBN loan. It will also serve as collateral for the loan.
This is innovative thinking; it solves the problems and costs the CBN nothing, and as a loan, it will be fully repaid as long as the bank exists. The solution provided by this creative transaction beats the N1.3 trillion used in saving Polaris Bank, for example.
In my view, this is a clever way to restructure Unity Bank’s obligation into a “ 20- year repayable “Bond” with all the attendant positive benefits.
Victor Ogiemwonyi, is a retired Investment Banker, and writes from Ikoyi, Lagos.
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