If a Bank is Sick, the Signs are Self-Evident, Says Sanusi

Few hours after the CBN governor, Sanusi Lamido Sanusi announced the sack of the managing directors/chief executives as well as the executive directors of five banks; he exclusively spoke to the board of editors at the Ikoyi residence of THISDAY chairman on why the apex bank took the action. According to the CBN governor, the step was aimed at saving the banks from collapse, because their balance sheets had shrunk with subsequent cash flow problems. He said the banks needed fresh funds because of their huge exposure to the capital market and huge non-performing loans that contributed to the liquidity problems in the affected banks. Excerpts:

Why did you sack these bank executives? Long before I became CBN governor, I had expressed reservations about the pace at which regulators were moving in terms of regulations for addressing this issue. My belief was that there are a number of banks that have huge exposure to the capital market and have therefore exposed themselves to serious risk, and until they come out and provide for these losses, we would not know the real state of health of their balance sheets. My view at that time was that when the rest of the world was recognising their losses from mortgages and other products, Nigerian banks should have taken advantage of that time and done the same and it would never have been an issue. I have always said that by not doing this, when the rest of the world is recovering, we will be having our own problem.
When I became the governor of the CBN, I was alarmed at the quantum of exposure which some of the banks had and that one of my challenges was to understand that it was not a short term problem. An exposure to a capital market that has lost over 70 percent of its value was a long term problem unless people believe that the capital market will pick up in the next few months and I do not think that stocks are going to go back to that very high level within a short time. As a result, the CBN asked for a special examination of these five banks.
Just to put this into context. If we take the average exposure at the discount window every month, between October last year and July this year, these five banks accounted for 90 percent. The remaining banks accounted for 10 percent. This for me is an immediate sign of distress. We tested it further and closed the window and said no more money. And we guaranteed the inter-bank market. If we don’t guarantee the inter-bank market, banks will not lend to them.
We immediately saw the affected banks taking money from the inter-bank market to recoup exposure to the discount market. This was clear evidence that they do not have cash at all. Their balance sheet had shrunk. The cash had gone. There were clear signs of the banks going under. So, we sent in special examiners. The idea was to go and find out the true facts about the problem.
What we found was not so much of a surprise, but I think the extent was alarming because I did not believe that there were banks that have up to 48 percent of non-performing loans or 50 percent non-performing loans. What the banks needed to do was to provide for these loans and to raise capital. The solution was not to borrow money. The solution was not to give them inter-bank funds. In every capitalist environment, if management loses a lot of money, it will go. It is not a crime. The MDs of all the banks behind the mortgage crisis in other parts of the world took the right action and resigned. They did not steal money. They did not commit a crime. But they ran an institution in a manner that cost it its franchise, or cost its shareholders money or placed their depositors at risk. They put their firms at risk and they took responsibility for it. So, it is in this light that the action that we have taken should be seen.
This was the basis for the decision to sack them. There is no way the CBN will inject money and allow these same teams to manage the funds. We had to provide the funds. It will be difficult to get such funds from the capital market today. Even if it is possible, it will take months. We don’t have that kind of time. Everyday, we are seeing signs that these banks are in trouble with liquidity problems. The experience this country has had is that we have never been able to deal with failed banks. Banks have filed, depositors lose money and the people who own the banks walk away rich.
The truth is that the owners of the banks don’t own the banks. They own it legally, but for every N1 they have in the banks, the depositors have N8 to N10. In other countries, N30 to N35. If a bank collapses, the owners actually own about 10 percent or less of the assets of that institution. It is you and I and the poor man that go and put money in that bank that will lose. People put money there not because they know anything about the balance sheet or liquidity ratio. It is because they have an understanding that if a Nigerian government has allowed the bank, they must have done everything they need to do to make sure that the system works so that a man can carry his life savings and put in this institution and go to sleep. When we say that we do not want a bank to fail, it is not because we want to protect the shareholders or managements. It is because we want to protect the depositors. So, the steps we have taken are aimed at protecting depositors. The banks could fail if money does not go into them. I have no doubt about this. It is in the national interest to inject money into them and this is what I have done. I had to ask the management to leave so that a new management can come and restore the banks into good health. And because we do not intend to own the banks, I see this as a temporary capital until they can raise new funds or find a merger partner and work with advisers to advise them and give them options.
They needed new funds and you don’t have the time to allow them go to the capital market. Why the rush? Why don’t you allow them to go to the capital market and shore up their capital?
The issue is not about going to the capital market. If today, the owners of the banks come up with the capital and bring it in and say to us, look we can bring in the N100 billion or N120 billion that you want, we will take it and give them back the bank.  All we want is to save the institutions. It is a simple technical matter of bringing in money.
You are shoring up the banks with N400 billion. Are you issuing a bond?
No, we are not issuing a bond. The CBN has a lot of money. We have the power under our Act to do this. What we will put there is a convertible loan. We want to make sure that whatever we provide is not a loan that will be taken back immediately. We want the management to know that they have this money until they get fresh capital. We also want to make sure that we don’t lock ourselves permanently because the last thing we would want is to get Nigeria back to the era of nationalising banks. There have been a number of hybrid options used in different parts of the world and within the next couple of days, all the legal arrangement of the option to be adopted will be worked out. At the moment, we have given them this money at a convertible Tier 2 loan, but that is not necessarily the final form it would be.
Are you sure what you have given them will be enough to meet their liquidity problem?
It will be enough. We arrived at this figure by making sure that we arrive at the minimum regulatory capital. Second, we looked at their exposure at the discount window and inter-bank market to get an idea of what they need. But having said that, remember they we have put in a new management and by the time the analysis is done and the new management says ‘listen, we need so much capital’ we shall provide it.
Is this money you are providing different from what you are providing in your secure inter-bank market?
In a sense, it will be replacing that or it will be funding that.   
Add all together – the exposure in the discount window and the inter-bank exposure – is it new money or different?
There is some new money, but you must remember that exposure to the discount market and the inter-bank markets vary from banks to banks. Today for example, at the discount window, I think we have about N157 billion. I don’t know exactly what the discount bill is right now. I know that when I looked at it last week, one of the banks had N38 billion left. Another bank had N40 billion at the inter-bank and N40 billion at the discount window. Another bank had N44 billion at the discount window and nothing at the inter-bank. One of the banks had over N100 billion at the inter-bank market.
Mr. Governor, I think it is in the national interest to look at each bank one by one. Let us start with Union Bank which is a first generation bank.
I will not discuss the details of respective banks. The reasons are many. First of all, as a regulator, I have certain information like a doctor and a patient. I can’t be discussing about them on the pages of newspapers. The boards of directors of the banks will be getting our report. The management of the banks had an exit discussion in which they were shown what went wrong. Now, if they want to go and disclose it, it is their right. In a court of law, if it is required, we will present it. You don’t go and disclose it in a newspaper interview. I have made general references to the conditions of the banks. But I will not go beyond this.
But in the US experience, when they had a stress test of the banks, the stress test of each bank was disclosed
Yes, they disclosed the stress test result, but there are people who will tell you that you should not disclose their stress
But they disclosed sufficiently for the public
I have disclosed enough, because I have said publicly that these five banks accounted for 90 percent of the discount window. I have said that these five banks have under-provision of more than N540 billion. I have said these five banks have an average of non-performing loan of over 40 percent. I have disclosed enough.
Your investigation was done on ten banks in the first instance. So, are we expecting more? When will the remaining banks face the audit?
The examiner can do a routine examination or a special examination. We ordered a special investigation of these banks because of what we saw and then because of a general perception in the market. The results are coming out and the banks are taking actions. I can tell you that in the next couple of weeks, we would have done 24 banks.
So, you have a fair view of what the remaining banks look like?
I have a fair view. I have always had a fair view of what all the 24 banks look like.
What will happen if you go in there and you find out that the other banks unaffected now show worse signs than the ones you have done?
If I find that and I don’t think so. You see, in this business, I’m a professional. If a bank is sick, there are signs. If a bank is sick, the signs are self-evident. You will see high interest rates. You will know it from their cash flow. You will know it from movement in balance sheet action. You will know it from the kind of customers from their customer profile. It is on that basis that I can say that the banks we have taken out address substantially the problems in the Nigerian banking industry.
Are you saying that if the CBN had acted sooner, we would have avoided this?
I think if we had acted sooner, the volume would not have been like this. I believe we may not have had five banks. We initially had two, because we all know we started with two. Then, it became four. We are all in this country. If we had acted sooner, we would not have had five banks. If we don’t act now, it will get worse. Let me tell you this, every bank needs to survive and banks struggle for market share. If a bank’s deposit base is eroded, it could introduce a high rate of interest. The bank will win market share from smaller banks. Some of the small banks that are fine. They are not top banks, but they are fine and they will simply find out that their deposit base is being eroded because the distressed bank is able to offer a high rate of interest. So what will happen is that a number of small banks without problems will start having problems. You will end up with three or four banks that will remain solid. More and more of the smaller banks will have problems. Do you know that as I speak to you today, as at the last count in the US, 70 banks have collapsed. Most of them small banks. Now that there is an aggressive fight for share of the market in a time of uncertainty, small banks, no matter how well they are managed may go down.
With the meltdown, US tax payers money were given to shore-up banks. Not all bank CEOs had to resign.
Well, I have not asked all bank CEOs to resign as well. But you will also remember, if you start counting the numbers of CEOs that resigned when they gave the stimulus, you will run out of count.
How will the CBN manage the public perception of this action? People are afraid that banks are failing.
Part of why I’m having this meeting is to get that opportunity to lay to rest peoples’ fear. A banking system can collapse if we do not swiftly address problems. When an institution has the kind of exposure that we have seen, it is very important that you act to save that institution. For us at the CBN, what we have done is to strengthen the system. By the time we provide the capital and provide new management, we have strengthened it. It is about what kind of message we send out. In any event, we are going to ensure that the banks are well funded. We will ensure that nobody will keep money and cannot take out his money. We believe that there will be no problem. The final thing that I will say is that very often the fear of unintended consequences had stopped people from taking action. The question is if we did not take action, what is going to happen? For me, that was the question I had to agonise over. From October to May, this is nine months, I have not acted. How long are we going to wait? You saw an advert in the dailies yesterday by a bank asking the federal government to come and help it recover debt. It will be highly irresponsible for a regulator to sit down and allow an institution get to that level.
In fact, we heard that even if you were contemplating taking action that was one event that tilted your balance.
I’m not going to talk about what made me move or what did not make me move. I can only say that I have a responsibility and it was a really difficult responsibility. What the law says is that it is about me making a judgement and once I make that judgement, I have to take every step necessary to deal with it.
Before now, there was a general impression that the banking system was OK. Then, suddenly, this happened?
To be honest, I don’t think there was a general impression that the banking industry was OK. There has been liquidity problem which I have always said. Before I became governor and after, I have always said that there are pockets of problems. I have always known that.
The fear is that the President can reverse this action and there are already rumours that this action is aimed at implementing a northern agenda?
I was appointed by the President and the President has never interfered in my work. I’m the governor of the CBN. I’m acting under power given to me by the CBN Act. In exercising this power and in doing what I have done, I have briefed the President. Of course, I was appointed by the President. He knows exactly what I saw. He knows exactly why I took the action. He has told me that he has every confidence in me. I have no reason to believe that he would reverse it. I have also told the affected banks that if I have acted outside CBN Act, the best place to report to is the court of law and not the President. I want to assure you that the President is behind me in this.
On the northern agenda, on a matter of policy, I never allow other people to defend me when an allegation is made against me. Everybody who knows me knows that I’m not a detribalised but an untribalised Nigerian. At the age of 8, I went to a Catholic boarding school. At the age of 10, I went to Kings College, Lagos. I have spent all my life in Lagos. I have never been associated with any regional agenda.

mbulela:

Before now, there was a general impression that the banking system was OK. Then, suddenly, this happened?
To be honest, I don’t think there was a general impression that the banking industry was OK. There has been liquidity problem which I have always said. Before I became governor and after, I have always said that there are pockets of problems. I have always known that.

The fear is that the President can reverse this action and there are already rumours that this action is aimed at implementing a northern agenda?
I was appointed by the President and the President has never interfered in my work. I’m the governor of the CBN. I’m acting under power given to me by the CBN Act. In exercising this power and in doing what I have done, I have briefed the President. Of course, I was appointed by the President. He knows exactly what I saw. He knows exactly why I took the action. He has told me that he has every confidence in me. I have no reason to believe that he would reverse it. I have also told the affected banks that if I have acted outside CBN Act, the best place to report to is the court of law and not the President. I want to assure you that the President is behind me in this.


On the northern agenda, on a matter of policy, I never allow other people to defend me when an allegation is made against me. Everybody who knows me knows that I’m not a detribalised but an untribalised Nigerian. At the age of 8, I went to a Catholic boarding school. At the age of 10, I went to Kings College, Lagos. I have spent all my life in Lagos. I have never been associated with any regional agenda.

Interesting piece of information there. I agree this guy is untribalised Nigerian.