Banking Sector Reforms...Aftermath of September 30 Deadline

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1 Banking Sector Reforms...Aftermath of September 30 Deadline

2 CORDROS BANKING 5 OCTOBER 2011 Banking Sector Reforms: Aftermath of September 30 Deadline Banking reforms a recap Last week, the September 30, 2011 deadline set by Central Bank of Nigeria (CBN) brought to a close, the reform programme initiated about 24 months ago to end the banking crisis. In 2009, the Central Bank of Nigeria (CBN) bailed out 9 banks following the outcome of two rounds of stress test which showed that the banks were so badly capitalized and that they posed a risk to the economy. These banks, according to CBN, were poorly managed and were overexposed to the capital and oil markets. It should be noted that the managing directors and the executive directors of the rescued banks were sacked in the exercise. The CBN injected N620 billion into the rescued banks, saving them from collapse, and sought new investors to recapitalize them. In 2010, the CBN set up the Asset Management Company (AMCON) to absorb non-performing loans from the rescued banks in order to make them attractive for new investors. AMCON on its own had invested about N3 trillion in buying over the non- performing loans of these rescued banks. Thereafter, the CBN set September 30, 2011 deadline for all the rescued banks to recapitalise or face nationalization. In August 2011 the CBN revoked the licenses of three banks for failing to show ability to recapitalise ahead of the deadline, effectively nationalizing Bank PHB, Afribank and Spring Bank. The assets of these banks were transferred to three newly created, nationalised banks: Keystone Bank, Enterprise Bank and Mainstreet Bank. AMCON which took over the banks also injected N680 billion to recapitalise the banks. Unity Bank Plc, one of the bailed out banks has already recapitalised while Wema Bank Plc, the last of the rescued banks, has since scaled down operations to become a regional bank with emphasis in the south west region.

3 The M&A Deals Five banks including Union Bank Plc, Oceanic Bank Plc, Finbank Plc, Intercontinental Bank Plc and Equatorial Trust Bank entered into different M&A deals ahead of the September deadline set by the CBN. The entire process is expected to take 12 to 18 months to complete. Below are the summary of the various transition implementation agreement entered into: Union Bank Plc Union Bank shareholders approved a $750 million injection by a group of private equity investors led by African Capital Alliance who would own 60% of its equity. The full capitalisation of the bank will be achieved through the Asset Management Corporation of Nigeria s (AMCON) investment to bring net asset value to zero, Union Global Partners Limited s investment and a Rights Issue, to be made to the bank s existing shareholders. Intercontinental Bank Plc Intercontinental Bank Plc will merge with Access Bank. Meanwhile, holders of Intercontinental Bank shares will retain one out of every seven shares of 50 kobo, credited as fully paid up for, in the recapitalised Intercontinental Bank. Shareholders of Access Bank authorised the bank to enter into a transaction for the acquisition by the bank through a special purpose vehicle, 75 per cent controlling equity interest in the authorized share capital of Intercontinental Bank Plc, under a private placement. The shareholders among others, also supported the bank s plan to utilise the sum of N billion standing to the credit of the bank s 2007 public offer proceeds account or any part thereof, in entering into the investment. The shareholders would get 10 per cent of the total shares following the merger. The bank at the EGM completed the allotment of three billion ordinary shares to AMCON and 15 billion shares for Project Star Investment Limited, which is the bank s special purpose vehicle. Oceanic Bank Plc Oceanic Bank will be recapitalised by Ecobank Transnational Inc (ETI) and merged with its Nigerian subsidiary Ecobank Plc. Oceanic Bank will transfer 100 percent of its share capital to pan-african lender Ecobank Transnational Incorporated (ETI). ETI will pay N38.5 billion worth of its ordinary shares and N16.5 billion in preference shares for total control of Oceanic Bank. The shares will be paid to existing shareholders and AMCON. Details of the proportion are yet to be stated.

4 Under the deal, holders of Oceanic Bank shares will get one ordinary share and preference share of ETI for every 20 Oceanic shares held on Oct. 4, Oceanic Bank will subsequently be delisted from the Nigerian Stock Exchange. Equitorial Trust Bank Equitorial Trust Bank Ltd will merge with Sterling Bank Plc. Sterling Bank will issue 3 billion new shares to acquire Equitorial Trust Bank. The new shares would represent 20% of the enlarged bank after the merger is concluded. Furthermore, existing shareholders of ETB and AMCON will split the stake equally. Details as regards the value of the new shares were yet to be given. Finbank will merge with FCMB Shareholders of FCMB plc and Fin Bank approved the merger of the two banks, targeting growth in retail and mobile banking. The boards of both banks approved that existing shareholders should receive one FCMB share for every 60 existing shares of Finbank Plc, or receive 10 kobo as cash consideration for each existing share of Finbank Plc. Implication of the M & A to the banking sector The conclusion of the M & A will result in the following for the entire banking sector: Reduction of systemic risk in the banking industry Protection for depositors fund up to N3 trillion Enlarge customer base and branch networks Strong assets quality in terms of non-performing loans ratio to total loans. Expanded market share for merged banks Business units profitability and technical efficiency Improved Balance Sheet position for banks Higher lending capacity for banks to key economic sectors Unlock the flow of credit into the economy Emergence of 7 tier 1 capital bank holding about 80% of total bank assets, 70.5% of the banking sector deposits and 72% of the total loans. Stronger and effective re- regulation amid continuous policy thrust by regulators What to make of it by the capital market Although the current stalling global economic growth and declining performance of the capital market is a reflection of declining risk appetite, the consolidation in the banking sector provides the capital market with the following upside potentials:

5 Attractive companies with strong fundamentals Indicates a robust positive outlook for the stock market in the medium to long term Attractive benchmark for longer and bigger institutional investors such as the PFAs, Fund Managers (Foreign and Local) and other institutional investors to come back to the market The success of the merger will further support the participation of development finance investors like the IFC and other supra-nationals to invest in banking sector shares. Downside risk General economic and political risk. Political risks and vulnerability to the oil price remain key risks for all the Nigerian banks. Poor financial disclosure Concentrated client bases Margin pressure Our take on this We acknowledge growth potentials of the banking sector, supported by increasing economic prospects for the Nigerian economy. Earnings momentum, as indicated by the most recent quarterly results announcements of the banks, remains positive. We equally expect robust growth in non- interest income, driven by income diversification strategies of the banks. However, we opine that shares consideration will dilute earnings growth at the EPS level and ROEs will likely be restrained until capital raised is effectively deployed.

6 Disclosures This report has been issued and approved by Cordros Capital (Cordros) and is based on information from various sources that we believe are reliable. However, no representation is made that it is accurate or complete. While reasonable care has been taken in preparing this document, no responsibility or liability is accepted for errors or fact or for any opinion expressed herein. This document is for information purposes only. It does not constitute any offer or solicitation to any person to enter into any trading transaction. Investments discussed in this report may not be suitable for all investors. This report is provided solely for the information of Cordros clients who are then expected to make their own investment decisions. Cordros conducts designated investment business with market counter parties and customers and this document is directed only to such persons. Cordros accepts no liability whatsoever for any direct or consequential loss arising from any use of this report or its contents. This report is for private circulation only and may not be reproduced, distributed or published by any recipient for any purpose without prior express consent of Cordros. Users of this report should bear in mind that investments can fluctuate in price and value. Past performance is not necessarily a guide to future performance. Cordros and/or a connected company may or may not have a relationship with any of the entities mentioned in this document for which it has received or may receive in the future fees or other compensation. Cordros is regulated by the Securities and Exchange Commission to conduct investment business in Nigeria. Cordros Capital Limited.

7 Contacts Research Tayo Orekoya Paul Maliki Customer Service Tel , Stock Trade Mandates Tel , Cordros Capital Limited 70,Norman William Street S.W. Ikoyi Lagos Tel ,