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For most banks, the
recently released financial results for the first quarter of this year
have shown that the banking sector is yet to recover from last year’s
crisis making majority of them to post losses in their annual reports.

Consequently,
investors’ confidence in the sector on the Nigerian Stock Exchange
(NSE) has remained on the ebb. The management of the exchange last week
acknowledged that the weak momentum being recorded in the market could
be attributed to “the not too impressive audited results released by
some quoted companies,” especially the banking sector which dominates
about three quarters of the entire market.

Virtually all the
banks declared ‘stress-free’ by the Central Bank of Nigeria last year;
Access Bank, Diamond Bank, Ecobank, United Bank for Africa, and Skye
recorded a huge drop in profit after tax.

However, some
finance experts said the results of these banks are ‘encouraging’ since
the economy itself is yet to recover from the global downturn. They
further noted that the usual trend of doctored financial reporting
common in the banking sector is not likely to resurface again.

Competitive account

Egbo Amaechi, a
finance analyst and an executive member of the Shareholders Association
of Nigeria, said, “The performance of these banks during the first
quarter should be commended going forward, even though investors are
not too happy. Since the results posted to the general public were
approved by the relevant authorities, we have to assume that they are
real.” Commenting on “competitive financial reporting,” Mr. Amaechi
said, “I don’t see banks in that kind of competition again. Don’t
forget that this regulatory regime is quite different from the previous
one. The Central Bank is strict this time.”

Indication of strength

In his opinion,
Rasheed Ola Yussuff, chief executive officer of Trust Yields Securities
Limited, a stock broking firm, said, “Given the scenario of the economy
crisis with a situation where companies are still surviving and making
little profits; while some are also paying dividend and declaring
bonuses, I think most of the released results are encouraging.” “Over
the months, these banks have taken the worst scenario and it can only
be better from there on. Although an investor that is expecting a huge
dividend we look at the result and get angry. That is understandable
because the person is looking at his or her cash flow. But from the
point of view of the company itself, it’s a mark of strength and not
weakness. If you have a reserve that you are keeping aside and you are
still making profit, then it means that you have more money within the
organisation to use,” Mr. Yussuff, a former general manager of the old
Eko International Bank Plc, said.

He, however, said
that the usual trend of all-is-well financial reporting by banks was
one of the reasons why the sector crashed.

“Today, that cannot
happen again. You cannot say because everybody is declaring profit you
want to follow the trend. If your bank is not doing well, your result
will show.” “I think it’s a good thing that the banks are more
transparent now. When a bank says its net profit is this amount, it
means it made more than that but probably had provided for bad loans.
And that should be commended because banks are simply saying we’ve
cleaned up our books and there is no doubt about our health now. I
believe those results are indications of strength. Tomorrow if they
recover some of those bad loans, then it will become surplus for them.
That is why some banks could post positive results in their first
quarter result this year,” Mr. Yussuff said.

Improving
performance Meanwhile, analysts at Financial Derivatives Company
Limited, a business advisory firm, said the capital market “will remain
positive on the strength of better-than-expected corporate
announcements as the reporting season gets under way.” Subsequently,
they added that some profit taking should occur as investors cash-in
recent gains.

The proposed Asset
Management Corporation of Nigeria is expected to further stimulate the
capital market, as loans would be restructured to boost the balance
sheets of banks and enhance the flow of credit to the economy.

The bond market is
also set for a surge in activity, as the Federal Government takes the
lead in financing the N1.5 trillion deficits in the 2010 budget, with
about N800 billion of which is intended to be funded through local bond
issues. Analysts also anticipate an increase in corporate bond issues
in order to increase the tenor of liabilities to better fund longer
term asset.

Shares as collateral

According to the
NSE, another contributory factor for the wobbly performance at the
capital market is “investors’ initial reaction to the Central Bank’s
position on the use of banking shares as collateral for lending.”
However, Rilwan Belo-Osagie, managing director and chief executive
officer of First Securities Discount House Limited, said, “On bank
rejecting shares as collateral, it’s a situation of once beaten twice
shy. We went through an era where shares were readily accepted as
collateral, and there were certain assumptions made by the banks; then
the economic meltdown that crashed the capital market for about two
years. Obviously, a natural reaction is that you first of all shy away
from using shares as collateral.”