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BANK CONSOLIDATION: DEALING WITH THE ISSUES It is no longer news that the achievement of the deadline set for the consolidation exercise in the banking industry is commendable especially when viewed from the fact that the exercise was greeted with criticisms and skepticisms. Indeed we will not forget in a hurry such articles as “ Soludo this is not Ludo” by Simon Kolawole and the extensive analyses by a renowned Nigerian economist. However, the critics were largely questioning the possible attainment of the target date, workability etc and not necessarily the desirability or otherwise of the reform agenda. I also wish to commend the efforts of the Central Bank governor. Meanwhile, as the Yoruba will say “atigbe iyawo koja, owo obe lo soro” which literally means that there is a difference between achievement and progress (any man can marry a woman but not every man can be a responsible husband) It is in the light of this that I make bold to warn that except the regulatory authorities pay closer attention to the emerging developments in the sector, systemic failures may result. The effects of such failures may be more disastrous than the previous ones. It is no longer news that from the days of Agbonmagbe bank to this day banks have failed without serious implications for the economy. However, except greater attention is paid to these “infant” banks, collapse is imminent with catastrophic consequences for the investors, shareholders and the economy. It just cannot be business as usual. The notion of “too big to fall” has being proven wrong in Japan. This article will not dwell on technical and operational issues as such. Such issues as integration, compatibility, information technology (IT) compatibility etc have been discussed by other analysts so I will not bore you with such details. I will like however to focus on soft issues which are as important, if not more important than the operational and technical issues. It has been proved that such qualitative factors as inferior management, weak credit administration, non-adherence to credit policies, non/poor application of prudential guidelines and poor book-keeping contributed largely to the bank failures experienced in Japan, Mexico, Brazil and a host of other countries between 1993 and 1996. According to Wikipedia, The phrase mergers and acquisitions or M&A refers to the aspect of corporate finance strategy and management dealing with the merging and acquiring of different companies as well as other assets. Usually mergers occur in a friendly setting where executives from the respective companies participate in a due diligence process to ensure a successful combination of all parts. Historically, mergers have often failed to add significantly to the value of the acquiring firm's shares. Corporate mergers may be aimed at reducing market competition, cutting costs (for example, laying off employees), reducing taxes, removing management, "empire building" by the acquiring managers, or other purposes which may not be consistent with public policy or public welfare However, the mergers and acquisitions, which took place under this reform agenda, can best be described as the “poison pill” forced down the throat of operators. Desirable as this might be in achieving the objectives set by the CBN such a pill also brings with it its own dislocations and disorders. In spite of this however and going by the responses from the banks one can say that certain objectives are being achieved. Notable among these are synergy, increased capital, improved credit ratings (external), economies of scale and perhaps taxation. Other issues
Increased Revenue/Profitability
Our economy is still largely dependent on petro-dollar. It will take a few more years for the current reforms to achieve a reasonable level of diversification in our economy which will open up new investment/ deposit mobilization outlets. Therefore, in order to increase earnings to support the bloated capital base a bank will need to either engage in mega deals (such as the on-shore end of oil and gas, aviation or telecommunications and such other capital intensive sectors) or increase the number of branches to cater for the retail end of the market. In order to achieve other objectives such as market share, public sector visibility and government patronage a wise bank will likely adopt a strategy that will take care of these two investment outlets. This means that the services of experienced professionals and advisers will be required in addition to the decentralization of management and decision-making. This is the greatest challenge today. Indeed, in line with the recommendations from textbooks, the first step taken by some banks was to lay off staff both at the managerial and the operational levels. Several years of experience, commitment and loyalty were thrown down the drain. Indeed some employees that were retained are still unsure of the security of their employment. It was rumored that a bank even laid off holders of HND in spite of the fact that such employees have higher qualifications such as ACA, ICAN, and MBA. Consequently, management is overstretched with serious effects on staff morale, customer service and professionalism. It is disturbing to note that in such highly capitalized institutions, the average age is between 25, 28 years, and the span of control averages 1:10 It is yet to be established if the focus has shifted from aggressive deposit mobilization to effective utilization of funds. In the first instance, youthfulness is an asset whereas in the latter instance maturity, professionalism, qualitative experiences are required. Another important consideration is cost of funds. According to The Banker of January 1996, “within the Japanese business community, there is a long established joke that bankers do not mind spending Yen 50 to acquire a savings account of Yen 1. In a country with one of the highest propensity to save in the world, Japanese bankers have traditionally focused on market share rather than operating efficiencies” It is therefore important for the operators to pay particular attention to these factors. Customer Service Issues
These have been discussed in part above. The customer is King and if the only thing that consolidation means to them is the return of queues inside the banking halls, late rendition of statements, posting errors, and rude customer service personnel, then it is time to review the position Fraud In any organization where the operatives are largely inexperienced and/or are not effectively supervised frauds will take place. It is very costly to send operators on regular trainings and so banks are advised to ensure that their ‘midfield players’ – first and second line management teams - are experienced, tried and tested players who can deliver effectively at the tactical and decision making levels.
Another important consideration is the role that politicians play in bank failures. It happened before in our country and it will happen again if necessary checks are not put in place. The INSTITUTIONAL INVESTOR of September 1996 wrote, “Politicians had regularly drained Banespa, largely to further their political ambitions. The bank’s failure on the last business day of 1994 is the biggest in the annals of world banking”. It went further “ the incestuous relationship between bankers and politicians threatens to wreck Brazil’s financial system” In Brazil, Banespa was considered “ too big to be allowed to fall”! Just as most Nigerian banks, most banks in Brazil concentrated on the public sector. This led to serious consequences for both the sector and the economy in general.
According to INSTITUTIONAL INVESTOR, “ But now, Brazil’s vast banking system concentrated in the public sector and engineered to profit from chronic inflation is in deep trouble. Banks once made money on the float – using delays in check clearances and other payments and low-interest deposits to invest in high-yield government debt. When inflation fell they tried to make up for lost income and wound up making many bad loans instead. What sank Mexico in 1993-1994 was a big credit expansion in an over-valued currency” Inspection / control issues Even with the development of sophisticated audit programmes, most control activities are on-site. It is therefore necessary to fortify inspection/ control units with well-experienced professionals. It is no longer safe for any bank to employ junior managers to head control departments. Indeed it is recommended that real-time control units (strategic control dept) be established at the branch level. It is also recommended that zonal and regional inspection teams be established. I must add however that the role of inspection will be greatly enhanced by the employment of seasoned professionals and experienced personnel. It is not likely that central management will be effective if she has to supervise the activities and operations of all branches from head office. Loss of jobs This has been dealt with earlier. While it may be true that this is inevitable, one of the possible consequences of synergy is growth. So if growth is an objective and it sure has to be for the time being, if shareholders commitments are to be achieved in the short term, then it is natural to expect that more hands will be required. Indeed some of the old staff can be redeployed to other areas such as new branches and control.
Finally, from Wiipedia “for the merger not to be considered a failure, it must increase shareholder value faster than if the companies were separate or prevent the detenoration of shareholder value more than if the companies were separate”. Conclusion
I have no doubt in my mind that the bankers as well as the regulators are aware of some of these challenges and are putting structures and processes in place to mitigate the negative effects of challenges that will arise from the mergers. It is important to note however that having a mega bank in place is not an end in itself. It is the beginning of several other challenges and opportunities which may be profitable or disastrous. The transition period has to be handled with care by all the stakeholders - shareholders, customers, the banks and the regulators. It is also very important for regulators to be strengthened and trained to be able to handle the new challenges that come with increased size.
It may not also be a bad idea to insist that each of these banks be quoted on the stock exchange.
Early detection of weaknesses should be top priority while clear policy statements should be requested from banks on how to deal with bad loans and other unserviceable assets acquired from the weaker bank/s. The establishment of a functional credit bureau cannot be over-emphasised. Perhaps, it is instructive that we study or take a look at the operations of ABSA Bank of South Africa and the mega banks in India and Thailand, which have similar history and structure as our new mega banks On my part I wish the new banks and their management good luck and successes in their endeavors Thanks for having read this article Taslim Anibaba (FCA). 7th August 2006
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Posted by Robot| 06.08.2006 23:16