Grandiose Parlor

Zenith Bank Plc - one of the top three banks in Nigeria announced a pre-tax profit of 20 billion Naira this week; this is a 57-percent increase over the N13 billion recorded in the previous year, according to online news report from Nigeria. Oceanic Bank too posted gross earnings of N31 billion for its first quarter result ended December 31, 2007.

Virtually all banks have been posting mouth-watering profit figures lately, and if - like me - you hare been wondering how accurate those numbers are, you are not alone. Although there are some out of the 25 banks with long history and solid foundation, there is something about the numbers that makes me uneasy given the failed banks era of we saw in the 80s. We are not alone, others are scratching their heads as well.

Two recent newspaper reports have questioned the “sudden boom” in the banking sector and offer reasons and information why “all that glitter may not be gold” in the bank vaults.

Chijama Ogbu writes via Nigeria Punch, “…just as the general outlook appears good, the bankers are beginning to tread dangerous paths again… These days, growth indexes are hardly supported by performance history or financial fundamentals. Figures just keep leaping to your face, as each bank tries to portray itself as a bank of prodigious abilities.” The article is titled: Secrets behind banks’ huge profits.

Chijama – whose article is primarily driven by insider information states: “I recently spoke with a banker, who was until recently a managing director of one of the new generation banks in the country. What he told me are the odd things banks do to make huge profits…” and “some of the profits being declared by the banks were mere paper profits, meant to deceive their shareholders.”

According to him, one of the ways they jack up their profit profile is to suspend major capital expenditure till they are captured in their financial report, only for it to be spent immediately after. That way it reflects on the account as part of the banks’ worth, when in actual sense the money is no longer there.

Read the article in full, please.

The other article is Ijeoma Nwogwugwu’s “Nigeria banks Nigeria: My Mercedes is Bigger Than Yours”. [ Click to read (PDF)].

This article and the other speak to the sharp behind-the-scene practices orchestrated by bank top management.

Ijeoma wonders: “Why do banks keep having to go back to the capital market to raise more funds to expand their businesses in order to attract more customers and mobilise cheap deposits that they will eventually be made available to a select few?”

Valid question. One would have expected with the increase in capital base which stands now at 25 billion Naira at least; loans would be more accessible and services would be better, right?

This has not happened yet. Ijeoma adds:

Every time these banks go to the capital market in search of funds, we all rush head long to subscribe for their shares without attempting to read between the lines. We also fail to carefully dissect their prospectus and demand to know from the banks how previous funds they raised from the market was deployed and if they were utilised efficiently. We are all lured by the capital gains to be made when their share prices move up (that is if we are fortunate to get our share certificates on time. But the registrars ensure that never happens), but we fail to pay attention to other performance indicators that matter just as much. In the process, we fail to notice that half of the banks are posting a negative growth on their earnings per share [EPS], because each time the basket of shares is increased, their EPS is diluted.

Economists and financial analysts in the house, where are you? Can this be happening in Nigeria? Not again!

Related article:
Nigeria: War of the Banks