Business

How Nigerian Banks Mislead Investors With Crafty Accounting Reports

First quarter results so far released by Nigerian banks have indicated a fantastic return to profitability. Virtually every bank that has released a first quarter result has posted what can be regarded as an impressive performance given the difficult times the industry is passing through. These extraordinary results are usually pushed into the market immediately after the release of distressing audited results, which, in the words of a bank managing director, ‘stink to high heavens’. It has become a predictable trend. The first quarter result is either released simultaneously with the audited report or comes immediately after. The reason is glaringly obvious. The banks want the effect of the huge losses in the industry, particularly in their individual companies to be mitigated by counteractive information. So far, the trick has worked. The outrage that the audited results could have elicited is being neutralised. Let’s look at some examples.

Reporting gimmicks
Union Bank’s recently released audited result has been one of the most terrible performances in the sector with an appalling loss after tax of N281.2 billion. It made provision for only N276.9 billion, meaning that if it had not made the provision it would still have recorded a loss of about N4 billion. But it also released an unaudited first quarter result in which it claimed to have made a profit of N3.1 billion. Based on its first quarter report, the market appears to have blissfully ignored the overwhelming evidence of distress and decay in Union Bank as contained in its audited result; thus, its share price rallied immediately after it was released. Just before Union Bank released its result, Wema Bank had orchestrated the same game plan. Its audited result indicated a loss after tax of N6.7 billion. It, however, simultaneously released its first quarter result in which it declared a profit after tax of N675 million naira. It got a favourable review in the media like its counterparts. Afribank, a big time loser declared a loss after tax of N230 billion but managed a first quarter profit of N1.9 billion. Similarly, Oceanic Bank with a loss of N89 billion had a profit of N1.7 billion. First Inland Bank equally recorded an end of year loss after tax of N96.7 billion but reported a profit after tax of N990 million in the first quarter report released at the same time. Initially, the public was sympathetic but its share price has since crumbled to its nominal value of 50k and is still reeling in the shockwaves of its poor performance. Sterling Bank was another bank with a woeful audited result. Its loss after tax was N9 billion.

One way of looking at the first quarter results is that the banks are already projecting the amounts that AMCON would save them and are incorporating these into their results with the hope that at the end of the year, their profits would just be okay.

AMCON still necessary?
The way the banks are going, one is tempted to conclude that the Asset Management Corporation of Nigeria (AMCON) is no longer relevant since they have recovered and are already back to profitability. If indeed they have begun making solid profits, according to the CBN, then their toxic assets are no more a burden to them. From their first quarter results, we can be sure that forecasts of full-year audited results would be dazzling and in some cases equal to what obtained before the CBN struck.

One nagging question that keeps tugging at the mind, however, is what happened to the heavy mass of non-performing loans that the banks declared in the past year? Have they all been recovered? How come they are all declaring impressive first quarter results? Have they been given some form of reprieve by the apex bank or have they devised a means of reporting unaudited reports without the rigours of factoring in their toxic assets? Have they made sufficient profit to write off such loans? There are so many questions that have not been answered and the banks have not been helpful as they have not made any clarifications. Whatever happens, investors must realise that what the financial institutions are reporting as first quarter results are management accounts and cannot be relied on as dependable statements on which to base investment decisions.

Whither the profits?
It is also difficult to fathom how come the banks are making such huge profits, some of which compare favourably with pre-meltdown profit levels. In these periods when economic activities have slowed down considerably, it is particularly hard to understand their claims of return to super profits. In addition, it has been acknowledged that banks are not yet giving out loans as they used to do before the Central Bank interventions. So where are these huge profits coming from? These fantastic profits do not align with revelations that have become commonplace in the industry to the effect that foreign investors who showed interest in both the ailing banks and those that passed the CBN stress tests discovered much more decay than were previously revealed. It is either the current profits have disproved those findings which were corroborated by the apex bank or the banks have further sunk into their old ways of doing things.

When recently, the CBN Governor, Sanusi Lamido Sanusi, said the banks had come to realise that it is not a crime for banks to declare losses, there were sighs of relief among economy watchers who felt that banks would be content to release moderate performances on their way to recovery. But very few banks have done so. There seems a stubborn determination on the part of the banks (as revealed in their first quarter results) to cling to the culture of super profits that are not based on the realities on ground.

Sanusi does not appear to have helped matters. He reportedly said boastfully before the results started coming in that some of the ailing banks had returned to profitability. Clearly, the CBN governor was trying to justify his interventions which had come under heavy criticism as such claims would mean that the reforms have started yielding fruit. If this is not the case, then he has mellowed down on the zero tolerance stance he started with. Now, it appears he has emboldened the banks to continue in their old ways. In the past ten months, the ailing banks lost most of their businesses to the major ones which passed the test. Thousands of depositors shunned banks such as Intercontinental Bank and Oceanic Bank which suffered the worst negative publicity coordinated by the CBN and the Economic and Financial Commission (EFCC), and moved their accounts to Guaranty Trust Bank, First Bank, Zenith Bank, United Bank for Africa and Stanbic IBTC. Others that lost patronage include Bank PHB, Afribank, Union Bank, First Inland Bank and a few others. Those which lost business are ironically claiming equal rates of success with some of the healthy ones which are finding it tough to cope with the volume of traffic in their banking halls.

Timely warning
Sanusi, in his usually contradictory manner, has mercifully warned that the banks are not yet out of the woods. It is becoming clear that he makes utterances as he deems fit to suit the demands of the circumstances he finds himself because he had said the opposite a few weeks earlier. But whatever the case, investors should take a cue from his warning. They should ignore the various ways by which the banks are trying to downplay their distress. First quarter results should be taken with a pinch of salt, while emphasis on turnover without respect to good corporate governance practises in incurring operational costs should be ignored. Chief executives should not be telling people what they intend to do when they have not adequately taken responsibility for the results they are releasing. It is unfortunate that our chief executives cannot be transparent or accountable

. They cannot take responsibility for losses and give reasons why those losses came about and what has been done to plug any identified loopholes.

Bottom line
Compare the banks with companies that better civilised approaches and the difference will be clear. Cadbury, after its problems, came out with the real figures and was not in a hurry to paint its performances in deceitful languages. It gradually worked its way out of its loss not minding that it took years. The result is that its performances can be relied on. The new management there has demonstrated transparency and we can expect investors to believe the management. Starcomms Plc, when it was being listed, told investors not to expect dividend in three years! That was sincerity! The three-year period would soon be over and the company is on the verge of breaking into profitability. Why would investors not trust their figures or forecasts? But Nigerian banks are different. While it will take decent companies years to break even from such huge losses, our banks want us to believe that it would take them less than a year to get back to profitability. The bottom line is that they are not willing to change. For this reason, investors should be wary of the antics of banks and scrutinise their results and body language thoroughly before staking their money because the banks are still very far from full recovery.

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