No Credit Crunch Today, Come Tomorrow

The Nigerian Stock Exchange lost 31% of it’s value in January alone.

There were only 19 trading days in January yet the index was sinking at nearly 2% EVERYDAY.

To put this is in perspective, even the Dow Jones in the country where the credit crunch supposedly emanated from only dipped 9% in the same January.

There’s 2 ways to look at this a] we can bury our head in the sand and declare the credit crunch has nothing to do with Nigeria or b] ask some serious questions.

As usual we Nigerians have overegged the omelette again. Nothing is ever what it appears to be.
Take a look at the stat below

“The stock market lost over N3 trillion in 2008. It opened in January last year at N10.18 trillion market capitalisation and then peaked at N12.6 trillion on March 5 before the bears set in. The market closed for the year 2008 at N6.957 trillion. This is against the gain of over N6 trillion and a growth rate of 74.7 per cent in 2007”

The above is even more stunning.
As of Friday 13th February 2009, the NSE closed with a market capitalisation of just under N6trn.
Effectively, the NSE is now worth less than the gains that were made in 2007 alone!
Incredible.

It’s safe to say that what fuelled the crazy boom of 2007 and early 2008 was the easy access to money people had through the share loan scheme of our magic banks.
When you really think about it, it is almost impossible to have the kind of growth we have had without the active participation of speculators.

Take N1m to the banks and they’d promptly give you another N2m to trade the stock market.
As 9ice would say; Let’s go there……everybody was making money and the world was a wonderful place where nothing could ever go wrong.

Some of these shares were rising phenomenally even in cases where the underlying company was not doing any business at all.

Now, I’m an accountant [I think] and I have an idea of what a balance sheet looks like.
It’s got assets in it and it’s got liabilities in there as well.
The whole idea of course is that it all balances nicely, thank you very much, at the end of the day.

I also happen to work in a bank which has done pretty well [relatively] since the credit crunch started.
This has been parlty due to the bank being quite well diversified and having different types of businesses that are not totally related.
So when investment banking has totally tanked in the last 1 year, other parts of the bank have kept it going and some have even grown despite the conditions.

Now back to Nigerian banks and their share loan schemes.
Say a bank borrows you N2m and you bought First Bank shares with everything early last year at N50 per share.
The bank holds this shares as collateral against the loan you have borrowed, no?
Now First Bank’s shares have since lost 65% of their value and are now trading under N18 per share.

So you are the accountant for say Zenith Bank and you know the bank has billions of naira in outstanding loans to people who used them to buy shares such as First Bank.
Again, when you are giving out a loan to somebody, surely you dont take a collateral worth less than the loan you are advancing do you?
Now you know there’s a problem.
You know that given the current market conditions, the value of the collateral you are holding has been severely impaired.
I am talking severely.

One of the first things you learn as an accountant is prudence. From the first day to the last, the concept of prudence in accounting is hammered into you until it becomes second nature.
Therefore if you are carrying assets that have been so badly impaired, you need to make a write-down ASAP.
Sort of like holding your hands up and saying ‘I dont think we would be able to sell this asset for what we thought anymore’.
That writedown of course has to go somewhere….so you stick it through your profit and loss and it in turn reduces your profit for that year.

Out here, this is the reason why we have mark-to-market accounting…..where companies are constantly valuing their assets against the current market and if a problem is detected, neccesary action as above is taken.
Hence the reason why it appears banks in the western world are running out of money and making huge losses.

But in Nigeria, things are done differently.
Our banks have chosen to operate in a parallel universe.
I have not heard of a single bank making less profits this year than it did last year. Tufiakwa!…..loss making is for mumu oyinbo banks.

This is truly phenomenal. Perhaps we are witnessing the development of a new type of accounting to be called Pretend Accounting:IFRS 419.
Just pretend like the problem is not there and eventually it will go away.

Take UBA Plc  for example, the bank is on track to make Profit After Tax of N52bn [$351m] for the year ended Dec 31st 2008.
In the previous year to Dec 2007 it made PAT of N21bn [$141m].
To save you the trouble of finding a calculator, that’s a 128% increase in profits year on year.

If you care, you can look at the other banks…the numbers will be similar….all of them making spectacular profits while the rest of the markets crashes and burns.
Who cares when you are operating Pretend Accounting eh?

So where did the N8trn [$54bn] that has been lost on the NSE since March last year come from?
Ok, some of it came from foreign investors and other assorted mugus like me [my portfolio is currently down 45% and it’s still going down…like the yellow submarine] who poured money into the system when the market was like a dog on heat.

But that alone is not enough to account for $54bn that has now evaporated into thin air is it?

This is a classic example of how we as Nigerians operate with no rules and nobody bothers to think about tomorrow.
The DG of the NSE, bless her, was perhaps too busy organising the very well attended Obama dinner to notice that something was going wrong.

Even now, we are still pretending like nothing happened and everybody is waiting for the ‘markets to rise again’.
We have no interest in learning any lessons from this disaster.

We need to confront our mistakes and be honest with ourselves.
People need to sit down and critically analyse what went wrong in Nigeria with a view to preventing this sort of thing from happening again.
Almost everybody has been a loser in this……the ordinary man on the street who was genuinely looking for an extra income has also lost out big time from the market collapse.
In a society with no safety net like Nigeria, the pain is felt even more.

In the last 3 years a lot of nonsense has gone on in the Nigerian financial sector.
Stuff like the Nospecto ponzis are a complete disgrace.
We cannot always wait for the damage to be done before we begin the hand wringing.
These things need to be prevented from happening in this form in the future.

There will always be problems for a nation state to deal with.
But it is double jeopardy for the same problems to keep coming up everytime and no one seems to remember from the last time.

Nigerian banks need to start some very honest accounting and declare the bad stuff they are carrying in their books.
All these magic figures they are declaring doesnt really help anyone ….it has clearly become a game now because no bank wants to be seen as the one who hasnt doubled it profits from the previous year.
The banks do not even have that many lines of business to the point where if one side has a bad year, the other parts of the bank simply prop it up.

Every crisis always presents an opportunity for fundamental changes that are not usually possible when everything is going well.

Maybe this is the time for banking reform in Nigeria.

Maybe I am talking to myself.
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