Towards a better investment environment for all!
When Lehman Brothers, with USD 639 billion in assets and USD 619 billion in debt couldn’t, after months of negotiations, close the Saturday, 13th September last-minute saviour acquisition deal with Barclays PLC and Bank of America Corp at the height of the most recent financial crises, it had no choice than to file for bankruptcy on Monday, 15th September, 2008, making this seminal event the largest bankruptcy filing in history!
No central bank in the world will remain aloof and watch their financial sector collapse, except it becomes inevitable like in the cases of Greece and other European countries. Thus, consistent with the mandate to ensure financial stability at all times, several other banks affected by the financial crises of 2008 were rescued through various forms of corporate restructuring and deal arrangements. Two of such banks were Merrill Lynch which was acquired by Bank of America the same day Lehman fell. And Northern Rock, then UK’s 5th largest mortgage lender which suffered the first run on a British bank since 1866, after unsuccessful bids to acquire it, was nationalized in February, 2008 by the Labour government of UK “in all but name”, according to the Telegraph of London.
In the previous year of 2007 when correction in the US housing market was gaining momentum, Lehman rather increased its exposure than any other firm, hence “did not take the opportunity to trim its massive mortgage portfolio” of toxic assets according to Investopedia. The firm had the opportunity to do so, which in retrospect, and by some accounts “would turn out to be its last chance”, especially in light of some missed partnership and take-over opportunities.
Admittedly, the current situation in Ghana is no where near the epic proportions of the U.S. sub-prime mortage-induced financial crises of 2008 with its attendant consequencies of economic recession which hit most parts of Europe. Far from that!
But, to the extent that the banks mostly affected in the crises were overly exposed to toxic assets, with Lehman Brothers being the largest victim, some parallels can be drawn with the current situation in Ghana. According to the Bank of Ghana’s (“BoG or the Central Bank or the Regulator”) latest Banking Sector Stabilization report, the amount of non-performing loans (NPL’s) recorded by banks increased by 36.17% in February 2017, representing an increased from 4.7 billion to 6.4 billion within the 12 month period.
The dim NPL records are mainly attributed to non-payment of loans by clients (both individual and institutions) as a result of, not least, high cost of funds, the absence of robust credit underwriting systems and processes, which situation is worsened by the lack of addressing systems and centrally connected credit referencing bureaus needed to properly identify and track the credit history of potential clients. The consequences of this combination of strong factors are made even more manifest in the event of breaches to single obligor limits.
Again, to draw some similarities, whereas Northern Rock was nationalized by the UK governement “after two failed takeover offers” from Virgin Group and the in-house management team, the Central bank of Ghana also deemed it fit to find an acquirer in the 64 year old Ghana Commercial bank (GCB), another indigenous bank by the way, who was ready, willing and able to step in strategically to save the situtaion on the very day the potentially public-confidence-shattering announcement was made by BoG on Monday, 14th August, 2017. Thus, institutions currently on the path to making progress in meeting BoG’s required targets will draw some vital lessons and intensify their negotiations towards successful deal closures, mindful that there may well not be another GCB with similar strong balance sheet or bigger and with the right strategic-fit suitable to come to the rescue!
Probably, for now, the use of Fintech startegies where technology can be used to track the location of borrowers as recently proposed by the CEO of ZeePay could add to the repetoire of solutions that will be provided when client addressing systems, among others becomes fully operational.
Sometimes, the recommendation of remaining within the scope of ones core business competences without necessarily expanding too wide, too thin and too fast needlessly couldn’t be trumpeted any louder. By some accounts, at a point, “Lehman had morphed into a real estate hedge fund disguised as an investment bank” veering off what they had been doing well, and consistently for over 150 years.
In my previous article on “A world of Investments: Mergers & Acquisition”, published 22nd May, 2017 I mentioned “the risk of lossing quite a number of locally owned Ghanaian banks, majority of which currently require adequate time to grow, stabilize operations and thrive to also look forward to becoming century-old in the provision of financial services within their borders and beyond.” Internally, at the company level, how things are done properly, not least through proper corporate governance structures, and externally, through early warning systems which will include strict monitoring and enforcement have become very important lessons for both the banks and the Regulator, if indeed the locally owned Ghanaian banks will have the chance to thrive, grow sustainably and flourish to also become century old and more!
Hidden within various not-so-pleasant situations always come opportunities for most. Much as the full picture of this financial event in Ghana may not readily be known we can still draw some lessons and inspiration on an individual staff level from the following account. “Lehman forced me into the world ….”, said Lynn Gray in an interview with CNNMoney. The situation led her into entrepreneurship where she founded Campus Scout, and she admits that “I have a very blessed life now’.
So, ten years on, several lessons have been learnt including “tighter financial regulation and accountability”. In 2012 Virgin Money acquired Northern Rock for £747 million.
And in Nigeria, the result of a reduction of existing banks from 89 before year 2005 to a current number of about 25 banks due to then critically needed mergers and acquisition deals which helped to create strong banks with sizable balance sheets strong enough to cross borders and compete beyond Nigeria and Africa.
The point is that such corporate, or indeed systemic financial shakeups happen once in a while. They seek to create win-win situations by helping the system to re-organize and re-align with regulator financial stability goals, shareholder value creation expectations and ultimately, depositor capital preservation or indeed investor return objectives.
Overall, the traditional principles of banking will not change. The ringing bells, albeit subtly, of prudence and the need to remain conservative in the management of depositors’ funds or investments will continue to sound!
The writer, Peter Nii Odoi Charway, is the Head of Research & Strategy at Ideal Capital Partners Limited, a SEC regulated Investment and Asset Management firm engaged in asset/ fund management, corporate finance & advisory services, investments and research.
Location: East Legon, Accra, Ghana. www.idealcapitalpartnersgh.com; email@example.com