Author Topic: CAPITAL MARKET CRISIS: BANKS FRET OVER POOR COLLATERAL  (Read 984 times)

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CAPITAL MARKET CRISIS: BANKS FRET OVER POOR COLLATERAL
« on: February 25, 2009, 12:43:18 PM »
  Capital market crisis: Banks fret over poor collateral
By Yemi Kolapo and Sunday Ojeme

Indications emerged on Tuesday that banks might be in more trouble than obvious as regards their exposure to the capital market.

Fresh facts by market insiders on Monday showed, for instance, that investors, who borrowed from banks to partake in a promising initial public offer of a leading telecommunications outfit, in July 2008, might have dragged the affected banks into irrecoverable debts.

The telecommunications company in question raised N93.15bn by listing about 6.9 billion ordinary shares by way of introduction on the Nigerian Stock Exchange at N13.56 in July 2008, but the share price had nosedived by a whopping 82.5 per cent to N2.36 as at Tuesday.

The development has become worrisome to investors, especially those that borrowed heavily from banks to take positions in the stock with the hope of reaping high returns even after settling their debts.

Investigations by our correspondents revealed that at the peak of the initial boom in capital market activities, margin loans were given on the basis of acquaintance and with little or no formality with the belief that the highly rewarding market would pay back in folds.

But the unexpected downturn, which began in March 2008, cast a bad dent on the books of many banks by making most of these loans unpayable.

It was gathered that one of the consolidated banks may be nursing a bad wound in this regard, sequel to its huge and largely insecure exposure to the lingering capital market crisis.

One of the legacy banks of the consolidated bank in question has a large shareholding by the Lagos State Government.

A prominent traditional ruler in the South-West was said to have borrowed N500m to partake in the public offer by the telecoms firm with little or no collateral.

A very reliable source close to the bank that gave the facility said the deal was closed on a ?man-know-man? basis, even though the shares were supposed to be the collateral until full repayment.

This means that since the share price of the telecoms stock has depreciated from N13.56 to N2.36, the monarch?s investment is now worth about N87.02m.

?How does he pay back?? the source asked.

The source added that he was also privy to a N1bn loan given by a manager of a bank to a fellow bank manager for the same telecoms firm?s shares, which later turned sour due to the sudden market decline. Consequently, the value of this investment has nosedived to about N174.04m.

The relationship between the borrowers and the bank has since gone awry with the reality that the entire value of the loan may not be recovered should activities in the nation?s capital market continue on the current low note.

However, experts said ordinary Nigerians, who did not have the opportunity of accessing such loans given to banks? cronies were better off for it, adding that now they do not have to worry about how to repay in the current tight financial environment.

Those who invested in other sectors with margin loans from banks are facing the same worrying situation.

For instance, Access Bank?s share price fell by 67 per cent, down from N15 in July to N5.09 as at Tuesday; Chevron?s share price, which reached a peak N441 in October last year, had fallen by a huge 72 per cent to N86 on Tuesday while Flour Mills also depreciated by 81 per cent, from N59 in July 2008 to N11 on Tuesday.

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CAPITAL MARKET CRISIS: BANKS FRET OVER POOR COLLATERAL
« on: February 25, 2009, 12:43:18 PM »

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