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Executive Commentary

Executive Commentary                                                   

INVESTORS INTEREST REBOUNDS IN IBTC CHARTERED BANK POST-MERGER - [ 22/10/2007 ]

Investors have renewed interest in the shares of IBTC Chartered Bank Plc following the conclusion of the merger of the former with Stanbic Bank Nigeria Limited to form a new IBTC Chartered Bank
About 404.9 million shares of IBTC worth N6.4 billion were exchanged by investors in 182 deals.
There are indications in the stock market that the merger will impact positively on the fortunes of IBTC Chartered Bank.
The Standard Bank Group of South Africa merged its Nigerian operations  with that of IBTC Chartered Bank and thereafter the enlarged bank became part of the Standard Bank Group. The merger was officiated in August of this year and on September 24, 2007 the merged entities began trading under the name IBTC Chartered Bank.  Standard Bank's presence in Nigeria began in 1992, trading under the name Stanbic Bank (Nigeria) Limited.
Stanbic Bank and IBTC Chartered merged their operations following the consolidation in the Nigerian banking industry.
The rationale for the merger is to enhance the competitive positioning of both banks by combining them to create one of Nigeria's leading banks with a significant capital and asset base offering a full range of financial products and services.
The merger will leverage on the combined skills and capabilities of both banks and will result in significant capital and revenue synergies.
Mr. Greg Brackenridge, regional managing director of Stanbic West Africa had said  "the deal not only represents a major vote of confidence in Nigeria's banking industry, it is a major direct foreign investment that will benefit the entire national economy," remarking that it is the major international deal that takes advantage of recent regulatory reforms in the financial services sector, adding that the major is being closely watched by others.
The managing director said the Nigeria banking sector was undergoing rapid consolidation, remarking that there were 89 banks 18 months ago, but presently they are 25.
He said the board of IBTC had voted unanimously for the proposed merger because it wanted to benefit from Standard Bank's international presence, adding that after the merger, IBTC will become one top 10 banks in Nigeria and will be on course to become number one by 2010.
Mr. Greg Brackenridge, regional managing director, Stanbic West Africa had said then that the stakes were very high for IBTC and Stanbic Bank, for the merger to sail through.
He explained that the biggest hurdle he faced in pushing the deal through is the introduction of the concept of tender offer into the Nigerian market based on the highest levels of corporate governance demanded by international investors. The managing director said that a tender offer is a democratic process which is based on international best practice, adding that it is an open and transparent process.
He said the two banks are entering into a partnership designed to enhance existing shareholder value for shareholders of IBTC and Stanbic Bank.
Brackenridge noted that Nigeria is a large country and IBTC has more than 115,000 shareholders and all of them must be given forms and the information required to authorise the sale of one third of their assets.

      

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THE CAPITAL MARKET AS A CATALYST FOR ECONOMIC DEVELOPMENT - [ 29/08/2007 ]

    THE CAPITAL MARKET AS A  CATALYST   FOR     ECONOMIC    DEVELOPMENT

       A Paper Delivered On 23^rd August, 2007

                                           By
                      Chidi Ajaegbu FCA, FCS

During The South Eastern Regional Conference Of Institute Of Chartered Accountants Of Nigeria (ICAN) Held In Concorde Hotel, Owerri

STOCKS THAT CAN MAKE INVESTORS RICH IN 2007 contd. - [ 09/07/2007 ]

INTERPRETING FINANCIAL STATEMENT FOR INVESTMENT DECISION - PRESENTED BY: CHIDI AJAEGBU FCA, FCS - [ 19/06/2007 ]

AVERTING OLD AGE CRISIS - [ 20/09/2006 ]

PREAMBLE

On several occasions, the planning and implementation of retirements are left too late and consequently panic sets in and mistakes are made in such situations.  The lateness of this plan and its implementation can be adduced to a combination of factors.

-                     Management’s non-chalancy i.e. non-sensitization of staff

-                     Staff make beliefs in terminal benefits

-                     Lack of cohesion among staff i.e. absence of unionization

-                     Lack of objective leadership of the staff union

It is therefore laudable that at the advent of the Pension Act 2004 both the Management and Staff of ICAN are being pro-active by cordially resolving the conflicts arising out of an ongoing in house Pension Scheme and the expectations of the Pension Act, 2004.   The decision of the Council of ICAN is equally commendable to defer to the general preferences of ICAN staff members to be allowed to take direct control of their previously contributed pension fund.

However, it will be erroneous to allow total independence of action by staff members without any form of guidance, as the ultimate responsibility of ICAN pensionable staff lies, at least secondarily with the Institute, if for nothing else, but as benchmark to existing staff members.

The happiness of ICAN retirees will be a factor to the productivity and transparency of existing work force.  It is therefore in the mutual interest of both ICAN and its staff to embrace a pension policy both at corporate and private levels that will deliver a decent life style at their old ages in order to avert a crisis and so as not to impair on the motivation of existing work force.

Summarily, a well articulated and implemented retirement plan motivates and in most cases reduces corrupt practices and could therefore enhance efficiency and create a happy workforce.  We strongly believe to a reasonable extent, the intent to unethical malpractices are predicated on uncertainties of the future.  The spirit of the Pension Act, 2004 is to reduce and possibly eliminate the shortcomings of previous pension schemes by handing over the future of workers to them directly and to provide only, the necessary policy and regulatory frameworks.  It sought the elimination of under-funding of pension fund schemes especially in the public sector, for example, NNPC (with its N100b pension gap).

The Pension Act, 2004 provides that employers with more than 5 employees are expected to cause its staff members to open a pension fund account with any of the licensed pension fund managers where every month and not later than 7 days from the payroll date, the organization will remit a total of 15% of the staff members’ remuneration, the 15% being equally shared by both the employer and the employee.

INVESTMENT OPTIONS

Sequel to the Council decision to return contributions to the contributors, the Management of ICAN felt that there was a need to generate and discuss investment options for staff members to consider.

Broadly, some of the investment options for an investor to evaluate and decide on are:

-                     Deposit Accounts

-                     Equities

-                     Real Estates

-                     Insurance Policies

-                     Trading

-                     Others

This list is by no means exhaustive.

DEPOSIT ACCOUNTS

Advantages:

-                     Near to cash, as this kind of investment can be terminated with or without penalties (monetisation of equities investment takes just 3 days)

-                     In a zero inflationary environment, the returns are fixed and certain. Price fall in the money market does not affect returns as they are already locked in.

-                     Its short-termness gives the investor the leverage to take remedial actions in case of volatility in the market.

Disadvantages:

-                     It is not responsive to inflationary pressures in the market place, once the deposit is made.

We shall seek to demonstrate in the course of this seminar that in an inflationary environment the nominal returns do at times constitute capital erosions in real terms i.e. loss of part of your capital as against an indication of profit and how nominal interest rate would make the non discerning investor to believe that he is making profit.

TABLE - INFLATION Vs INTEREST RATE

                                                                              Source: Central Bank of Nigeria & NSE

REAL ESTATE

One of the essentials of living is shelter and the drive to own a house either as a home or otherwise is overwhelming.  It is therefore human when at the earliest “opportunityâ€� people move very far from urban areas to acquire and develop properties; but what are the practical considerations?  Have these factors been critically and objectively evaluated and if so what are the conclusions?  Do these conclusions support these decisions?

Real Estate for speculative purposes must be in good locations to allow for quick turn around of investments.  However, before a decision is taken with the intent to provide shelter for your household or for commercial purposes.  A proper cost and benefit analysis is expected to have been done for an investor to fully appreciate the cost implications of such an investment decision.

Considerations must be given to the following factors:

-                     Disposable income and financing methods

-                     Distance to work place (transport cost) e.g. wear and tear on your motor vehicle

-                     Alternative to investment; other investment outlets

-                     Security of the new area

-                     Qualitative cost e.g. strain on your health for waking up 4.00am

-                     Quality of schools for your children

-                     Impact of distance to your productivity in the office

-                     Other social opportunity costs of living in Ogun state or even Oyo State whilst working in Lagos

-                     Title cost and squabbles in new areas would you in an informed and non-emotional decision still want to answer a landlord in Ogun state or Oyo state because of your Landlord/Tenancy problem?  I would humbly submit a no answer.

How then does an ICAN staff become a landlord?

-                     Open an account with a Primary Mortgage Institution as soon as possible

-                     Join your co-operative society

-                     And develop a minimum of 5 years plan on an equity portfolio tied to acquisition of a landed property in an average location.

Please remember you are not in any competition with anybody and therefore you must not borrow at a commercial rate to finance an owner occupier property that will constitute to be a total mismatch of funds and the consequences will be grave.  At all times avoid mismatching funds, it has dire consequences both for corporate organizations and individuals.

The opening of an account with a Primary Mortgage Institution and your cooperative society gives you the latitude to borrow at a mortgage rate and with a longer tenure.  The concessionary rate and tenure will cushion your cash flows.  You could borrow to either invest in the capital market under proper guidance with the objective of growing this portfolio big enough to either buy landed property or commence development.  It is always better to develop in stages; acquire the land, pause for 2 to 3 years and commence the next level of development.  Again remember you are not in competition with anybody.

Once more, in the course of this seminar, we shall seek to demonstrate that empirically you can make as much 500% or more on a portfolio in 5 years or less and that you can monetize your investment in the capital market within 4 days as against an indeterminable time in the case of a real estates even in prime locations.

Even though real estate is a good store of value, one of the very fundamentals of a good investment is ability to exit from your investment as and when you want to and that is a major draw back in real estates.

Have we considered the cost of maintenance of the property and management (collection of rent from troublesome tenants)?  With the foregoings, what is our real rate of return or put alternatively, what is the opportunity cost for an owner occupier property without proper planning?  We need to properly reflect on these factors for an informed decision.

Finally, acquisition of an economically viable real estate is a necessary component of your portfolio.  It must however be structured to serve the dual role of serving as a home and also an income generating unit on the long run.  At this initial/intermediate level (intermediate meaning those that own houses in the new areas) a sincere and genuine saving relationship like we mentioned earlier with a credible primary mortgage institution will be an appropriate starting point.

Insurance Policy:

In set economies, the number and value of intermediations by core players like banks, discount houses etc, have significantly declined over the years, with the core players accounting for less than 20% of all credits created in USA in 2005.  The above fact underscores the growing importance and relevance of non-core banking firms especially insurance in the developed world.  This can only mean the growing acceptability of the Insurance function worldwide and the multiplier effect would continue to impact on us as our economy races towards globalization.

The ongoing reforms in our insurance sub-sector are partially aimed at deepening the insurance market, positioning it to meet the emerging globalization of the world economy and its challenges especially, in depth and timely settlement of claims.  The immediate and long term objectives of the reforms are primarily to build and sustain public confidence in the ability of this sub-sector to deliver on its promises, afterall insurance is a promissory note and therefore an investment on hope and nothing else can be a more important drive agent than public trust and all stakeholders are working tenaciously to continue to build and sustain that trust through timely claim settlement.

How far has this sector gone with its core responsibility of claims settlement? 

This is one of the most underestimated investment outlets, in a world that you have insurable interest in virtually all facets of the economy and the level of apathy is particularly worrisome.  It has been established that this apathy by the public arose from the non-settlement of claims by Insurance companies in time past.

With an effective regulatory body like NAICOM, NIA and the effect of ongoing reforms, universal banking and competition in the industry, delay in settlement is a thing of the past.  The advantages of an Insurance cover are too numerous to itemize and we therefore recommend it as part of your portfolio.  We are not unaware of the diminution in value of the cover over time arising out of inflation and since it is not a good store of value, it should not constitute more than 10% to 15% of your investible funds, but it is an essential part of your investment portfolio

The Capital Market:

The capital market is an Intermediatory market and it is generally a member of the financial market.  A market is a place you buy and sell commodities, services, instruments etc.  The stock market (capital market) is therefore a market where shares are sold, and shares are fractional parts of a company usually domiciled in 50 kobo units.  This pricing has little or no effect to the actual or market price, which is driven by a lot of other factors.

The Capital Market worldwide since the 16^th century has always been magical to the non-discerning public. It has however proven over time that it is a good store of value and probably has the highest legitimate returns than any other investment option and this was proven by a study conducted in 2004 by London Business School.  This study covered over 26 nations (including Nigeria) and dated back to 1904.  “Investment is defined as the deferment of today’s consumption in anticipation of a greater future consumptionâ€�.  This definition is expressed in real terms and therefore includes the effect of inflation:

-                     Why would you want to invest N100 for one year and earn 50% returns making N150 that will not buy what N75 would have bought a year ago? (Fixed Deposit)

-                     Why would you want to invest N100 and earn a paper profit of N100 that can not be realized as and when you want it? (Real Estate Speculation)

-                     Why invest your N100 in a place you will earn N20 and use N5 to collect the N20 and N13 to maintain the investment. (Rent Income)

The Nigerian capital market as at today provides the necessary vehicle for the expansion of real wealth by investors.  It is insulated against inflation and in addition to several advantages, the continued preference for fixed deposits still baffles the discerning advisers and you keep asking:

-                     Aren’t there better forms of investments to the Nigerian Investors?

-                     If the answer to the above question is No, have we evaluated our returns on these placements

-                     If no, what is the continued justification for the significant rise in investment in deposits inspite of inflationary pressures in the economy and very low returns on deposits.  The only reason will have to be lack of knowledge or resistance to change, which is human in nature.

YEAR	INFLATION	INTEREST%	REAL RATES	GROWTH IN
			OF RETURNS %	NSE CAPITALISATION