CHAPTER ONE
INTRODUCTION
1.1 Background of the Study
Prior to the year 2005 merger exercise, the Nigerian Banking sector was highly oligopolistic with remarkable features or market Concentra and leadership. Under the recapitalization and consolidation exercise in the industry, each licensed bank was expected to meet up with the new minimum capitalization requirement of N25 billion on a solo-basis or achieve that either through merger with others or acquisition of by others. The banks were encouraged to enter into merger acquisition arrangements with other relatively smaller banks thus taking the advantage or economies of scale to reduce cost of doing business and enhance their competitiveness locally and internationally. According to the former governor of the Central Bank of Nigeria (CBN), Professor Charles Soludo, recapitalization of the Nigerian Banking Sector was ‘necessitated by the high concentration of the sector by small banks with capitalization of less than $10 million, each with expensive headquarters, separate investment in software and hardware heavy fixed costs and operating expenses, and with bunching of branches in few commercial centers-leading to a very high average cost for the industry, in his view, Saluda (2004) slates that the fragile of the Nigerian Banking sector in the pre-merger exercise is so bad that, only ten (10) banks out of the eighty-nine (89) in operation accounted for 51.9’% of total assets, 55.4% of total deposit liabilities, and 42.8% or total credit.
According to CBN (2004), the rating of the licensed banks in operation, using the CAMELS parameters revealed that ten (10) banks were “sound”, fiy-one (51) were “satisfactory”. Sixteen (16) were rated “marginal” and ten (10) bank were rated “unsound” in 2004. However, the performance of banks since 200l exhibited a deteriorating trend as the number of satisfactory” banks declined steadily from 63 in 200I to 5l in 2004. In the same vein, the number of hanks that were “marginal” increased from 8 in 2001 to 16 in 2004. “Unsound” banks also increased from 9 in 2001 to l0 in 2004. The marginal and/or unsound banks exhibited such weakness as under capitalization, illiquidity, weak/poor asset quality, poor earnings, etc. The CBN reform’ to consolidate the banking sector through drastic increase of the minimum capital base of commercial banks from N2 billion to N25 billion in 2005 led to a remarkable reduction in number of banks! Immediately, aer the recapitalization deadline ended in December 31st 2005, the number of operating banks in the country reduced from 89 banks to 25 banks but later reduced further to 23 banks with the merger of some banks like first Atlantic Bank Plc and Inland to form Fin Bank Plc, Stanbic Bank Limited and IBTC Chartered Bank Plc to for Stanbic IBTC Bank Plc. The number of operating banks later increased to 24 banks with the entering of Citibank Nigeria limited. With the recent merger and acquisition of some of the nine rescued banks, that is, the merger of Access Bank Plc with Intercontinental Bank Plc, merger of Ecobank Transnational Incorporated with Oceanic Bank Plc, merger of First City Monumental Bank with Fin Bank Plc, the number of banks operating in Nigeria has been reduced further.
However, in August 2011, the CBN revolved the licenses of three of the rescued banks for failing to show ability to recapitalize ahead of the September 30, 2011 deadline, eectively nationalizing bank PHB, Afri bank and Spring Bank. The assets of these banks were transferred to three newly created, nationalized banks: Keystone Bank, Enterprise and Mainstrect bank. AMCON which took over the banks also injected N680 million to ‘recapitalize the banks. Unity Bank plc, one of the bailed out banks has already recapitalized while WEMA Bank Plc, the last of the rescued banks, has since scaled down operations to become a regional bank with emphasis in the South-West Region. According to Buneseu (2010), the post-merger performance of all Nigerian banks was overcast in 2008 by the global financial and economic crisis which was precipitated in August 2007 by the collapse of the sub- prime lending market in the United States. The crisis led to the crash of most other sectors and markets across Europe with consequent effect on developing economies especially oil-export dependent countries like Nigeria. The rush by stock investors to liquidate their investment to repay their loans in order to avoid the excessive lending rate caused the Nigeria stock market to crash. The crash of the stock market did not only aect the financial performance of some of the banks, it also increased their risk exposure. Sanusi (2010a) attributed the post-merger challenges of Nigerian Banking Industry to the inability of the industry and the regulators to sustain and monitor the sector’s explosive growth which as a result led to risk-built in the system. According to Sanusi (2010b), the reports of the special examination team carried out by CBN/NDIC revealed that nine (9) out of the twenty- four (24) banks were in grave situation prompting immediate intervention by CBN. The reports further revealed that non-performing loans in ten banks totaled N1,696 billion, representing 44.38% of total loans while the Capital Adequacy Ratio in the ten banks ranged between 10% and 7.41% which were below the minimum ratio of 10%. This statistics portrays a fragile banking system. It is therefore necessary to conduct a study of this nature to evaluate the merger exercise in Nigerian-Banking sector in term’s of the financial performance of the commercial banks.