RUMBLE IN THE STOCK MARKET! BY: LES LEBA 0805 220 1997
The value of all the shares listed on the Nigerian Stock Exchange fell by over N1000bn recently to the consternation of the small but financially buoyant subsector of equity investors in Nigeria. Before this fall, the total market capitalization hovered around the N12 trillion mark. The actual significance of the over 10% drop is best appreciated when expressed as about 50% of the 2007 federal budget of about N2.2 trillion. Media reports indicate that the value of shares in the banking sector were the worst hit by the virtually unexpected equity depreciation. The shock waves from the considerable value loss sent jitters through the ranks of our stock market nouveau riche and the regulators of the Nigerian Stock Exchange (NSE) had to suspend trading of volatile stocks for short durations to stem the tide and prevent a contagious run on the integrity of the market. This was followed by orchestrated media assurances by the NSE to sustain the confidence of the investing public. The initial explanation for the downturn related to the drive by some investors to liquidate their stock holdings so as to benefit from fresh stock offers which promised higher price appreciation in the short to medium term. This explanation, however, failed to assuage market anxiety. In this event, the NSE stepped up a notch on the blames ladder by castigating the sponsors of private placements which were not immediately listed on the Exchange as the beneficiaries of the over N1000bn loss from listed stocks. The Exchange quickly instituted a protocol to reduce the negative impact of private placements. Unfortunately, such protocol had no immediate effect and the downward slide in the market continued. In the frenzy to find a culprit, rumours filtered into the media that the downturn was the result of an unidentified memo from the CBN to all commercial banks to call back all loans given out for the purpose of acquiring shares. It was speculated that the need for banks to call in those loans advanced for what is generally called XXmargin tradingXX may have triggered the hurried sale by investors to enable them liquidate their indebtedness. However, the CBN Governor, who, in view of his defence of banks’ anti-real sector posturing, has been described by some people as the ‘Group Managing Director of All Commercial Banks Plc’ quickly came to the rescue and denied ever originating any instruction banning margin trading as an instrument for stock purchase! The market bounced back momentarily and gained almost N400bn shortly after Soludo’s endorsement of margin trading, which has clearly become the engine of growth of the stock market! Inexplicably, these gains were short-lived and the bearish trend resurrected, as stock prices once again came tumbling down. We cannot hazard a guess as to which villain the NSE or the media may now ascribe the blame, but it is speculated that in spite of CBN’s overt accommodation of margin trading, an earlier denial by the NSE of the existence of margin trading in the stock market may have continued to aggravate the problem as it sent ‘wrong’ signals that the NSE actually frowns at such financing arrangements! This perception may have stampeded some banks to call for immediate settlement of such loans in their portfolio to avoid possible sanctions. Indeed, this was the view of Finance Minister, Shamsudeen Usman before the House of Reps Committee on the capital market recently. It may now be appropriate to examine the obvious dichotomy in the media reports of the divergent positions of the CBN and the NSE in order to identify the origin of the deep source of funds channeled to margin trading and its impact on not only share prices but also the stability of the stock market. The universal role of banks is to lend out money to genuine investors and earn a good return from its loans for legitimate projects adjudged to be realistic and sponsored by people with proven track records. Thus, banks may also lend for purchase of shares, so long as the shares belong to corporations with solid fundamentals and credentials; even then, the bank would still hedge such loans by demanding other marketable collaterals from the investor, so that in the event that potential dividends and/or capital gains do not adequately service the loan on schedule, the bank could fall back on the sale of the related collateral! In general, not much can be said against this form of financial engineering; however, this favourable
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perspective may be reversed if the corporation that is the object of the share loan is also the bank doling out the funds for investment on itself! It is possibly for this reason that the stock market regulators were wary to endorse margin trading; those analysts who describe such borrowing as incestuous, unethical and not clearly transparent share the same sentiment with the NSE. In this event, the CBN blanket accommodation of margin trading is most unfortunate, and its liberal approach becomes more worrisome when we observe that the Apex Bank is also the source of the deep funds which allow banks to eagerly embrace margin trading. As things stand, a bank’s ability to expand credit to customers largely depends on the volume of public funds each bank has as deposits. In other words, the larger the revenue allocations of the three tiers of government paid into the banks, the larger the capacity of banks to expand credit to customers. The impact of public lodgements become more critical as over 80% of bank deposits belong to Ministries, States, Local governments, Departments and Agencies. These public deposits become the catalyst for the villain of too much money (excess liquidity) in the system. Thus, the banks benefit from the ‘scourge’ of excess liquidity in at least two ways; in the first place, it gives the banks the opportunity to profitably lend back to the CBN, government’s funds, when the CBN sells its treasury bills to the banks in an attempt to mop up excess liquidity and stem inflation; secondly, the public funds provide the banks with the credit capacity to also lend money to other customers in the private sector for various ventures, including the very lucrative business of margin trading! Thus, in simple terms, much of the equity in the stock market, particularly bank shares, have been indirectly financed by the good fortune of having government statutory allocations paid into the commercial banks! Curiously, share prices of the banks, in particular, have risen geometrically even when the dividends and the fundamentals do not justify such phenomenal increases. Some analysts believe that self interest and the incestuous component of much of the equity investment in banks may be ultimately responsible for the downturn we are witnessing in the stock market today. Once investors liquidate their loans from the initial capital appreciations, they may decide that the dividends paid do not justify the high price of these shares and they may rightly sell off so as to enjoy their capital gains or move into more solid or fresh investment opportunities. If this be the case, the current haste to sell off shares may just be the beginning of the dawn of reality in our stock market!
Save the Naira, Save Nigeria!!
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