Emerging Markets

Monday, April 30, 2018

Earnings Quality among African companies: Recurring restatements are not welcome

Dear Africa interested professionals:
                                                           When I ponder on earnings quality, it goes beyond the financial performance of the companies as provided to us by their directors.  Are the numbers provided to us possess the qualities of transparency, authenticity and longevity?  Are this year's numbers going to be adjusted (restated) next year with the reality of this already known today?  Do restatements suddenly become an annual recurring act for some companies, just the way financial reports are audited annually?

Public companies that continually restate their books, change key figures significantly without any clear, detailed explanation are guilty of poor earnings quality as their audited financials are not as reliable as they should be.  

I have randomly selected visible companies across different industries in Africa and reviewed their two most recent annual reports (covering three fiscal years) for restatements and reasons given where applicable with commentary.  

1). Tanzania: Tanzania Portland Cement - Did NOT restate FY 2016 & 2015 annual reports.  

2). Egypt:  Commercial International Bank - Did NOT restate FY 2017 & 2016 annual reports.  

3). Kenya:  Centum Investment - Did NOT restate FY 2017 & 2016 annual reports.  

4). Kenya:  Equity Bank - Did NOT restate FY 2017 & 2016 annual reports. 

5). Kenya:  Safaricom - Did NOT restate FY 2017 & 2016 annual reports. 

6). Mauritius: Mauritius Commercial Bank - Did NOT restate FY 2017 & 2016 annual reports. 

7). Botswana:  Letshego - Did NOT restate FY 2016 & 2015 annual reports. 

8). Ghana: Ghana Commercial Bank - Did NOT restate FY 2017 & 2016 annual reports.  

9). Uganda: Bank of Baroda - Did NOT restate FY 2017 & 2016 annual reports.

10). Zimbabwe: Delta Corporation - Did NOT restate FY 2017 & 2016 annual reports.

11). Namibia: Bidvest - Did NOT restate FY 2017 & 2016 annual reports.  

12). South Africa: Capitec Bank - Did NOT restate FY 2018; RESTATED FY 2016 in FY 2017 annual report.  FY 2016 was restated because loan origination fees previously included in loan fee income was restated and included in interest income of the income statement.  
Commentary: Across the three years reviewed in two annual reports, this was the only restatement and the explanation was clear.  No problem here. 

13). South Africa: Naspers - Did NOT restate FY 2017 annual report.  RESTATED FY 2015 in the FY 2016 annual report.  The reason was due to a change in the group's presentation currency from Rand to the $US effective fiscal year end March 2016. 
Commentary:  Across the three fiscal years across two annual reports, this was the only restatement and the reason is straightforward.

14). Nigeria: Zenith Bank: Did NOT restate FY 2017 & 2016 annual reports.  

15). Nigeria: Dangote Cement: RESTATED figures in the FY 2017, 2016 & 2015 annual reports covering four fiscal years.  

FY 2016: Restated Finance income, finance costs, pre & post tax profit.  Interest income was overstated and interest expense was understated.  Line items on the balance sheet, cash flow and income statement were restated.  
FY 2015: Restated due to change in how foreign exchange gains and losses were stated. Starting in 2016, net exchange gain/losses was stated as one line item instead of separately
FY 2014: Restated due to an adjustment to the presentation of administrative expenses.  

It is also worrisome how the impact on profit from the changes to FY 2016 in the FY 2017 annual report was made to reflect only under the 'Company' column and had no impact on the Group column which is what is publicly reported to regulators and the media.  The Company is a subset of the Group.  

16). Nigeria: Lafarge Africa: RESTATED figures in the FY 2017 annual report for FY 2016.  The restatement was reflected only in the 'Company' column.   The reason for this restatement according to the board of directors was "Due to the merger of the Company with two subsidiaries and the liquidation of two subsidiaries into the Company during the year, the 2017 Company numbers are those of the  merged and liquidated entities while the 2016 numbers are those of the Company prior to the merger and liquidation."    

In the FY 2016 annual report of Lafarge Africa, FY 2016 operating profit line item (Group) was stated as a loss of N10.98B.  In the FY 2017 annual report, FY 2016 operating profit line item (Group) was stated as a gain of N12.4B.    It is hard to fathom any acceptable explanation for this kind of significant reversal in a major line item on the income statement.  Not surprising, management did not even acknowledge this significant change in figures.  

Poor earnings quality is reflected on multiple occasions for Dangote Cement and Lafarge Africa.  Incorrectly charging interest, continually restating different line items on an annual basis and lack of transparency across performance impacting line items tells a story driven by a desire to misinform rather than inform.  Recurring restatements of financials reflects consistency in an inconsistent way that continues to reflect poorly on the companies in question and their willingness to reveal their true state of affairs in a timely manner.   Restatements should largely be a reaction to an unavoidable situation e.g. Naspers and not an action taken in an avoidable situation e.g Dangote Cement.

Monday, January 22, 2018

Beware of some Nigerian Banks: All that glitters is not gold

Dear Retail Investors:
                               As the buying frenzy continues, be wary of where you are investing your money.  Most stocks are rising on momentum and vested interests manipulating the share price upward and not because of improved financial performances and near-term expectations.  

The banking industry takes the brunt of bulls and bears so, I will focus on this industry.  I will mention (briefly) three banks to be wary of when the tide turns and stocks start heading south as investors panic and seek for the exits while trying to hold on to their unrealized gains.  

1. FCMB: The bank's nine-month (September 2017) result is not on the Nigerian Stock Exchange's corporate disclosures page.  Not surprising given the below...

Pre-tax income declined by 52% year-on-year and Gross Earnings declined by 16% year-on-year.  To put this result further into perspective: 

Pre-tax income was 7.57 Billion naira in April 2007 (12-month result) and ten years later now operating as a holding company, nine-month pre-tax income in September 2017 is 6.84 Billion naira despite interest income being approximately seven times larger in September 2017 compared to April 2007.  

2. Skye Bank: No 2016 fiscal year result has been released while 2017 fiscal year results are about a month away from release every other bank.  No news is not good news...  Remember when Oando delayed its result for almost a year?  Unless you are a thoroughbred speculator, the time to exit is now.   

3. Stanbic IBTC: This bank is a holding company that incorporates the largest asset management company in Nigeria.  Nonetheless, this bank's gross earnings and assets are less than that of Diamond Bank while trading 13X higher per share.  Almost all of the free float is under the control of this asset management behemoth to dictate price movement as and when necessaryto drive its agenda.  Interest expense and credit impairment continues to be understated perennially, giving a significant artificial boost to profit.  

I will leave it there.  The market has gone crazy; do not rub shoulders with it.  If a stock does not deserve to rise to the level it has, when it falls, it will take no prisoners on its reverse journey.  

It is better to gain less than to lose more.  Unbridled optimism is the recipe for unbridled losses.  

Saturday, January 13, 2018

FBN Holdings (First Bank): 200% Return in 2 Years is now Reality

Dear Readers:

                           On May 4, 2016, I sent an email with a link to the current featured article on this blog.  I said that FBN Holdings (First Bank) will return at least 200% in two years (twenty-four months) or less from that date.  My call has come to fruition.  

The article can be found as the featured post (left side) on my blog for reference and verification purposes.  Featured post can only be viewed using a desktop, tablet or laptop and not on mobile/cell phones.  

On May 4, 2016, the price of FBN Holdings was N3.50; the price of FBN Holdings on January, 10, 2018 is N10.63.  This is a 204% return.   My call was achieved in twenty (20) months.  

I will offer another one now without delving into the pitch details:

Diamond Bank will return 200% return within the next 15 months or less.  Reference price date is January 8, 2018.  

Do not miss this one...   Tell others to tell others.

Thursday, December 21, 2017

Nigeria Financial Markets: People continue to rise above the system

Dear Readers:
                    Oando has been in the news negatively of recent.  The Securities & Exchange Commission of Nigeria (SEC) issued a directive that a forensic audit be carried out on Oando in October.  A directive of this nature had never been issued by the SEC to a listed company.  When we suddenly cross our fingers (prematurely) and hope that Nigeria may be turning a new tide, the Minister of Finance (a politically exposed person) suspends the Director-General of the SEC: Mounir Gwarzo for malfeasance approximately a month after he directed a forensic audit and the suspension of trading in Oando's shares.  

Suddenly, Oando became more emboldened in an air of perceived innocence and defiance granted it by the suspension of Mounir Gwarzo by Mrs. Kemi Adeosun, and has been writing long letters to the investing public and filing suits in every and any court in its quest to stop the ongoing forensic audit. We learnt in grade school that clear consciences fear no accusers.  I remember analyzing Oando some years back from an investment perspective and I wrote "this company is being run by management, for management, with management interests as its number one priority."  Its actions thus far, have further reinforced my aged comment.  

The key observation here is: The head of a key regulatory body in the financial services industry gets taken out when he does something not done before that shouts vociferously at the systemic cesspit of corruption in the Nigerian financial markets and aims to potentially take down the 'untouchables.'

Stanbic IBTC was in the news negatively in October 2015 for falsifying its fiscal year 2013 and 2014 financials according to the investigation carried out by the Financial Reporting Council of Nigeria (FRCN).  This is similar to the Public Company Accounting Oversight Board in the USA.   FRCN directed Stanbic IBTC to withdraw its fiscal year 203 & 2014 results as they were deemed to be misleading and restate them.  Stanbic IBTC refused to comply with the directive and also went to every and any court to overturn the directive.  Suddenly, in January 2017, Jim Obazee was fired by the Presidency and Stanbic IBTC goes ahead to release its fiscal year 2015 and 2016 financials largely as is, while getting rid of everybody implicated in the scandal and watching its stock price rise by about 200% in 2017 and now happily touting itself as a billion dollar bank by market value.   

The key observation here once again is: The head of a key regulatory body in the financial services industry gets taken out when he does something not done before that shouts vociferously at the systemic cesspit of corruption in the Nigerian financial markets and aims to potentially take down the 'untouchables.'

Access Bank is now using a letter dated after the head of a presidential investigation panel on the recovery of public property was asked to cease his duties and the future of the panel now in limbo in defense of its decision as a bank not to obey the Independent Corrupt Practices Commission's (ICPC) request to lift a "Post No Debit" order on the accounts of Blaid Properties and Blaid Construction Limited.  

I am in no way saying that the personal accusations against these men as heads of these regulatory bodies are true or untrue.  This is about people being taken out just when they dare to START to right the wrong in Nigeria's financial services industry and expose the high and mighty.   

The system of influential people are fighting (and have been fighting since time immemorial) back to preserve into perpetuity the cesspit of corruption, deceit and opaqueness that permeates the financial services landscape in Nigeria.  

The Stanbic IBTC issue was transformed into an attack against the founder: Atedo Peterside.  

The Oando issue is now transformed into an attack against the person of Wale Tinubu and his relation Bola Tinubu as a consequence.  

The Access Bank issue will be transformed into a personal attack against Aigboje and Herbert instead of focusing on the wrongdoing as stated by the ICPC.  

If I write an op-ed about Dangote Industry's trucks killing and maiming people in Nigeria (on an almost daily basis) without nothing of note being done to right the wrongs; the issue will be transformed into a personal attack on Aliko Dangote by Jude Fejokwu and his army of sycophants will go on the offensive while families weep for loved ones deemed not worth a penny.  

All these companies have a case to answer; the system that protects the wrong, high and mighty will never allow their owners to answer for it.  

Money is NOT made in Nigeria and in most countries globally by having values; the deeper down in the recesses of the earth you can bury values, the higher your wealth will rise exponentially.  Integrity and fiduciary responsibility speeches are for symposiums, conferences and seminars only. It is all about perception and not reality.  Telling the truth does not put food on the table.  

Tomorrow is a new day; we await what it will bring.  None of us truly knows; so, do not get too comfortable.    

I need to go now.  I was just passing through,  

Wednesday, October 4, 2017

Africa needs better auditors: fees are rising and values are dropping

         The most disturbing business relationship in the world is one where one party compensates another party that is supposed to be loyal to the society at large and uphold certain fiduciary principles.  You are paid by one entity but, your allegiance is supposed to be to a larger entity that has not compensated you in cash and/or kind but expects the integrity of your profession to trump selfish business concerns.   Auditors get paid by the client but, the investing public is expected to believe the audited financial statements meet certain required and expected standards of honesty and transparency.  Reality of events across the world clearly shows that audit firms have pledged their loyalty to the paying client and not the users of the financial statements they audit.

Africa needs better audits by auditors if it its constituent countries’ stock exchanges are ever to become developed markets and if it wants to increase stock market participation rates by its citizenry. Africa is already on the back foot; negative news gets amplified and positive news gets diminished in comparison.  The audited financial results of companies need to be as is (allegiance to truth) and not as desired (allegiance to paying client).  Africa needs the stock prices of public companies to be driven by substance and not speculation.  The audit firms have shown (more so in recent times) that they heed to the needs of their (paying) clients and not the users (non-paying) of the financial statements they provide opinions on. 

Recent accounting scandals (non-exhaustive) in Africa that have brought the immediate need for a total overhaul of the audit practices for public interest entities are as follows:

South Africa: African Bank Limited – Deloitte, LeisureNet – Deloitte, Linkway & Gupta Family – KPMG
Nigeria: Cadbury – Deloitte, Dangote Flour – Deloitte, Oceanic Bank – PWC, Stanbic IBTC – KPMG
Kenya:  Mumias Sugar – Deloitte, Uchumi Supermarkets – Ernst & Young, Haco Tiger Brands – PWC, Imperial Bank – PKF
Uganda: Crane Bank – KPMG
Ghana: Intercontinental Bank (now Access Bank) - PWC

Audit firms have been given numerous opportunities to rise above monetary inducement and selfish business interests and have failed the investing public.  It is time to save the investing public from audit firms through the following:

                 I.        Every country in Africa that has a functioning stock exchange must create an ACT by law that establishes a Public Company Accounting Oversight Board (PCAOB) which will be a private sector, non-profit company. This body will oversee the audit of public companies.  The legislature must pass the law and each country’s president must assent to it.  A clause will be put in the ACT ensuring that the law establishing the PCAOB cannot be repealed by successor governments, it can only be replaced with a better version after a majority vote in both legislative houses.  Given Africa’s history with corrupt leaders and despots, this law must have a protective barrier that ensures there is no way back to the “dishonest and opaque” days of old through the efforts of bad future leaders.     

                II.        Public interest entities (PIE) will no longer be able to choose their auditors.  We have seen clearly where the allegiance of audit firms lie.  The PCAOB will choose auditors for each PIE and rotate auditors every eight (8) years or less if necessary. 

             III.         PIE will no longer pay their auditors directly or determine remuneration.  The PCAOB will determine auditors’ remuneration on a biennial basis and pay the auditors annually post-audit.  The fees will be publicly released for each company with an explanation of fee basis.  Audit firms will now be engaged by the PCAOB to audit PIE on behalf of the investing public.  An escrow account will be set up in which the agreed fee with the PIE will be paid into by the audit firm.   

              IV.        The audit firms will make an annual contribution (as a function of the number of and market capitalization of all PIE as at year-end managed by an audit firm) into the Audit Malpractice Fund set up by PCAOB which will be used to fund the operations of PCAOB. 

                    V.        PCAOB must be fully independent of industry regulators in each country and is not accountable to them.  The Central Bank cannot prevent the PCAOB from indicting a bank’s auditor, censuring the bank’s board and demanding a restatement of the financial statements for the years where it is determined the audit firm failed in its fiduciary responsibilities to the investing public. 

                   VI.        The PCAOB will bar audit firms from auditing in any industry they are found to be deficient in their audit of a PIE for ten (10) years.  For example, if PWC Kenya is found wanting in its audit of Safaricom by the PCAOB, PWC Kenya will be barred from auditing telecom companies in Kenya (public or private) for ten years. 

             VII.        Global audit firms (PWC, E&Y, KPMG & Deloitte) will no longer be allowed to be legally distinct from the local firms using their name.  If a global audit firm refuses, it must severe all business/partnership ties from the local audit firm and a name change must immediately be effected.  Once no longer legally distinct, aggrieved parties are now able to sue the local firm and its headquarters; both are now legally liable.  If you are receiving money from use of your name, you should also be legally financially liable when the local audit firm using your brand name is deficient in its audit function. 

            VIII.        Audit firms will be permanently barred from doing board corporate governance and/or industry reviews for PIE.  KPMG Nigeria regularly does rankings survey/analysis of the most customer-focused banks in Nigeria.  Zenith Bank typically wins and KPMG is the auditor of Zenith Bank.  PWC did a Ghana Banking Survey inclusive of banks it audited.        

Once freedom is abused repeatedly, freedom must be lost.  The audit firms have been operating freely and have run amok in the process.  The time has come to rein them in with shackles to protect the financial markets.  Governments gave us prisons to protect us from dangerous people.  Governments in Africa should give us PCAOBs with the powers I mentioned above to protect us from a network of auditors that have proven to be untrustworthy and unreliable.  Their weakness is money; their strength is obscurity and statutory protection.     

Tuesday, March 28, 2017

Random Musings - Stanbic IBTC, UBA & Access Bank

Dear Africa Interested Professionals:
                                                           I have put together a bunch of random thoughts to close out the first quarter of 2017.  Will be back to the rest of the continent as from Q2 2017 and put Nigeria to bed for awhile.  

Stanbic IBTC Accounting Scandal: Do you know that everyone directly linked to the falsification of results is now out of the Stanbic IBTC picture directly?  

1. Atedo Peterside; Resigned as Chairman of the board of Stanbic IBTC.

2. Sola david-Borha: Resigned as CEO of Stanbic IBTC Holdings.  Now works for Standard Bank  Group out of Johannesburg.

3. Arthur Oginga: Resigned as CFO and has left the Standard Bank group entirely.  He now works for a bank in Botswana.  

4. Jim Obazee; The Executive Secretary of the Financial reporting Council that leveled the charges against Stanbic IBTC.  He has been relieved of his duties.  The Corporate Governance Code for businesses he was about to implement nationwide is now in limbo and may never be heard of again.    
5. Ayodele Othihiwa: Is no longer the engagement partner for the account of Stanbic IBTC for KPMG.  

I guess the majority shareholder: Standard bank of South Africa has decided to clean house and get all "actors' out of the scandalous close-up picture.

I will state that there was TRUTH in the accusations.  I am not speaking for Jim Obazee's intentions. The bank did have a case to answer.  Despite the denials by all accused scandal participants, KMPG Nigeria did make some amendments in the 2015 annual report that also includes the 2014 statements. The bank's concern now is how to get its share price back to N25.00 so that another rights issue can be embarked upon.  

UBA:  I have an article (it is the featured post on this blog as at 3/28/17) and UBA was used as my example.  I said the bank's share price has not moved in tandem with its fundamentals because the bank's balance sheet was overly stretched and needed to be loosened.  As this takes place, the bank's share price will begin to be freed from its shackles.  UBA's (A - L)/TC is now at about 2.5X and was at 3.1X barely a year ago.  The figure needs to drop below 1.95X and is clearly moving in the right direction.  A similar situation is plaguing Kenya Commercial Bank.  Financial leverage has dropped from 9.1X to about 8.3X.  UBA has risen about 40% over the past one year as a consequence. 
Secondly, UBA has been enamored with rapid expansion over the years.  I wrote another article a year ago, discussing UBA and Equity Bank (Search in the archives) and said that UBA's desire to expand again is not in the bank or its shareholders' best interest.  The bank needed to consolidate on what it has by improving the performance of its existing locations in 18 African countries and not move into more countries.  UBA has heeded (not publicly as far as I know) has held off on this.  The increase in pre-tax income across its 18 locations (N15.3B) from 2015 - 2016, exceeds the increase in pre-tax income from UBA Nigeria - of approximately N7.7B over the same period. This is a doubling.  

I discussed UBA in May of 2015 with a Scandinavian fund manager on the phone and reached out to him recently to remind him of what we discussed, what I said and what is currently in play as it relates to UBA and if he still holds a position.  In summary, as long as UBA continues to reduce its assets on its balance sheet and does not expand into new African countries while maintaining positive earnings accretion, UBA will return to a double digit banking stock before the end of March 2018 in my opinion.    

Access Bank:  I have stood by the TRUTH and have asked investors to exit their positions in Access Bank.  While what I am seeing, may not be clear to others yet I stand by my opinion that the bank's FY 2016 performance is NOT a true reflection of its present reality and this will not be the first time. Certain brokers have been trying hard to defend the stock's share price as investors exit.  Many banks have tried this in 2006, 2007 and part of 2008.  It is not sustainable and burns through cash pretty fast directly and indirectly.  Yesterday, was telling as the bank's share price opened lower, went lower during trading, and still closed the day in the GREEN.  No other stock among the over 100 traded, had the same experience.  No other stock opened lower, went even lower during trading AND ended up gaining (positive price performance) for the day by market close except Access Bank.  The same late push-back happened today, but, fell 3 kobo short to make it into positive territory.  The stock was down in excess of 2% just ninety minutes before closing.  The TRUTH never loses...  Stay tuned.  

I am not 100% sure, but it appears Zenith Bank has "pulled the plug" on their equity public offer for at least the near-term.  If true, GREAT NEWS!  Management is listening and adjusting to the new dynamics in play.  You can go and read my views on Zenith (a very different perspective) in two other articles on this board over the past one month.  The market is also not giving the stock that positive bump everybody expected given its eye-popping dividend yield.  

We are in different times now, Management and Investors, I hope you are listening and acting accordingly?      

I keep all published articles up on this blog permanently for the sake of POSTERITY, except for those that reflect my personal experiences and are not emerging market research related.  

Tell others to tell others about this Africa Research Blog; the financial TRUTH that makes a difference is HERE.  

Tuesday, March 14, 2017

Kenya Commercial Bank and Zenith Bank Nigeria: When 12% dividend yield is not enough

Dear Africa Interested Professionals:
                                                           Zenith Bank on February 27, 2017, released its fiscal year 2016 result; Kenya Commercial Bank did the same on March 9, 2017.  Zenith Bank offered its shareholders a final and second dividend for the 2016 fiscal year of N1.77 per share.  This equates to a final dividend yield of approximately 12% which is one of the best dividend yields for a bank in Nigeria's stock market history in relation to its current price.  The market did not budge as the stock was marked down on March 13, 2017, at pretty much the same price it was when the result and dividend declaration was announced on February 27, 2017.  What could have caused this?  The chatter among investors is the announcement of of hybrid capital raising in excess of N100B to commence later this year.  I do not agree that the imminent capital raising announcement was the major cause of the investor apathy towards Zenith's eye-popping dividend yield.  I see it more of wrong signals to investors by management based on decisions taken.  

1. Issuing dividend when debt is more than equity in your capital structure (see my article on Dangote Cement and Access Bank for more on this).  Paying down debt and reducing leverage would have been wiser and put the bank on a better footing moving forward.  

2. Bloated outstanding shares of 31.4B that is set to increase likely to about 40B before the end of 2016.  The approximately N57B spent as final dividend payment, could have reduced outstanding shares by about 10% through a share buyback.  

3. Issuing a dividend to investors and then taking it back from them and asking for extra through a rights issue.  It is better not to receive than to receive and more be demanded from you than you even received.  Zenith is putting its investors in a cash negative position.  Not nice,  

There may be a lot more to this lackluster response by investors to Zenith Bank's earnings release and subsequent announcements than is clearly obvious.  

Kenya Commercial Bank (KCB) released its fiscal year 2016 result on March 9, 2017.  The Kenyan banking industry has had it rough over the past twelve - eighteen months with banks closing down and/or going into receivership, auditing scandals and six months ago, President Kenyatta signed into law a bill compelling the Central Bank of Kenya (CBK) Governor, Patrick Njoroge, to ensure Kenyan banks cap their lending rates at 4% above the CBK interest rate of 10.5% (at the time and now reduced to 10%) and pay a minimum interest rate of 70% of the CBK rate on deposits.  The law came into effect on September 14, 2016.  

Over in Nigeria, we had policies aimed at enriching the banks during a recession, being crafted and rolled out officially and unofficially with explicit or tacit approval of the Central Bank Governor who was at the helm of Zenith prior to taking up his current position in June 2014.  
  • Banks were charging arbitrary currency exchange rates for online or point-of-sale transactions using their debit cards.  Obtaining dollars from the CBN at N305 and debiting their customers with diverse figures ranging from N330 - N450 with N380-90 being more prevalent.  
  • The removal of commission on transactions has been delayed.
  • The spread between lending and deposit rates is now at 20%, (6% deposit and 26% lending) one of the highest in the world. The CBN governor spoke recently defending why these obscene lending rates have to remain in place as the cost of doing business in Nigeria is high and banks need to appropriately price the risk of its intending borrowers.  
  • The fee for withdrawal and deposit of cash from banks has been increased and will commence in the states with the lion's share of economic activity on April 1, 2017.  The fees are variable.  and apply to deposits and withdrawals. 
This is just to mention a few.  Despite the above, let us see how these two prominent banks fared.

Kenyan banks were typically charging 18% for lending prior to the lending cap law coming into effect and repriced them downward to 14.5% for the last three-and-a-half months of 2016 after the law came into effect.  Nigerian banks' lending rate was typically at 26% or higher.  Six-month NIBOR rate hovers around 23%.  

Despite the above, KCB's Interest earned on Loans/Net Loans for FY 2016 was 13.3% while Zenith's was 11.9%.  There is more.  Non-performing loans/Net Loans for FY 2016 was 7.1% for KCB and 3.1% for Zenith Bank.  Despite operating in a higher lending rate environment in excess of 50%, having better asset quality and business opportunities, KCB still earned more interest income on its loans than Zenith did.  To top it off, KCB was able to extract in a regulatory constrained business environment more pre-tax income from its assets of 4.9% compared to 3.3% for Zenith Bank that earned N48B from foreign exchange dealings alone.  

KCB only has the equivalent of 10% of its assets in the form of contingent liabilities, Zenith (after removing the contingent liabilities attached to Zenith Custodian) still has 20% of its assets in the form of contingent liabilities.  Let me remind you that Zenith is Nigeria's second largest bank by assets (after FBN Holdings).  ROE for 2016 (no averaging) was 20.4% for KCB and 18.4% for Zenith Bank.

KCB has been constrained from a regulatory perspective a lot more than Zenith but, still achieved a better performance than Zenith that is in a more relaxed, financially supportive, regulatory environment (led by their former CEO) embedded within an economy in recession.  

Zenith wants more capital from its investors; has it offered enough in performance based on what it has already been given?  Its investors may just be saying; Zenith Bank  you owe me and not the other way around.  Zenith Bank. your investors want to receive more from you and deservedly so.  WE are told that there is more joy in giving than receiving.  12% dividend yield may just be too little, too late.  

The market is sending Zenith Bank's management a message on behalf of its shareholders.  I will be watching with my 3-D glasses on to see how Zenith's management will respond to a changing investor perception.  My advice over the years has been, manage the business and let the business manage the shareholders.  Management of Nigerian banks continue to prioritize managing shareholders to the detriment of the business.  

When the drummers change their beat, the dancers must change their rhythm to avoid a disconnect.

    Tell others to tell others about this Africa Research Blog; the TRUTH will set us free. 

Tuesday, March 7, 2017

Dangote Cement and Access Bank; the push back starts where it matters

Dear Readers,
                       This morning Access Bank was down in excess of 5% during trading hours.  During the last two hours of the trading day, there was a concerted effort to mop up the supply side to stop the bleeding on the downside.  The stock succeeded in closing the day just down 0.46%.  Maybe, another 30 minutes of trading and a deep red price movement would have a turned into a shallow green price movement.
Dangote Cement also rose with minimal shares traded <55,000 and as expected boosted the overall market as it single-handedly makes up one-third of the market capitalization of the Nigerian Stock Exchange.  There are vested interests here of course and plenty of exposure...  If Dangote Cement goes down (stock price wise), the Nigeria ASI Index goes with it and many emerging market portfolios will be hit.

Stay tuned.  We are in interesting times. Companies that use chicanery to drive interest in their stocks, will find their level regardless of artificial forces postponing the doomsday.

I told you about Forte Oil, since 2014. Where is Forte Oil now?

 The TRUTH will set us free; I will keep telling it.  Its a CALLING and I have answered the call.  

Monday, March 6, 2017

Dangote Cement and Access Bank; are investors buying their story?

Dear Readers;
                       I will make this quick.  Companies must present a true state of affairs of their businesses.  While I cannot force them to do so, I will call them out.  Luckily, investors are actually getting a bit more cautious in their usual exuberant reaction to results that appear impressive on first take.  

Dangote Cement:

Dangote's Cement is not selling.  This has been a perennial issue.  The company is producing but, is selling way below its production.  The company is now competing on the level of Zenith Bank for interest income witha figure of N43.82B.  Finance income earned in 2016 by a cement company is approximately 90% of the interest earned on bonds by Zenith Bank for the whole of 2016 - $48.73B.  This is ridiculously deceitful.  This line item was pretty much used to negate finance expense of N45.4B.  Operating Profit for the group actually declined 16% from FY 2015 - 2016.  Outside of Nigeria, where the company is embarking on an expansion frenzy across Africa, the company achieved an operating loss of N1.93B in 2016 as against an operating profit of N13.3B in 2015.  

Tax waivers are supposed to be for companies not for production lines.  Let us play along nonetheless.  Dangote Cement has not been granted a tax waiver but, has gone ahead to report its audited earnings based on the belief that it will be granted a tax waiver.  How do you produce an audited result which reflects past events and use a future wish (tax waiver that generated a tax credit) to boost your net income in the interim?  I know he is powerful in Nigeria and can pull strings better than a violin player, but this is surreal.  

This stock deserves to be punished to a price below N100 naira; this process started last week, ramped up today and hopefully will continue.   Management of companies need to realize that their stock prices will get pummeled if the published financials are meant to mislead rather than inform investors.  

Access Bank:

Management says its derivatives are held for day-to-day cash management rather than for trading purposes and are held at fair value .  All derivative contracts are considered to be valued with reference data from FMDQ.  The co-owner of Access Bank - Aigboje Aig-Imoukhuede was the former Chairman of the Board of FMDQ.  

Despite the above statement its derivatives are not for trading, but, for hedging purposes, Access Bank went ahead to book on its income statement, a net gain on derivatives of N50.1B.  The bank's net income for FY 2016 is N71.4B.  You can do a search for my commentary on Access bank's H1 2014 result on this blog for more detail about this paper profit boosting maneuver in play by Access Bank.  The bank's auditor also expressed concerns while leaving enough room to earn its paycheck. 


On a side note, Zenith Bank made about N46B from foreign exchange trading and foreign currency realized revaluation gains.  This is more than a third of the bank's net income for FY 2016.  The benefit of having your former CEO heading the Central Bank is clearly reflected here.  Ever heard of first dibs?    

Zenith could have gone ahead and bought back about 3.7B shares of its bloated outstanding shares of 31.4B using the N56B it is paying out for its declared final dividend of N1.77.  This would have also sent a signal that the bank believes its shares are undervalued.  Zenith now has more debt on its books than equity.  Management still believed that paying out dividends yielding 12% is better than paying down its astronomical debt.  This stock was punished last week. 

Nestle is getting a boost in its share price with a resilient performance despite a 67% decline in net income from 2015 - 2016.  

 Investors may just be catching on; they want the TRUTH from companies and are ready to vote with their funds to send a message.  I stand with you.  BUY Nestle for coming to the table with clean hands, SELL Dangote Cement and Access Bank for coming to the table with dirty hands masked as clean.    

Zenith Bank management did not act in a shrewd manner; you have to decide if this is a deal breaker for you or not.  The bank is "going for broke" and its either it wins big or loses without mercy.  

   Tell others to tell others about this blog; the financial TRUTH is here without fear or favor

Monday, February 13, 2017

SEC of Nigeria, Brokerage Scandal, Access Bank and more...

Dear Africa interested professionals:
                                                     Find below the verbatim text from the SEC about the Brokerage Scandal in Nigeria.  This is classic example of the grandiose speeches I mentioned in my last article that are more focused on self than transparency.  The SEC's response is largely defense and pacifying rather than providing clarity and answering questions.  Why did the media have to break a story more than four months after SEC knew about it?  Now, the SEC wants to respond and feel it is being proactive and transparent.  This issue will be buried before you can dig six feet.  It is Nigeria; nothing of this nature is new. People are talking as I write and the hook is gradually being removed from the mouth of the fish.  Victor Ogiemwonyi will not be sentenced to jail for any financial crime.  He has enough people that sit at the top of regulatory bodies to get him off the hook.  

This is why I continue to repeat; nobody involved in financial market and banking deals should sit at the top of any regulatory body anywhere in the world.  Decisions will be taken or avoided (behind the scenes) to ensure their interests  and those of their cronies and surrogates are protected.  

The current and last President of the Council of the Nigerian Stock Exchange (Aigboje Aig-Imoukhuede and Aliko Dangote respectively) own two (2) and four (4) listed companies on the same Exchange they oversee from the top.  The current and last Central Bank Governor (Godwin Emefiele and Sanusi Lamido Sanusi) were executive directors at listed commercial banks just before taking up their new appointments at the helm of the Central Bank of Nigeria.  The banking industry is in another round of crisis and the capital market is on life support as all bond yields are less than Nigeria's inflation and the stock market is in negative territory once again at -6% despite two new listings over the past two weeks.  Is their appointment the direct cause of this malaise? No! The signal to the marketplace from their appointment is bad and this is what the Nigerian capital market is suffering from!  How can someone be allowed to buy a bank (Intercontinental) that a company he owns (United Securities) borrowed N16B ($133m at the time)from and defaulted on the loan?  These are the kind of intangibles that make a market full of potential almost comatose and reluctance by investors to take the market as serious as they should.  

As long as people continue to use the system to serve their interest, instead of protecting the system from interests that undermine it, the Nigerian capital markets and banking industry will continue to flatter to deceive.  Everybody continues to keep quiet as long as they get their own piece of the dollar rain.  Those that have the power and influence to effect change for the GOOD OF ALL, better get to work; posterity will not be kind to them otherwise.       

Do you know which Nigerian bank holds the unpalatable record of achieving the most net income in the fourth quarter relative to the previous three quarters?  The answer is Intercontinental Bank that achieved 92% of its cumulative nine-month net income in the fourth quarter of its FY 2008 alone.  Do you know which bank is second?  Access Bank achieved 88% of net income for the previous nine months in the fourth quarter of its FY 2007 alone.  Which bank bought Intercontinental Bank? You guessed right; Access Bank bought Intercontinental in October of 2011.  No other Nigerian Bank has achieved this "phenomenal" feat that obviously defies logic.  Talk about weird coincidences...   

The former CEO of Intercontinental Bank: Erastus Akingbola is still pursuing the sale of Intercontinental to Access Bank through the Nigerian court system.  The Court of Appeal on November 8, 2016 reserved judgment and is still reserving judgment as I type.  Justice delayed may very well be justice denied especially in the current set up where the system is subject to certain people instead of everybody being subject to the system.  

S & P rates Nigeria B+ and Egypt B-.  Nigeria just issued a $1B Eurobond with a yield of 7.875% for 15 years.  Egypt just issued three weeks earlier, a $1B Eurobond with a yield of 7.5% for 10 years and $1.25B Eurobond with a yield of 8.5% for 30 years (thirty years.)  The 8.5% yield was Nigeria's market target rate for its 15-year Eurobond.  Intangibles have clearly made Egypt's debt more appealing than Nigeria's debt.     

The SEC letter as mentioned earlier...

"The attention of the Securities and Exchange Commission (“the Commission”) has been drawn to various publications in the National dailies alleging that investors in the Nigerian capital market have recently been defrauded by a licensed member of the Nigerian Stock Exchange (NSE).
In response to these publications, the Commission states as follows;
  1. As the apex regulatory authority of the Nigerian capital market, the Commission would do everything within the confines of the Investments and Securities Act (ISA) 2007 and the Rules and Regulations made pursuant to the Act, to ensure the protection of investors and their investments in the market.
  1. The Commission has established a robust framework for investigating complaints received from investors. The Commission also has an excellent enforcement mechanism and continues to maintain zero tolerance to any form of infraction in the market. Furthermore, the Commission adopts a risk-based monitoring and supervision of operators and institutions in the market to forestall potential systemic collapses.
  1. The Commission imposes stiff sanctions on erring operators to serve as a deterrent within the limits permitted by law, while infractions with elements of criminality are referred to the Law enforcement agencies for prosecution as provided under Section 304 of the ISA 2007. In furtherance of this, the Commission has developed a thriving partnership with the Nigerian Police Force (NPF) and the Economic and Financial Crimes Commission (EFCC) to prosecute these matters.
  1. Trading Platforms and other Self-regulatory Organizations in the Nigerian capital market have viable Rules/risk management strategies and have also adopted corporate governance standards that conform to global best practice. The Commission continues to collaborate with these platforms to ensure the eradication of all forms of market manipulations.
  1. In line with its commitment to implement the Nigerian Capital Market Master Plan (CMMP 2015-2025), the Commission has in recent times launched several notable initiatives which would galvanize the market, safeguard investors’ portfolio and contribute to the overall transformation of the economy. These include the E-dividend, Direct Cash Settlement, Full Dematerialization, Recapitalization exercise, Corporate Governance Scorecard and the establishment of the National Investors’ Protection Fund.
  1. With respect to the activities of Partnership Investment Company Limited (PICL) and Partnership Securities Limited (PSL) in the Nigerian Capital Market, the Commission wish to state that it has had All Parties meeting with some of the parties concerned and further investigations are ongoing. The matter is also currently before the Economic and Financial Crimes Commission (EFCC).
The Commission assures all investors and stakeholders of its commitment to ensuring the continued development and stability of the capital market, while no stone is being left unturned to recover for investors monies illegally converted by market operators."

9th February, 2017

Friday, February 10, 2017

Brokerage Scandal rocks Nigeria: Access Bank and Surrogates make their presence felt

Dear Africa interested professionals:
                                                          I have incessantly spoken out about no proper system of checks and balances within some African Financial Markets.  Individuals continue playing musical chairs with influential positions to ensure they continue to have control over the financial marketplace and preserve their business deals while expanding their business empire.  Remember in 2014, when Access Bank (against extant rules in place) tried to freeze its share price for four months while it embarks on a rights issue to "preserve shareholder value?"  The freeze was on for a week until Arunma Oteh (SEC DG) at the time intervened and forced the freeze to be reversed.  Diamond Bank had completed its rights issue a few months earlier without seeking preferential treatment.  

Partnership Investment Securities (owned by Victor Ogiemwonyi) is currently embroiled in a financial scandal involving aggrandizement of clients' funds to the personal benefit of the owner and his companies.  One of these clients turned out to be Arnold Ekpe - the former Chairman of Ecobank Transnational Incorporated among other companies.  Arnold Ekpe had requested (all necessary paperwork was filled out) for the proceeds of the sale of his ETI shares to be deposited into his bank account.  

The trade was conducted on the Nigeria Stock Exchange, cleared by the Central Securities Clearing System and ended up in the account of  Partnership Investment Securities with Access Bank 

There are two financial bodies, one brokerage company and one bank thrown into the 'dark' spotlight here.  

1. Central Securities Clearing System (CSCS)
2. Nigeria Stock Exchange.  
3. Access Bank.
4. Partnership Investment Securities

Let me solve this quadratic equation quickly for all of you without using the "Almighty Formula."  

1. The Deputy CEO of Access Bank: Obinna Nwosu is on the board of CSCS.  

2. The owner of Access Bank and WAPIC Insurance: Aigboje Aig-Imoukhuede is the President of the Council of the Nigeria Stock Exchange.  The President is the equivalent of a Board Chairman.  The Nigeria Stock Exchange also has major influence over the CSCS as a major shareholder.  The CEO of the NSE selects the CEO of CSCS and chairs the board of CSCS.  

3. Access Bank co-owner/and frontman is the President of the NSE Council and the NSE has influential control over CSCS activities and operations.  The President of the NSE Council also has major influence over the contract renewal of the NSE CEO.  

4.  For about a year-and-half - January 2013 - July 2014 Victor Ogiemwonyi and Aigbjoe Aig-Imoukhuede were both members of the Council of the Nigeria Stock Exchange.  

CSCS (where Access Bank's deputy CEO sits, the current CEO - Herbert Wigwe) was formerly in that position) moved the proceeds of the trade (in excess of 1.5B naira to the Access Bank account of Partnership Investment Securities.     

Access Bank received over N1.5B into its coffers, its customer (Victor Ogiemwonyi) gets access to funds that do not belong to him and everybody smiles to the bank, except, Arnold Ekpe.  

CSCS MD looks away (he has purportedly resigned two months ago), NSE management looks away while Aigboje and Victor look happy.  The Nigerian financial system continues to remain a joke as certain individuals continue to remain and strive to remain bigger than the system in Nigeria while everyone else that is supposed to matter and protect the interests of the common investor cower in fear while remaining focused on SELF-PRESERVATION given the highly vindictive nature of the financial services industry to whistle blowers and the blatant evil & corruption that permeates the Nigerian business environment masked by nice suits, grandiose speeches and smiles on television.  

Egypt's EGX30 index continues to soar despite having similar economic issues like Nigeria.  Egypt's financial market does not worship certain individuals for starters; ponder on that.    

More to come soon...  The TRUTH will set us free; I will keep telling it.  

      Tell others to tell others about this Africa Financial Markets Blog; the financial truth is here.

Tuesday, December 6, 2016

Deloitte in the news again; Join me on this journey

Dear Professionals:

                               A little over a year and a half ago, I wrote two articles in two days about my concerns with companies audited by Deloitte based on my numerous experiences as an independent investment analyst. I will post both articles below.  In response to this article, some partner from Deloitte South Africa started chasing me around the internet with threats; he was obviously not thrilled with my truth telling which he deemed misleading lies. I always tell you readers, "posterity is never prejudiced."  Just as light and darkness will always reveal themselves, so also will the truth no matter how obfuscated it may initially appear.  

Over the past month, Deloitte has been sanctioned by regulatory bodies in two different countries over poor audit oversight of its clients.  

1. Deloitte has been hit with a record four million pounds fine by the Financial Reporting Council (FRC) after a five-year investigation into Deloitte's work for an AIM-listed aircraft parts maker called Aero Inventory.  A Deloitte partner (Mr. Clennett) was also fine 150,000 pounds.  I quote the FRC: "Deloitte and Mr. Clennett fell significantly short of the standards reasonably to be expected of, respctively, a member firm and a member of the Institute of Chartered Accountants in England and Wales (ICAEW).  

2. The US auditing watchdog has just fined Deloitte's Brazilian arm a record $8m for "falsifying audit reports, altering documents and providing false testimony during an investigation that unearthed what it described as its most serious finding of misconduct."    

Let us take a quick trip back to Africa and go back in time.  The former auditor of Forte Oil was Deloitte in conjunction with a smaller firm: Aminu Ibrahim & Co.  A former Executive Director, Finance for Forte Oil became a whistle blower of sorts and was terminated under acrimonious circumstances in September 2010.  He even went public to state his life was in danger.  He accused Deloitte of aiding and abetting accounts misrepresentation.  He was also on the audit committee of the board up until the half-year mark of 2010.  Immediately after the furor, the company changed its name to Forte Oil from Africa Petroleum and removed Deloitte as its auditor.  

Ironically Tesco of UK who was indicted and exposed for overstating its profit in excess of 263m pounds using PWC as its auditor, has gone ahead to now select Deloitte as its new auditor.  Based on noted antecedents, I do not know whether to laugh or cry; pondering in progress.    

The other big three have their issues to along similar lines.  I learnt in elementary school: Bad, worse and worst.  I am dealing with the worst in my opinion first.  

Find below my Deloitte articles written in May 2015:

 I was about analyzing the refined sugar production industry in Africa while honing in on Omnicane of Mauritius, ILLOVO of South Africa, Mumias of Kenya and Dangote Sugar of Nigeria.  I came across some recent unsavory developments at Mumias Sugar in Kenya; this brought to the fore a disturbing situation that I have noticed since 2006 on multiple occasions and feel it is time to speak out without fear or favor.  

Mumias Sugar is currently plagued by an accounting scandal with Deloitte at the center.  It is alleged that Deloitte connived with top executives of Mumias to conceal accounting flaws at the company.  Mumias is alleged to have declared false profits by taking 2.6B Kenyan shillings from a different but related company and declared it as part of its profits.  In addition, the executives have been accused of secretly importing sugar into Kenya which they repackaged and sold under the Mumias brand.  The allegations have already led to the sacking of the CEO, Commercial Director and Company Secretary of Mumias after a separate KPMG audit found them culpable of wrongdoing.  

I have had numerous mental agonies reviewing audited reports of companies in multiple industries in Nigeria with one common denominator: Deloitte & Touche.  In 2006, Deloitte & Touche was sanctioned (just a fine) in Nigeria for also declaring false profits on behalf of Cadbury over multiple years. It is very difficult in Nigeria to be sanctioned for wrongdoing which is likely why this has not happened again and not because auditing has become more transparent.  Where applicable, I have expressed concern over shenanigans in some audited financials of companies audited by Deloitte & Touche in Nigeria (locally known as Akintola Williams Deloitte) in some of the research reports I have written.  

Another interesting note is the spike in yearly audit fees for some of the companies audited by Deloitte which is in excess of reality in my opinion in some particular instances.  The last year Deloitte audited UBA before the change to PWC (2009), audited fees paid increased from 86 million naira ($573,000) to N196 million naira ($1.3m).  The question that will forever linger is was this a payment to Deloitte for the 2009 15 month audit only or in addition a parting gift for a job well done over the years?  Of course PWC refused to take a "haircut" and charged N222 million in 2010.  PWC Nigeria has its own ongoing and past drama but we we will leave that for now...  

few of the companies audited by Deloitte at the time that quickly come to mind based on the Mumias Sugar 2015 accounting shenanigans story above are:

1. Continental Reinsurance 2009

2.  Dangote Cement 2010

3.  Fidelity Bank June 2007

4.  Dangote Flour 2010

Is Deloitte in Africa as a company's auditor now a liability?  A cloud of suspicion now hangs over its clients on the continent.  What are shareholders going to do about this?  Deloitte is now the third most prestigious accounting firm in America behind PWC and Ernst & Young with KPMG coming in fourth.  Deloitte was 1st when I was in college.    

I keep wondering why multinationals and individuals come to Africa to do business and suddenly lose their values all for a buck.  I know money is important and useful.  I was also taught that a good name is worth more than riches.  I guess that world has gone into oblivion and I am now living in the past...

 In continuation of our article on audited reports on some companies in Africa by Deloitte & Touche and the attendant fallout, we state some large companies current or recently audited by Deloitte & Touche in Africa.  

South Africa (listed companies):  

Bidvest Group

Illovo Sugar

Angloamerican (Deloitte LLP and not Deloitte & Touche which is a subsidiary)

Vodacom (just changed to PWC for fiscal year ended 3/31/15 after a request for proposals)

Two top South African banks are audited by Deloitte & Touche in conjunction with another major audit firm as required.  

First Rand Bank (PWC and Deloitte & Touche)

NedBank  (KPMG and Deloitte & Touche)


East Africa Portland Cement (nominated by the Auditor-General of Kenya)

Mumias Sugar


Delta Corporation


Dangote Cement (in conjuncton with a non-major audit firm based in Kano)

Dangote Sugar

Skye Bank (the only listed Nigerian bank left to release its audited 2014 financials after acquiring a troubled Nigerian Bank in Q4 2014)  This bank's board has been taken over by the Central Bank of Nigeria in 2016. I

Wema Bank

Flour Mills of Nigeria

Custodian & Allied Insurance (disturbing mental experiences in 2009 & 2011 while reviewing)

Why are three of the prominent sugar companies in Africa being audited by Deloitte & Touche?

The largest companies by market value in Zimbabwe and Nigeria are audited by Deloitte & Touche.  What does this portend for these markets going forward?    

Overall, we see PWC consolidating, Ernst & Young gathering more market share at a faster rate and Deloitte & Touche losing clients as far as Africa is considered if not beyond.

Being a 'STAR' used to mean you were good at what you do and your 'moral compass' still worked properly.  Nowadays, being called a 'STAR' in your profession means ,you will do whatever you need to do to get paid.  

The TRUTH will set us free; I will keep telling it and posterity will always never be prejudiced.