Emerging Markets

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.

Wednesday, October 26, 2016

SEC Nigeria stands up for the Retail Investor

Dear Africa interested individuals:
                                                        On Monday, April 25, 2016, I wrote an article on this blog titled: 

"Nigeria All-Share Index: Retail investors will determine how it moves."  

I have been a vocal proponent of retail investors being given the necessary support to return in droves to the Nigerian stock market and for their outstanding grievances to be addressed e.g. the dividends not yet paid out for banks that were taken over by the Central Bank (Bank PHB, Afribank etc) during the tenure of Sanusi.  Where is the money?  No one is talking. 

The Nigeria Stock Exchange (NSE) leadership has a different opinion.  Retail investors should be pushed to invest indirectly in the marketplace by investing in mutual funds instead of directly purchasing equities into their own accounts.  Some mutual fund companies were even engaged by the NSE to do investor education (of course marketing their funds) to retail investors to drive this agenda.  
I have been and will remain adamant that the Nigerian stock market needs retail investors to en masse return to the stock market with whatever amount they have in their possession if the market wants to be even keeled.  The Nigerian stock market achieved its highest index value in March 2008; this is also when foreign investor participation peaked.  Foreign investors were in when the market achieved its all-time high and the market has been on a topsy turvy decline since then.  Retail investors drove the market between the second half of 2006 through 2007, not foreign investors.  The alienation of retail investors through a variety of unfavorable policies and business decisions has been the bane of the NSE All-Share Index performance over the years.  There are other reasons, but, the alienation of domestic retail investors directly and indirectly is the foundation of the market's decline.  
Where are the foreign investors that were waiting to jump in with their millions of dollars after the naira depreciated in 2016?  More importantly, the index performance is still in negative territory. Nigerian Bank price-earnings ratios are collectively the lowest in Africa.  No foreign institutional investor appears to be excited enough to invest heavily over a sustained period of time despite the relative cheapness of bank stock prices.  So what's missing?  In a hyper-inflationary environment, the best way to protect yourself (besides buying things in bulk instead of piece-meal) is to invest in equities.  Despite this, market participants in Nigeria (brokerage houses and investment banks) continue to ignore their own and seek foreign intervention in their market.  There is a proverb in Nigeria translated means "what you need that takes you far and wide in search of is actually right next to you."  Retail investors must be brought back and given the much needed platform to invest wisely and directly!  Their grievances from the boom and bust of 2007 & 2008 must also be addressed.  

I am happy the Securities and Exchange Commission (SEC) of Nigeria has formally announced a plan to open up the stock market to retail investors.  The SEC said the lack of adequate retail investor participation has subjected the stock market to extreme fluctuations driven by foreign investor market participation volatility.  

I will keep standing up for what I deem to be logically right even if unpopular.  The SEC has finally aligned with my stance and has set the ball in motion.  I am thrilled though, this is just the beginning. When you keep shouting, one day someone worthwhile will listen.  Such is life; patience is a virtue.  Retail investor, your cry is gradually being heard.  I stand with you and always will.  

  Tell others to tell others about this Africa Research Blog; the financial TRUTH is here.       

Tuesday, September 27, 2016

Auditors: The more values dropped, the more money made

Dear Readers:
                       The most disturbing business relationship in the world is one where one party compensates another party that is supposed to to be loyal to the society at large and uphold certain fiduciary principles.  You are paid by one party but, your allegiance is to a larger group that has not compensated you in cash and/or kind but expects your human values to trump monetary value.    

Auditors get paid by the client but, the general public is expected to believe the audited financial statements meet certain standards and do not serve the selfish interests of the paying client. Equity, fixed income and alternative investments analysts get paid by companies and the public is expected to believe the published reports reflect the honest, selfless view of the analysts and not the business and personal interests of his/her employer who pays the analysts' wages and bonus.  A boss of mine once upon a time called equity research a 'game.'  Lying to deceive readers is now labeled a game...      

The auditors and analysts almost all the time follow the idiom: "he who pays the piper, calls the tune."  When an analyst or auditor employee does not play the tune of their employer, all the rot of the system is now heaped on this non-conformist.  The punishment due to the employer is meted out to the employee who has not allowed the love of money to destroy their conscience or who got 'hung out to dry' as a scapegoat for regulatory infractions to save the employer's reputation and credibility.  I am going to focus on auditors for this article.  

Ernst & Young was very recently fined $9.3m for improper auditor relationships by the Securities & Exchange Commission (SEC) in the USA.  US regulators took enforcement action over relationships that became a little too close.  

Event 1: A senior EY partner involved in the audit of a NY based public company forged an improperly close friendship with the company's CFO and spent more than $100,000 on corporate entertainment for the executive.  Obviously, this partner will be highly sought out in the industry for his understanding of how the game is played.  He imbibes the right values and is not a rogue auditor.  

Event 2: Another EY partner who was auditing a different public company became romantically involved with its chief accounting officer.  

Ernest & Young failed to take appropriate action in both instances.  

Mr. Andrew Ceresney (Director of Enforcement at the SEC) said "EY did not do enough to detect or prevent these partners from getting too close to their clients and compromising their roles as independent auditors."  

I put 'compromising' in bold to reflect what the financial system is about nowadays; doing what needs to be done to get paid.  The system is bigger than all of us.  Open your mouth and swallow whatever it throws at you without batting an eyelid.  Pragmatism is in; Idealism is out.  No compromise on this one.  

Ernst & Young spokesman said the individuals involved "violated multiple EY policies, hid their conduct and behaved in a way that was antithetical to EY's global code of conduct, culture, values, policies and training.  All have been separated from our organization."     

When companies get sanctioned by regulators for infractions, its not them, its the employee that is bad.  Reminds of one trader in London that was on trial for rigging LIBOR and he said "my boss made me do it."  That boss was high, dry and in full denial.  The employee is thrown under the bus so that the rotten system can continue with its charade that it upholds high standards professionally and personally.  

It is interesting how the response of EY contradicts the comment from Mr. Ceresney.  He said "EY did not do enough to detect or prevent..."  EY's spokesman in his response said the individuals "hid their conduct..."  This is akin to waking up late for work in the morning (you purposely did not set your alarm) and saying your alarm failed if you get questioned in the office.  In my opinion, the EY employees did not hide their conduct, EY just feigned ignorance and reaped the monetary benefits until the SEC burst their bubble.  This is the same kind of language used by auditors for their clients when accounting scandals take place.  The 'board misled us.'  I have been saying it for years, auditors should seek what they need and not just accept what they are given!  Obviously, too much money is at stake to go through with this.  All major businesses will just blacklist the auditor for inconveniencing the client that is paying you.  We paid you to give us gain and not pain;be our frien and not foe.  The same excuses they offer when an accounting scandal was used by EY to attempt to rise above this latest scandal.  Our client fooled us, our employees fooled us.  No, you did not do enough to detect or prevent what has now come to the fore.  

Let us take a trip to Africa briefly along these same lines.  On July 20, 2009, Oceanic Bank released its FY 2008 earnings.  Pricewaterhouse Coopers (PwC) was the auditor.  Oceanic Bank declared with auditor approval, revenue of N188.2B and net income of N9.6B.  On June 22, 2010, Oceanic Bank restated its FY 2008 earnings; PwC was still the auditor.  The results were restated according to management to reflect "economic reality as at December 31, 2008."  Revenue for FY 2008 now became N118.3B from N188.2B and net income was a loss after tax of N234.6B from a profit of N9.6B.  Meanwhile, PwC is still held in the highest esteem with its reputation largely intact.  

PwC was recently sued in the USA and have decided to settle caims out of court that it failed to catch a multi-billion dollar conspiracy between executives at a defunct mortgage lender and counterparts at Colonial Bank, which also lost its going concern status.  PwC  was also hit with a fine in the UK for signing off on the 2007 audit of subprime lender Cattles, which later collapsed, just the way PwC signed off on Oceanic Bank's FY 2008 financials and Oceanic Bank collapsed and is still haunting Ecobank even after its collapse.   

The last year Deloitte (Akintola Williams Deloitte) audited UBA Nigeria before the change to PWC (2009), audited fees paid increased from 86 million naira in 2008 to N196 million naira in 2009.  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.

When there is a widely acceptable rot in the financial system, those that are not willing to accept this rot, are made out to be the bad people, the rogues of the system.  The system refuses to surrender, so the few principled eggheads in the system are made out to be the bad people so that the real unprincipled people can keep on making money from the rotten system while pointing fingers at those trying to fix it.  

Auditors are necessary in our world of today; their lack of values in exchange for more money and deals is not necessary.  It is unfortunate how values have gone down the drain in our global financial system while monetary values and fines are on the rise.  Monetary values are rising in a geometric progression, while fines are rising in an arithmetic progression.  

I dedicate this article to Eric Ben-Artzi who was fired by Deutsche Bank for raising alarm over the bank’s inflated valuation of its portfolio of credit derivatives.   He refused his award because the SEC did not punish the culprits (he wanted to improve the system and not just get a pay day) and they happily walked away with multi-million dollar bonuses while Deutsche Bank gets a fine that is just a tap on the wrist.  Everything is about money; nobody is really interested in making our financial system better.  I share his disillusionment with the financial system.     

People do bad in companies and make money for their employers and get rewarded financially and labeled as cream of the crop and start walking with a sprightly gait.  People do good in companies by speaking out about the BAD, get fired and labeled as rogues that should be cast into the deepest parts of hell far away from the sane and principled  financial system they refused to conform to and almost everybody else is happily conforming to.     

If you do not STAND for something in life, then, you EXIST for nothing.  I stand for the TRUTH...

Tell others to tell others about this Africa Research Blog; the financial TRUTH is here. 

Sunday, August 28, 2016

Accounting Scandals: is Kenya the worst in Africa or just more remorsefully transparent?

Dear Africa interested individuals:  
                                                                Kenya has been in the nose in recent years with one accounting scandal after the other.  The scandals came into the public domain through aggrieved parties, Institute of Certified Public Accountants of Kenya (ICPAK) or foreign parent companies.  Investigations into the "cooking of the books" exposed corrupt dealings and outright looting in some cases.  These are definitely worrying developments as is the recent case of Tesco in the UK and Toshiba in Japan where profits were overstated.

In Kenya, accounting scandals of note over the years are:
1. Uchumi Supermarkets
2. Mumias Sugar
3. Haco Tiger Brands
4. CMC Motors
5. Kenya Airways

The only acknowledged accounting scandal in Nigeria till date is that involving Cadbury Nigeria.  On paper, corporate governance and cooking of the books is more prevalent in Kenya, than in Nigeria.

I am of the strong opinion that the collective system is less cooperative in Kenya to suppression of accounting and false reporting incidents.  The collective system in Nigeria is a lot more cooperative to suppression of accusations of creative accounting and false reporting.  This has ensured that acknowledged accounting scandals are almost non existent in Nigeria and gives the Nigerian financial reporting stakeholders a better image.  An incident ten months ago brings this suppression to the forefront.

The Financial Reporting Council of Nigeria (the equivalent of ICPAK in Kenya) is a federal government agency responsible for developing and publishing of financial accounting standards to be observed in the preparation of financial statements of public entities in Nigeria.  Its main objective is to protect investors and ensure good corporate governance practises in the public and private sectors of the Nigerian economy.  Many people actually do not know this body exists as they are reticent in their activities.  Five months after the inauguration of a new government in Nigeria, the FRCN came out of hibernation with a bang.

The FRCN on October 26, 2015 asked the directors of Stanbic IBTC TO WITHDRAW the financial statements of Stanbic IBTC for the years ended December 31, 2013 and 2014 and restate them in accordance with the law.  The FRCN also directed that the board members who attested to the financial statements now deemed to be inaccurate and misleading are suspended from attesting to the authenticity of any financial statements "until the investigation as to the extent of their negligence in the concealment, accounting irregularities and poor disclosures in the said financial statements is completed in accordance with Section 62 of the Financial Reporting Council of Nigeria Act Number 6, 2011.  Accordingly, they are not allowed to vouch the integrity of any financial statements issued in Nigeria."

Stanbic IBTC released a counter statement to the media dismissing the claims of the regulatory agency in its entirety stating that "Stanbic IBTC has met the disclosure requirements of the international financial reporting standards."  Stanbic IBTC failed at the first court level as the judge ruled in favor of the FRCN and the matter is now at the appellate court as FRCN is determined to ensure that its directives are carried out.  Things like this do not happen in Nigeria and the public reaction was more of opprobrium towards the FRCN.  The Central Bank has not admonished the bank so who is FRCN? The Central Bank released a statement a few days later, admonishing the FRCN for overstepping its boundaries and absolved Stanbic IBTC of any wrongdoing in its statements.

The FRCN stated that the Central Bank has embarrassed it and the government of Nigeria by its statement.  According to the 9 page letter sent to the Central Bank by FRCN, the Chief of Staff to the President said that the Central Bank should also be sanctioned if it is found that it is collusion with Stanbic IBTC given that it approved the financial results before they were publicly released.  The CBN governor has been focused on proving that the FRCN does not have the powers it has abrogated to itself to save face for himself and the regulatory body he heads.

I personally had an issue with Stanbic IBTC's 2014 audited report and brought this to public knowledge in 2015. Read my two articles on this blog about the bank's result by doing an archive search. Two other disturbing financial results that quickly come to mind are Dangote Cement 2010 and Continental Reinsurance 2009.  

I need to close this out a bit prematurely.  I may revisit this more in-depth at a later time.

Kenya's corporate governance and financial reporting is bad; Nigeria's is worse.  This is not apparent because Kenya is more transparent while Nigeria is more opaque about scandals.  The system in Nigeria is driven to protect individuals and not values the system was crated to uphold.  If the FRCN wins this case, the immediate casualties are Godwin Emefiele, Atedo Peterside, Sola David-Borha, Yinka Sanni,  Standard Bank group and frankly the holding company system in Nigeria.  FBN Holdings profit warning, FCMB Holdings profit warning and Stanbic IBTC falsification of results which if they were transparent, would have likely led to another profit warning.  The bank holding companies are apparently not holding on tight enough.  Another topic for another day.  

Patrick Njoroge keep on striving to preserve the Kenyan banking system by openly cleansing it while Godwin Emefiele strives to protect Nigerian career bankers (self inclusive) and their legacy by suppressing the reality of the rot within the Nigerian financial system and poor corporate governance OVERSIGHT. 

Corporate governance and transparency is below required standards in Kenya.  Some other countries are in the same boat, but, have decided to be dishonest instead of being honest about the realities in their business environments.  

Tell others to tell others about this Africa research Blog.  The TRUTH will set us FREE. I will keep telling it.  

Banking System: Is Kenya's more corrupt or just more honest?

Dear Africa interested individuals:
                                                                Over the past one year under the leadership of Patrick Njoroge, three Kenya banks have gone into receivership and the National Bank of Kenya has had its CEO & CFO removed along with four others.  A net profit of 2.25B Ks by September 2015 turned into a net loss of 1.15B Ks by December 2015 for National Bank of Kenya.  Patrick Njoroge, has stated that " never again will fuzzy numbers and creative accounting be used to deceive investors in banks."  The system is rotten and he has decided to openly acknowledge it and resolved to clean up the system.  Kenya is in tune with the rot within its banking system and is putting in place a better structure and closer surveillance and reporting to restore investor confidence in its banking system.

Let's take a five hour flight to Nigeria, the most visible frontier market in Africa.  Skye Bank reported a pretax profit of N14.98B as at September 30, 2015.  As at December 31, 2015, Skye Bank reported a net loss of N40.7B.  Key members of the board including the Chairman were forced out and the Central Bank of Nigeria appointed new board members including a new CEO  and Chairman.  The bank also received a lifeline in excess of N100B to enable the bank remain a going concern and meet its obligations to depositors.  The bank was also the only major bank not selected for foreign exchange dealing in the free float market.

I actually, raised eyebrows at the H1 2015 point about Skye Bank when discussing why Nigerian banks will keep telling less. Despite the above disturbing event and bailout, we have heard the following:

1. The CBN says Skye Bank is neither distressed nor liquidated and remains a healthy bank in the Nigerian banking system. All banks in Nigeria are safe and investors have no cause to fear.

2. The new CBN appointed Chairman of Skye Bank: M.K. Ahmad said that the CBN has not taken over the bank, but just reconstituted the board.  This also means that the bank is not under receivership.  This is not true as once a certain power asks certain individuals to manage a bank by executive fiat, that bank is under receivership.  The board was reconstituted by the CBN and the new board members are on the board purely based on authority from the CBN and you still want to tell the whole world that Skye Bank has not been taken over by the CBN.  The CBN just intervened.  There is a book called how to use statistics and lie.  We need a new one called how to use semantics and lie.

African Bank Investments Ltd. gave a profit warning two years ago and said it needed $792m to remain afloat. This is from the management of the bank. Corporate governance laxity was at the heart of African bank's collapse.  An independent investigation by a lawyer was undertaken to look into the collapse and the findings recently publicly released.  

Skye Bank gave a profit warning earlier this year but did not acknowledge needing emergency funds to remain afloat.  A few months later, the CBN intervenes with in excess of $300m and still says the bank is not in distress and of course the new management went along with the same mantra gleeefully.  The bank only had corporate governance issues according to the CBN.  "I laugh in Swahili."

Kenya does not have a more corrupt banking system; Kenya has a more honest bankint system where the system is more important than individuals. Kudos to Patrick Njoroge for bringing VALUES back into business.  The elevation of individuals and self preservation l is the bane of Nigeria's existence. Kenya has a banking crisis and is working to plug the loopholes while Nigeria remains in denial as Godwin Emefiele and his cohorts try to preserve their legacy by defending the indefensible.

Kenya and South Africa's banking systems are corrupt and both are asiduously working on correcting issues that have come to the fore.  A private investigator looked into the collapse of ABILITY in South Africa and how this can be avoided going forward.  Kenya is also ringing in massive changes to business as usual.  Nigeria continues to say all is well while grappling behind the scenes with fires burning left and right.  I will take the former over the latter any day.  I see hope fot the former and darker days for the latter.  When reality decides to bite, it will bite really hard.  

  Tell others to tell others about this Africa Research BLOG.  The financial TRUTH is here.