Why CBN Allowed Providus to Take Over Unity Bank

·      Describes Unity as systemically important bank which shouldn’t be allowed to fail

·      Declares its failure will render many people unbanked across northern region

James Emejo in Abuja

More facts emerged yesterday as to the main reasons behind the Central Bank of Nigeria (CBN)’s decision to back the take-over of Unity Bank by Providus Bank.

THISDAY gathered that a key consideration by the apex bank was that Unity Bank remained a systematically-important bank that must not be allowed to fail in the interest of many depositors across the northern part of the country.

Sources further confided in THISDAY that the amount of depositors’ funds in the bank was not really a major concern but the fact that Unity Bank currently remained the only bank servicing many northern states and local governments.

Therefore, the central bank was of the view that if the bank was allowed to go down, many people across the north will be unbanked and will not have access to a financial services institution.

In addition, it was learnt that most of the people who borrowed money from Unity Bank are mostly farmers, thus a failure would likely have a devastating impact on the region and country’s food security initiatives.  

Sources also revealed that these were the major consideration by the CBN when it approved Providus’ bid to take-over Unity Bank, adding that Providus Bank has 80 per cent of the capital injection into the new entity that would emerge from the proposed acquisition.

The CBN also recently approved another N700 billion which would also allow the apex bank to recover its support to Unity bank.

Only last week, the Nigerian banking sector landscape was shaken following the approval of the merger of Unity Bank Plc and Providus Bank Limited. The Walter Akpani-led Providus, a financial services provider licensed as a commercial bank by the CBN in January 2016 took the industry by storm.

What surprised many stakeholders was how a relatively younger Providus Bank was able to pull through such a major acquisition deal, passed the due diligence test and obtained the regulatory approval from the CBN Governor, Mr. Olayemi Cardoso.

THISDAY can now exclusively reveal the history of the transaction, the cast of characters behind the transactions, their challenges and triumph and how this may have become a model for the CBN in treating future cases of non-performing loans by banks in Nigeria.

The Birth of Unity Bank

As the deadline for the July 2004 banking recapitalisation programme drew closer, some banks risked revocation of their licenses. When the reform was announced, Nigeria had 89 banks, most which were small in size with limited lending capability. As of then, the single borrower limit for the banks’ lending was 35 percent of shareholder funds. Prior to this reform, the required minimum of shareholder funds was just N2 billion. While a few banks had shareholder funds of up to N10 billion, that meant their maximum loans could only be a maximum of N3.5 billion, an amount commonly said to be grossly insufficient to finance major transactions in critical sectors of the economy such as power, telecommunications, real estate and maritime.

The Soludo reforms began with the phased withdrawal of public funds from the banking sector in July 2004 with the aim of forcing the banks to find alternative deposits instead of a chronic dependence on government funds. By this time, industry analysts agreed, 83.9 per cent of money in circulation within the Nigerian economy was outside of the banking sector. The hope was that banks would chase these funds and improve their lending capabilities.

Thus, a hasty marriage of nine banks, namely, Bank of the North, First Inter-State Bank, Inter-City Bank, Pacific Bank, Societe Banque, Tropical Bank, New Africa Merchant Bank, Centre Point Merchant Bank and New Nigeria Bank was hurriedly put together to form Unity Bank with late Prof. Akin Mabogunje appointed as Chairman and Alhaji Falalu Bello as Managing Director from 2006 to 2011. Unity Bank commenced operations in January 2006 following the merger of the nine banks with competences in investment, corporate and retail banking.

THISDAY historical checks revealed that, due to some intense ethno-religious pressures, Soludo was reported to have quickly given Unity Bank “a pass mark” to escape the regulatory hammer. According to industry watchers, this was said to have been far from the truth as the bank had inherited several legacy debts comprising heavy Non-Performing Loans from the legacy banks. THISDAY’s archival findings further shows that, as of 2005 when the banking consolidation was announced, about 7 of the 9 banks that hurriedly coalesced into Unity Bank were already clinically dead. By 2009, Unity Bank itself was already with the NDIC.

However, on 1st of June 2009, Sanusi Lamido Sanusi was named Central Bank Governor by President Umar Musa Yar’Adua and his appointment was confirmed three days later in the heat of the global financial crisis to replace Dr. Chukwuma Charles Soludo. By this time, Unity Bank was widely known by industry watchers to still be on “life-support” in a manner of speaking. Sanusi Lamido then reportedly gave Unity Bank six months to recapitalize saying the bank had “the best corporate governance practice” despite not having any audited accounts for years. There were suggestions by sources close to the Nigerian Senate then that this was the condition the Northern Senators had given the Presidency to support Lamido Sanusi’s clearance ahead of the Senate Screening as CBN Governor.

Thomas Akoh Etuh to the Rescue

Upon assumption of office, Lamido introduced the risk-based supervision model which involved assessing the banks’ capital adequacy relative to their risk profiles. According to a source close with his fingers on the pulse of the Northern establishment, this development rattled come concerned elder statesmen who then approached one of Nigeria’s serial investors, the self-effacing Thomas Akoh Etuh pleading with him to invest in Unity Bank to save the bank as it already had a problem of negative shareholding and had just six months more to recapitalize. The source who was also close to the elder statesmen further confirmed to THISDAY, that by 2009, the elder statesmen specifically requested Thomas Akoh Etuh to invest the sum of N10billion in the bank. But for Unity Bank, even as of 2013, the problem of liquidity still persisted and the center could no longer hold again as Unity Bank could no longer meet up with clearing under the leadership of Alhaji Ado Wanka, its then Managing Director from 2011 to 2013.

THISDAY findings discovered that the then leadership of the bank had invested in Express Discount House with no collateral whatsoever. This exposure worsened the Unity Bank liquidity crisis. Ado Wanka and the Bank’s Chairman, Alhaji Numan Danbatta were subsequently removed from office and succeeded by Henry Seminitari as Managing Director and Lamis Dikko as Chairman.

The source told THISDAY how Thomas Etuh was offered the option of nominating a Managing Director for the bank following his readiness to invest in the bank, which he declined. “Thomas Etuh was however appointed Vice Chairman of the bank instead,” the source added. Further checks by THISDAY showed that that same year, Unity Bank initiated a Rights Issue to raise N40billion naira.

THISDAY findings also showed that, on 23rd January 2015, Thomas Etuh was subsequently appointed Chairman of the bank following the resignation of the former Chairman, Alhaji Lamis Sheu Dikko who left to pursue his political ambition. Thomas Etuh held the position until 2017 when he was said to have voluntarily resigned to attend to a pressing family crisis and was succeeded by Aminu Babangida as Chairman with Tomi Somefun becoming the Managing Director, a position she holds to date.

Another source close to the CBN confided in THISDAY that, “while all of this was going on, the legacy Non-Performing Loans (NPLs) were still in the books of the bank, some from the 1960s and 1970s with interest capitalizing monthly.” The source lamented how, the Management of the bank failed to take advantage of the forbearance window provided by the Central Bank of Nigeria (CBN) then to be able to save the bank. Another source close to Unity Bank wondered why, another CEO of the bank, Falalu Bello, who was appointed CEO and Group Managing Director of Unity Bank from 2006 to 2011 also refused to sell off these legacy debts to AMCON but rather retained them in the books of the bank with interest mounting daily.

The source disclosed that, “this is contrary to the claims now being disingenuously made by some vested interests around Unity Bank that a previously healthy Unity Bank Plc led by Thomas Akoh Etuh found itself completely hollowed out after giving out hundreds of billions of naira in non-performing loans (NPLS).”

Sale of Non-Performing Loans

THISDAY can however authoritatively reveal that, concerned by the lingering problem the NPLs had constituted to the sustainability of the bank, Thomas Etuh it was who sought counsel from a highly respected U.K-based Global Investment Banker who had helped the Bank of England to design the rescue of British banks during the last global financial crisis. He was said to have offered Thomas Etuh his time-tested strategy for debts to Unity Bank.  THISDAY investigation threw up the names of some very reputable firms such as PricewaterhouseCoopers, Olaniwun Ajayi LP and Frontier Capital Alternative Assets Ltd, FCAAL which were said to have been involved in conducting financial, legal due diligence and ultimately sale of the debts. An inside source at one of the firms confirmed to THISDAY that, “No Objection” responses were obtained from CBN and AMCON respectively. According to THISDAY checks, the AMCON Act requires that AMCON must always be offered the first right of refusal to buy such debts. Another reliable source at the CBN who spoke to THISDAY on Friday in Abuja said,” yes, Unity Bank obtained a “No Objection” response from AMCON and FCAAL was able to buy off the toxic debts off the books of Unity Bank.”

As of 2014, THISDAY gathered that Unity Bank had amassed non-performing loans (NPLs) of approximately N191.9bn, representing over 70% of the loan portfolio.  This was significantly higher than the regulatory threshold for prudential supervision and was the highest ratio of NPLs/Total Loans in the Nigerian Banking Industry at the time.  However, by the time the NPL deal with FCAAL was being completed in 2016, NPLs were said to have risen to approximately N242bn, excluding intervention and insider credits.  THISDAY learnt that the collateral coverage of NPLs, estimated at less than 10% of loan value, was very weak, further reducing collectability.

THISDAY investigation revealed that Frontier Capital Limited, a boutique investment banking firm, maintains a low profile but its involvement in the distressed debt space as an adviser, dates back to the early days of the Asset Management Corporation of Nigeria, AMCON.  Sources at AMCON told THISDAY that its former CEO, Femi Edun led one of the earliest loan restructuring deals to be approved by the Board of AMCON, Sparkwest Steel Industries Limited in 2011.  He was subsequently appointed as Chairman of the company’s board of directors, representing AMCON and the lending banks.  THISDAY checks also revealed that Frontier Capital has in fact advised on several other distressed debt transactions, acting for borrowers, lenders and AMCON at different times.

The company incorporated Frontier Capital Alternative Assets Limited (FCAAL) as a private acquirer and manager of distressed debt portfolios and other alternative assets as unconventional asset classes are usually described in the financial markets.  THISDAY searches at the Corporate Affairs Commission reveal that the owners of FCAAL are the management of Frontier Capital and InvestmentOne Capital Management, a subsidiary of Lagos based InvestmentOne Financial Services Limited, formerly owned by Guaranty Trust Holding Company Plc.

While the concept of distress debt investing may be new to the Nigerian clime until the AMCON dispensation, it is major practice in most advanced economies of the world. Harvard Business School Online says, “distressed debt investing, also called distress debt investing, distressed investing, or distress investing is the process of investing capital in the existing debt of a financially distressed company, government, or public entity.”  Some of the largest privately owned players in the field globally are Oaktree, Cerberus, TPG, Centerbridge, Fortress, PIMCO, Apollo, Bain Capital and Blackstone.  In 2022, International Financial Corporation and Nimble Group launched a $165million facility to invest in distressed debt in Southern and Eastern Africa.  FCAAL is the pioneer private player in West Africa, following publicly owned AMCON.

Sources close to Unity Bank say that when the deal with FCAAL was done in 2016, the bank’s, Unity Bank’s NPL/total loans ratio at over 70 per cent, was the highest in the industry and the sale of the NPL portfolio was a condition for keeping their banking licence.  The bulk of the bad loans were said to have been inherited from the 9 legacy banks that made up Unity Bank.

THISDAY learnt that FCAAL’s acquisition of the loan portfolio was preceded by rigorous financial and legal due diligence by the firms of PricewaterhouseCoopers and Olaniwun Ajayi LP respectively, the same firms who advised AMCON in the acquisition of NPLs from the banking industry in 2010.  Due diligence confirmed that of the non-performing loans to over 20,000 borrowers totaling N242 billion, only N51 billion was properly documented and fully backed by collateral. Therefore, the transaction fully complied with all legal and regulatory requirements then in force.  FCAAL acquired a further tranche of loans totaling N187 billion, in 2018.

THISDAY gathered that the commercial terms of the NPL transaction were for an upfront deposit of up to 5 per cent of loan value, depending on the quality of the loans, totaling N6.4billion and further payments of up to 60 per cent of collections.  THISDAY confirmed from multiple inside sources at Unity Bank that, to date, the bank has received over N15billion, whilst collections and payments continues.  FCAAL is said to currently be overseeing over 250 court cases on the Unity Bank NPL portfolio.

Multiple sources at the CBN and NDIC respectively confirmed to THISDAY that they have looked at Unity Bank’s NPL transactions on repeated occasions both as part of routine examination activity and by way of deliberate investigation instigated by anonymous petitions.  They commended the pioneering effort of FCAAL and described the transactions as a model for the banking industry to use as an additional option for NPL resolution, especially since AMCON is now in the “sunset phase” and no longer acquiring NPLs.

Multiple sources at the Central Bank involved with the transaction who spoke to THISDAY on condition of anonymity disclosed that, “by the time due diligence was conducted on the loans only N51 billion of the over N400 billion NPLs of Unity Bank had perfected collaterals. One of the CBN sources told THISDAY that “the attempt to pin the problem of the bank on Thomas Etuh may have been a clever diversionary tactic by some vested interest to scuttle the planned acquisition of the bank by Providus Bank. The allegations have no footings in the facts and figures before us at the CBN.”

The Providus Connection

THISDAY investigation confirmed that, following the global investment banker’s advisory to Thomas Etuh and the NPL sale transaction, NPLs were cleared out to less than two per cent percent. Nevertheless, raising capital remained a challenge for Unity Bank. An inside source at the Risk Department at Providus Bank confided in THISDAY on condition of not having her name in print that, “it was Thomas Akoh Etuh who led the efforts for Providus Bank to make N75 billion capital injection for the acquisition of Unity Bank.” She wondered why some vested interests whose positions would be affected should this capitalization move succeed began to hire some hatchet writers to begin to release false information alleging sharp practices in the process leading to the off-loading of the toxic loans from the book of Unity Bank, saying “CBN and all the parties in this transaction deserve some commendation as this is now a precedent for the banking sector.”

Alex Emode, a close ally of Thomas Etuh who spoke to THISDAY in Lagos, queried, “isn’t it illogical for Thomas Akoh Etuh to be working against the interest of a bank where he is still the largest shareholder? As Chairman of Unity Bank for a period of time, Emode told our correspondent that Thomas Akoh Etuh understood the realities of the financial health of the bank. “He received no official car nor a litre of diesel from the bank. Rather, he became an advocate of cutting costs and waste by reducing the large size of the Board of the bank from an 18-member Board to an 8-member Board. A clear testament to his penchant for cost-cutting but one for which he was hated by some powerful forces within the bank,” Emode added. Another source at Providus Bank to THISDAY, “I think the motive of those behind the negative media campaign was simply to force the CBN to halt the acquisition which comes with a N75 billion capital to restore the bank to sound state of financial health. Thankfully they have lost the battle for the soul of the bank.” 

Rationale Unity-Providus Bank Merger

Although the combination of Providus and Unity is structured as a merger, THISDAY checks revealed that Providus Bank is actually the stronger partner given its financial condition.  Providus Bank had shareholders funds in excess of N96.2 billion and total assets of N1.5 trillion as of  December 2023 and is one of the fastest growing banks in the industry.  THISDAY Analysts compared that to Unity Bank’s negative shareholders’ funds of N190 billion and total asset of N413 billion.

The combination with Unity Bank gives Providus Bank the opportunity to have a more national outlook, given the branch network, spread and profile of Unity Bank across Nigeria, especially in Northern Nigeria. For Unity Bank, the merger preserves the safety of depositors’ funds and its banking franchise.  It also allows Unity Bank and its shareholders to be part of a fast growing and well managed institution with bright prospects.

Unity Bank has one of the most extensive branch networks in northern Nigeria, inherited from some of its legacy banks, particularly Bank of the North, Tropical Commercial Bank, Intercity Bank and New Africa Bank.  This, combined with its focus on small and medium scales enterprises and the agricultural sector means that Unity Bank also plays an important role in financial inclusion – bringing banking services to unreached and under-served citizens and communities.

According to industry analysts THISDAY spoke to as part of its investigation into the transaction, approving the merger of Providus and Unity Bank, allows the Central Bank of Nigeria to achieve a number of objectives.  Firstly, by putting the management of the combined bank in the hands of a tested management team, CBN greatly enhances the prospects of repayment of the financial accommodation already extended to Unity Bank so that there is no loss to the Treasury. Next and of great importance is the objective of financial inclusion.  Preserving the branch network and customer accounts of Unity Bank secures continued access to banking services for millions of urban and rural customers in many areas of the north, including several areas where Unity Bank is the only bank.

THISDAY learnt that, by extension, this also allows the Central Bank to prevent loss of customer confidence. Therefore, the merger is consistent with the Central Bank’s responsibility to maintain financial sector stability, manage systemic risks and foster financial inclusion.

Unity-Providus Banks as Game Changer

Now that the regulator’s nod has been secured and Providus Bank will be able to make the injections of N75billion for the acquisition of Unity Bank, the bank may be well on its way to sound financial health as it no longer faces the challenge of the Non-Performing Loans in its books. Today, Unity Bank is one of Nigeria’s leading retail banks with 213 business offices spread across the 36 States and Federal Capital Territory. It is rated as Nigeria’s 8th largest bank by business locations. The Bank offers wide-ranging financial services to individuals, businesses and the public sector of the nation’s economy. Unity Bank focuses in particular on SMEs and Agribusinesses. The Bank is driven by the vision to be the retail bank of choice for all Nigerians and this is at the core of all that it does as a bank.

With the combined force of Unity Bank’s branch network and Providus Bank’s digital prowess, a stronger banking institution is bound to emerge from the transaction. This may well be the beginning of a season in the Nigerian banking sector.