Unibank sails into troubled waters

In an unprecedented move, the Bank of Ghana has taken over the country’s largest privately owned indigenous bank and appointed an administrator to nurse it back from the abyss.TOMA IMIRHE examines the situation and unravels the controversy this has generated.

For the second time in barely half a year, Ghanaians were last week treated to what, in the traditionally placid and conservative banking sector, can only be described as high drama. On Tuesday evening, the Bank of Ghana announced that it had taken over Unibank, the country’s largest privately owned indigenous bank, in order to save it from what BoG Governor Dr Ernest Addison, claims to be “imminent collapse.” This has come just seven months after the central bank revoked the licenses of two erstwhile universal banks, Capital Bank and UT Bank, on the grounds of technical insolvency, transferring their liabilities and some of their assets over to GCB Bank and putting the rest into receivership.

Little wonder that the announcement initially generated panic among the banking public, although the BoG’s assurances that Unibank remains fully licensed and operational, albeit under the temporary management of KPMG for the next six months, have settled nerves somewhat. Indeed, since the announcement, nothing has changed for Unibank’s customers, true to the central bank’s promise that none of their deposits are at risk in any way.

KMPG has been given the responsibility of restoring the bank to financial good healthy after two years of tottering on the brink of technical insolvency so deep that its capital adequacy ratio [CAR] was a negative 24% by the end of 2O17, in direct contrast to the key regulatory requirement that every bank maintains a CAR of at least 1O%. The timeline for achieving this is six months.

This will not happen. Even before KMPG begins what would be a herculean task even in the best of circumstances, it will have to ride through an inevitable – but unnecessary – run on deposits by customers who are understandably spooked by the unfolding situation.

To be sure, the depth of Unibank’s financial troubles, as espoused by the BoG last week, is frightening; and the situation is being worsened by allegations by the political minority that government is using the BoG as a blunt weapon in order to collapse a bank which it sees as being sympathetic to the National Democratic Congress. Combined this means KPMG has its work cut out.

The BoG though insists that its action is driven purely by regulatory imperative. It points out that Unibank’s CAR has been persistently in the negative for several months although the sheer depth of the problem had been hidden from it by misleading periodic financial reports delivered by the bank. Inadequate core capital has manifested in persistent liquidity shortfalls and consistent breaches of the cash reserve requirement, forcing Unibank to rely on Emergency Liquidity Assistance [ELA] to the tune of over GHc2.2 billion over the past two years. Indeed, all this points to technical insolvency, even though, the bank is expecting some GHc428.8 million in debt repayments from government contractors imminently – the BoG says it has done the math and Unibank will still have a major shortfall even after that money is paid.

But even more damning than Unibank’s financial challenges, in the view of its regulator, have been its attempts to cover them up. According to the BoG a key shareholder in Unibank managed to obtain liquidity support from the central bank using third party banks as agents, fronting for it. Thus it has emerged that Unibank is owing the BoG some GHc4OO million more than was originally believed.

Unibank also borrowed from the interbank market without the written approval of the BoG, at a time its CAR was less than the prescribed 1O% minimum, a rule in place to protect other banks from being pulled down through their loan exposure to a financially troubled counterpart.

The BoG is equally chagrined by how Unibank went about using the money it borrowed behind its back. It failed to comply with a directive dated October 26, 2O17, prohibiting it from giving new loans and making further capital expenditure, because of its financial shortfalls. Some of the loans it gave were in excess of its single obligor limits aimed at preventing over concentration of its credit risk. The bank also engaged in significant transactions with its parent company and affiliate companies including “connected lending” and other related party transactions without applying sufficient prudential controls as required by law.

The BoG further accuses Unibank of deliberately misleading it in its financial reports, part of what it describes as “poor corporate governance and risk management practices.”

The timing could not have been worse for Unibank, coming barely a fortnight after announcing its takeover of Agricultural Development Bank, then being forced to retract that claim upon the BoG ‘s insistence that it had not given the requisite approvals and the revelation that the shareholders in ADB that had pledged Unibank their shares had not, as yet, actually fulfilled that promise. Now, banking industry analysts and commentators are speculating that Unibank made that particular move in order to secure ADB’s financial wherewithal and use it to shore itself up.

Some confused observers are now asking how Unibank intended to pay for the acquisition of ADB if it was in so much financial difficulty itself. This tends to confirm the theory that Belstar had committed to using the proceeds of its 24% equity stake sale to invest in the recapitalization of Unibank itself, effectively transforming Belstar’s direct equity investment in ADB into an equity investment in a Unibank that also had a controlling stake in ADB.

But with that planned corporate takeover nothing more than a rapidly fading dream, there are much bigger, more pertinent questions now awaiting answers.

Perhaps the most important is: how did Unibank succeed in blind siding the BoG for so long? While Dr Addison now describes Unibank’s ongoing financial troubles as a legacy issue – meaning one inherited from the previous administration at the BoG – he nevertheless admits that the bank’s CAR worsened from a positive 4.75% in 2O16 to a negative 12.5% by October 2O17 and a negative 24% by the end of last year. This apparently happened during a period when Unibank was borrowing from both the BoG itself and the inter bank market without the central bank in the know, and was furnishing the BoG with false financial reports.

The next question is when did the BoG find out? This is because analysts find it curious that the damning revelations only were revealed a fortnight after Unibank got into the BoG’s bad books for claiming control of ADB, when it fact it was nowhere near having achieved that.

Indeed this has created the grounds for the conspiracy theorists, who assert that Unibank is being punished for its audacity in trying to take over a state owned bank through a hostile takeover.  The political opposition has taken this theory one step further, by asserting that government is making sure that an “NDC supportive” bank is stripped of its clout and influence.

Theories aside, the quantitative facts regarding Unibank’s financial troubles, as revealed last week by the BoG, are irrefutable, even if the timing of the revelations and consequent actions may indeed have created room for some degree of suspicion.

Ultimately though the BoG can lay claim to having stepped in to protect not just Unibank’s depositors, but the banking industry as a whole and the public purse. Unlike the erstwhile UT Bank and Capital Bank, Unibank is so big that its demise would have a major effect on the entire banking industry, through its interbank transactions which now constitute systemic risk to the entire industry. Indeed, it is too big to be allowed to fail, and while this guarantees customers deposits placed with it, it also means that if KPMG is unable to restore it to solvency from within, tax payers would have a huge bill to pay.

It is therefore unsurprising that the long delayed implementation of the Deposit Protection Act, passed in mid 2O16, but since then ignored, has been brought to Parliament’s front burner within hours of the BoG’s actions over Unibank.

But the public is taking little or no notice of that. For now, the attention of Ghana’s banking public will be firmly focused on the unfolding Unibank saga. And forget the six months timeline given KPMG – this is just the beginning of a long, drawn out saga that will generate fresh new headlines for a long time to come.