Oceanic Bank Analyst Report by Proshare -June 2010

8/8/2019 Oceanic Bank Analyst Report by Proshare -June 2010

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12010 www.proshareng.com

ISSN 1597 8842 Vol.1 No. 41

Half Year Results ReviewHalf Year Results ReviewHalf Year Results ReviewHalf Year Results Review

Issued on Aug 30, 2010


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2August 20102010 www.proshareng.com

Contents

Oceanic Bank Result Executive Summary 03

The Operating Environment 07

o The Financial Market in 2009 Regulatory Reality

o Banking Sector Metrics Peer Comparisons

o Recovery Strategy and Outlook

Fundamental Analysis 13o H1 Financials Reviewed

o Q2 2010 Snapshot & Salient Indices

Technical Analysis 21

The Analyst Insight 23

ISSN 1597 - 8842 Vol. 1 No. 41


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1.Executive Summary

Oceanic Bank Nigeria International Plcs Q2 2010 results for the period ended 30 th June,

2010 alongside its Q1 2010 report for the period ended 31st

March, 2010 have beenreviewed and form the basis of our objective analysis in this report.

The analysis revealed that the bank is making considerable progress in navigating itsway out of its peculiar and general challenges.

Whilst it is true that banks are back to reporting profits, going by the H1 2010 resultsreleased so far, a key concern with investors appears to be the question of perceptionmerging with reality i.e. that most banks actually recorded a decline in interestincome and non-interest income; even though profits were bolstered by write-backs, anunsustainable activity. Similarly, Investors make the point that not a few banks suffereda YoY decline in risk assets, which underscores the attitude towards lending at this point

in time.

To unravel this, we made a conscious effort to properly contextualise the operatingrealities and environment under which these banks, especially the rescued ones havehad to exist. Reviewing Oceanic Bank Plcs H1 2010 performance thus, provided us withsuch an opportunity.

To create a reasonable linkage with the immediate past of the bank, we recall thebanks December 2009 common year-end results (covering the usual 12months periodfollowing the banks earlier change from September year end to December year end in2008) released in compliance with the Central Bank of Nigeria (CBN) uniformaccounting year for banks in the country.

A cursory analysis of the results prior to the Q1 and Q2 results showed that the bankexperienced a myriad of challenges, as showcased in the figures posted in the recentlyreleased results.

This trend started with the restatement of the banks year-end result for the periodended 31st December, 2008 - http://www.proshareng.com/reports/view.php?id=11113 following allegedmaterial mis-statement discovered in the earlier accounts for the period

presented by the previous managementof the bank.

In the restated audited accounts, the auditors formed an opinion - that the currentmanagement team of the bank which resumed in August 2009 following theintervention of the Central Bank of Nigeria (CBN) identified significant errors and

irregularities in the accounting records of the Bank and some of its subsidiaries, whichwere indicative of managements over-ride of laid down processes and controls.

To this effect, the current management team, it is understood, carried out acomprehensive exercise designed to identify and correct all material errors in theaccounting records.

According to the banks auditors - at the end of the exercise, there wasrecognition ofloans amounting to N231bn that was previously not recognised; additional provisionsfor loans and interest-in-suspense amounting to N238bn and N78bn respectively hadto be made.

At the conclusion of the straightening of account exercise, the financial statements ofthe Bank and the Group consequently incurred losses before tax amounting to N346bnand N338bn respectively for the period ended 31 December 2008 and 2009; and


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delivered a negative shareholders funds ofN35bn and N28bn respectively as of thatdate.

The accounts earlier presented by the former Management of the bank showed groupprofit before tax and profit after tax ofN8.125bn and N7.126bn respectively for the

periods under reference. These figures when compared with the true state of thebanks financial report eventually arrived at, showed conditions of the existence ofmaterial uncertainty - casting significant doubts about the banks ability to continue asa going concern.

This was however, as indicated in the restated result, addressed in some ways by thefinancial support received from the Central Bank of Nigeria (CBN) which was furtherbacked by a confirmation of continued financial support for a period of at least12 months from the date of these financial statements."

Deriving from the statement above, the going concern of the bank was/is predicated onthe promised continued support from the Central Bank of Nigeria (CBN), which may be

extended or revised based on realities at the time of review before expiration. If thetrends of Q1 and Q2 is sustained and improvements occur in key areas of focus(discussed in section 2 below); the bank may not need any special financial support,except of course the AMCON.

Digging in to the Realities

The negative profitability recorded in the re-stated 2008 and 2009 annual reports toDecember 31 could be attributed to the overblown loan loss provisions the bank had tomake in recognition of the significant proportion of non-performing loans (NPLs) it wascarrying in its books. The bank had to make additional provisions for loan losses in the2008 and 2009 financial years besides the N42bn and N315.115bn loan loss

provisions made in the previous 2008 audited and third quarter report to September30th, 2009 respectively.

The grave situation in the bank, prior to the intervention of the CBN was evident in thespike recorded in the banks non-performing loans in its 2009 financial year; up by 43%to close at N634bn from N443.3bn at the end of 2008, and the unprecedentedgrowth in non-performing loan ratio which grew to 72% from 51% of the previousyear.

These figures, though unusual and should naturally constitute serious concern in theminds of the investing public, however serves as an indicator of the determination ofthe banks management and board to come clean - reclassify and provide for all loanscorrectly in line with CBNs Prudential Guidelines and the International Standards nowrequired of all banks operating in Nigeria - so as to purge the bank for a fresh start.

Turning the Corner?

For the 2009 financial year, the Groups Gross Earnings inched up by 66% to close atN196.4bn from N118.3bn recorded in 2008, while Net Interest Income grew sharplyfrom N7.5bn of the 2008 financial year to N101bn in 2009 December. This, according tothe new management, is attributable to the release of previously suspended interestincome on hitherto non-performing loans which have been restructured and are nowperforming.

The improvement now seen in the Q1 and Q2 performances is appropriately muted, yet

- such improvements as recorded in the interest income components of the bank;which inched up by +61.23% and +13.33% in Q1 and Q2 respectively should andcannot be ignored.


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Could this be an indication of an overall improvement in the banks credit managementregime or/and a decline in its internal rate of loan default?

While awaiting the Q3 results to validate these inferences, it is discernable that any

improvement in the banks cost efficiency under the new management would lendcredence and integrity to the new managements approach to profitability.

The cost efficiency measured by cost to income ratio is the gauge for this and it hastrended downward from 298.38% recorded as at December 31st 2008 to 145.32% atthe close of 2009 financial year to December 31st, 2009 going further down to94.47% as at March 31st, 2010 and 87.18% as at 30th June 2010.

Other issues related to imperatives for a turn-around are addressed in section 2.

On the Technical Side

Oceanic Bank Plcs share price over a nineteen month period to August 27th, 2010recorded a negative performance of -88.35% depreciation to close at N1.40 fromN12.02 it closed at the end of January 2nd, 2009 trading session. This trend placedOceanic Bank as one of the share prices with negative returns recorded in the sectorusing their January 2nd, 2009 price levels.

From January 04th, 2010 the banks share price still declined by -20.90%, retaining itsplace as one of the negative return stock in the sector.

Indeed, Oceanic Bank Plc share prices at the close of trading on the 26 th August, 2010traded below its 20days, 50 days and 200 days moving averages. This shows that thebanks share remains in the bearish territory.

With the cancellation of the 1 for 10 bonus earlier declared by the former management,a decision guided by the restatement of its 2008 financials; investors are left to grapplewith the realities of non-commensurable returns on their investments, and for howlong?

We try to provide some insight in our closing remarks in section 5.


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2.The Operating Environment

Since the assumption of office by the incumbent Central Bank of Nigeria Governor,

Sanusi Lamido Sanusi - there have been a wholesome paradigm shift in the bankingindustry on many fronts as things appear never to return to the old ways again.

Prominent among the changes that have come into the banking industry is need forstrict adherence to sound risk management beyond a clich, the adoption of world classstandards in disclosures, and the enthronement of a regulator-sensitive industry.

To achieve the shift in mindset sought, the CBN took fundamental policy decisions http://www.proshareng.com/admin/upload/reports/The%20Bull%20in%20the%20China%20Shop%20220809.pdf

(August 22, 2010). In this report, we presented the CBNs outlook for the financialmarket, its interventions andthe consequential impact of the steps taken and proposed seeking to highlight the implementation variables that could impact the economy,businesses and the fortunes ofthe banks.This was followed up with our 100 Days after

Report - http://www.proshareng.com/admin/upload/reports/100_days_after_Report_-_Proshare_251109.pdf; wherewesought to establish the post-intervention realities faced by customers, banks and theeconomy as a whole.

The conclusion drawn was that the avalanche effect of the actions taken will createsome dislocations in the short term but deliver a financial services sector and economythat is more credible and stronger in the medium to long term.

During this period of dislocation, the banks had to contend with excruciating but notexistential circumstances and changes that impacted on how they managed their poorrisk-based decisions, provisions for NPLs, focus on new businesses and managementchanges; further accentuated by the increased political/sovereign risk that pervaded the

economy between November 2009 and February 2010 all generally creating anatmosphere, it would appear, under a global crisis - un-conducive to commercialvibrancy.

Banks in the country underwent a rigorous stress test, the first of such in our clime theconclusion of which led to the axing of the Executive Management (CEOs and EDs) offive banks on August 14, 2009. In its subsequent and final audit, the CBN axed theCEOs of three additional banks and placed two banks on notice to build up its capitalbase by June 2010.

The consequential effect of the exercise starting from the period of the audit - took itstoll on individual banks, customers and the relationships that existed. Though it was not

unexpected that a general lull would pervade the market for some time; this stretcheda bit further into months, driven in part by a sustained and fast-moving negative newscycle on the banking sector and the economy.

More importantly, the management and treatment of specialised assets and bankshare-backed collaterals, which needed to be quarantined, led to subjective butprudence based provisioning that impacted on the performance results of both thecleared and un-cleared banks. This went on till December 2009 when the CBN auditundertook its year end review and recognised the need to take a more pragmatic andbest practice view of the provisioning required including the suspension of the generalprovisioning rule and the introduction of a prudential guideline to take care ofspecialised assets.

In the closing month of 2009, banks, faced with the challenge of operating a cost-effective institution, undertook the necessary laying-off of staff, partly to help reduce


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their operating expenses; but in the main, to streamline operations relative to thebusiness available now and foreseeable. This caused some tension in the industry as itsoon became widespread and with such severity that it became a matter for nationaldiscourse.

Since then, some level of stability has been achieved in the sector; with the CBNequally taking a number of policy steps to steer the reform forward. These include:

1. The adoption of a common year accounting date in the sector - revealing where eachbank stood in their fundamental and operational strengths; creating an atmosphereof healthy competition in financial reporting in the banking sector as observed in thetrend so far with banks well aware of how such a compliance and improved levelof disclosure will resonate well with an investing public long on suspicion about theirfinancial health.

2. The adoption of the International Financial Reporting Standard - to bring to bear on thesystem a level of transparency which will give the investing public more confidence

in the financial reports of banks - strengths or weaknesses.

3. The formal approval and constitution of the Board and Management of the AssetManagement Company floated by the Central Bank of Nigeria in conjunction with theFederal Ministry of Finance and backed by the Nigerian Stock Exchange/Securities &Exchange Commission expected to go a long way to providing the much neededrespite to the sector, and indirectly to the economy by easing liquidity into thesystem.

4. The review of the practice of Universal Banking with consequential impact on thegroup structure of banks leading to a reining in or extrication of subsidiaries notdirectly related to core banking into different models to meet the demands of thenew regulatory regime. It should be noted that a combination ofregulatory/supervisory inertia coupled with misapplication of the conceptby bankscreated the condition under which deposit-based banks got entangled in linked andsynergetic businesses which, left unregulated or effectively supervised createdconditions that impacted on the outcomes we have. It is expected that mostinstitutions will have to revisit their business strategy and models to meet thisdevelopment.

5. The setting up of about N1 trillion development fund to cater for the financing gapneeds of the power, Aviation and Real Sectors of the Economy.

6. Guidelines on many aspects of banking practices, services and fundamentals.

7. The CBN policy on terms and tenures for MD/CEOs of banks - the forward dated exitsof three pioneer chief executivesof UBA, Zenith and Skye Banks was professionallywell managed bythese institutions and stabilised the polity, sign-posting a positiveshift in the change management initiative embarked upon by the CBN.

Nigerian banks since then have taken steps to introduce and/or strengthen theprocesses and practice of sound corporate governance and leadership succession intheir institutions.

In effect, a significant shift has been achieved in the banking operator focus with theflight to quality as against the hitherto flight to profit mantra of old. Much emphasiswill now be placed on risk quality on all fronts in the sector and no bank will want to be

seen defaulting in delivering on this quality platform. The imperative for quality cutsacross all the strata of banking businesses and quality of items on their financials will beof paramount focus to the investing public.


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The Banking Sector Metrics of Note

Source: http://www.proshareng.com/bh.html


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Sector Metrics Peer Results Comparison

The banking sector metrics below show the portraits of the sector based on the resultsannounced so far.

Current N'm Previous N'm Current N'm Previous N'm

1 Access Bank Nine Months 66,076.46 89,552.70 -0.26 -4,402.17 20,814.22 -1.21

2 GTB Twelve Months 162,550.00 100,610.00 0.62 23,690.00 28,320.00 -0.16

3 Zenith Fifteen Months 277,300.00 211,600.00 0.31 20,600.00 52,000.00 -0.60

4 UBA Fifteen Months 246,725.00 169,506.00 0.46 2,375.00 40,825.00 -0.94

5 SKYE Fifteen Months 126,665.00 74,615.00 0.70 1,130.00 15,126.00 -0.93

6 DIAMOND Eight Months 67,735.00 108,979.00 -0.38 -8,142.00 5,144.00 -2.58

7 FINLAND Eighteen Months 72,386.00 30,779.00 1.35 -149,770.00 -96,726.00 0.55

8 IBTC Twelve Months 59,781.00 61,239.00 -0.02 8,138.00 11,993.00 -0.32

9 FIRSTBANK Nine Months 196,400.00 152,500.00 0.29 3,200.00 33,900.00 -0.91

10 ECOBANK Twelve Months 59,864.00 55,156.00 0.09 -4,588.00 5,000.00 -1.92

11 STERLING Fifteen Months 46,717.00 36,129.00 0.29 -9,019.00 6,263.00 -2.44

12 FIDELITY Eighteen Months 34,716.00 72,274.00 -0.52 1,557.00 1,430.00 0.09

13 FCMB Eight Months 35,789.00 72,698.00 -0.51 564.33 3,994.00 -0.86

14 UNITY Eighteen Months 46,420.00 42,982.00 0.08 -16,122.00 -12,895.00 -0.25

15 WEMA Twelve Months 18,994.00 16,551.00 0.15 -7,530.00 -20,455.00 0.63

16 UNION Nine Months 113,680.00 146,301.00 -0.22 -281,373.00 -72,854.00 -2.81

17 AFRIBANK Nine Months 93,591.00 98,079.00 -0.05 -230,140.00 -158,473.00 -0.45

18 SPRING Eight Months 17,290.00 25,124.00 -0.31 -24,164.00 -10,228.00 -1.36

19 OCEANIC Twelve Months 196,408.00 118,298.00 0.66 -88,619.00 -234,579.00 -1.36

Source: Proshare Research/Company Financials

Peer Results Comparison

Audited Result

Period

Reported

Gross Earnings%

Variance

PAT%

Variance

Banks

Price -

Aug 26

2010 EPS DPS

Dividend

Payout

Dividend

Yield PE Ratio

Earnings

Yield

PAT

Margings

Shares in

issue - Bill

units

Access Bank 8.01 -0.27 0.00 0.0% 0.0% -29.67 -3.4% -6.7% 16.437

Afribank 1.80 -16.97 0.00 0.0% 0.0% -0.11 -942.8% 428.1% 13.559

DIAMOND BANK 6.55 -0.56 0.00 0.0% 0.0% -11.70 -8.6% -12.0% 14.475

Ecobank 4.65 -0.64 0.00 0.0% 0.0% -8.73 -11.5% -7.7% 7.218

FCMB 6.58 0.00 0.05 145.2% 0.6% 245.41 0.4% 1.6% 16.380

Fidelity 2.34 0.05 0.03 46.3% 1.1% 43.33 2.3% 4.5% 28.963

First Bank 12.12 0.11 0.10 90.9% 0.8% 110.18 0.9% 1.6% 29.010

FIRSTINLAND 0.51 0.06 0.00 0.0% 0.0% 8.50 11.8% -206.9% 16.721

GTB 15.50 1.52 0.75 49.3% 4.8% 10.20 9.8% 14.6% 23.310

IBTC 8.60 0.43 0.30 69.8% 3.5% 20.00 4.8% 13.6% 18.750

Intercont 1.60 -12.58 0.00 0.0% 0.0% -0.13 -786.3% -152.2% 18.860

Oceanic 1.34 -3.63 0.00 0.0% 0.0% -0.37 -270.9% -45.1% 24.444

SKYE 6.52 0.10 0.05 50.0% 0.8% 65.20 1.5% 0.9% 11.580

Spring 0.84 -2.13 0.00 0.0% 0.0% -0.39 -253.6% -139.8% 11.321

Sterling 1.79 -0.72 0.00 0.0% 0.0% -2.49 -40.2% -19.0% 12.563

UBA 9.17 0.11 0.10 90.9% 1.1% 83.36 1.2% 1.0% 21.560

Union 4.79 -20.83 0.00 0.0% 0.0% -0.23 -434.9% -123.6% 13.510

Unity 1.11 -1.09 0.00 0.0% 0.0% -1.02 -98.2% -34.7% 14.737

Wema 0.78 -0.73 0.00 0.0% 0.0% -1.07 -93.6% -39.6% 10.321

ZENITH 12.51 1.21 0.45 37.2% 3.6% 10.34 9.7% 7.4% 31.390Source: Proshare Research/Company Financials

Peer Assessment Audited Accounts December 31st

, 2009


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Q1 and Q2 2010 Metrics Peer Comparison

Metrics(Q1 2010) Market Price EPS PE Ratio

Earnings

Yield PAT Margin

Shares in

issue in

Billion units

1 ACCESS 8.01 0.24 33.38 3.00% 14.47% 16.437

2 AFRIBANK 1.8 0.14 12.86 7.78% 7.65% 13.559

3 DIAMOND 6.55 0.11 59.55 1.68% 6.23% 14.475

4 ECOBANK 4.65 0.15 31 3.23% 7.82% 7.218

5 FCMB 6.58 0.055 119.64 0.84% 6.26% 16.38

6 FIDELITY 2.34 0.051 45.88 2.18% 10.49% 28.963

7 FBN 12.12 0.43 28.19 3.55% 19.79% 29.01

8 FINBANK 0.51 0.06 8.5 11.76% 7.92% 16.721

9 GTB 15.5 0.38 40.79 2.45% 33.07% 23.31

0 IBTC 8.6 0.43 20 4.83% 9.44% 18.75

1 OCEANIC 1.34 0.07 19.14 5.22% 5.53% 24.444

2 SKYE 6.52 0.19 34.32 2.91% 9.44% 11.58

3 STERLING 1.79 0.1 17.9 5.59% 15.33% 12.563

4 UBA 9.17 0.07 131 0.76% 3.23% 21.56

5 UNION BANK 4.79 0.25 19.16 5.22% 9.72% 13.51

6 WEMA 0.78 0.07 11.14 8.97% 8.02% 10.321

7 ZENITH 12.51 0.3 41.7 2.40% 17.28% 31.39


Q1 - March 31, 2010 - Price as at Aug 26 , 2010

Banks

Market Price at

Aug 26, 2010 EPS PE Ratio

Earnings

Yield Div Yield PAT Margin

Shares in

issue (M)

1 DIAMOND 6.55 0.32 21.78 4.59% 0.00% 9.94% 14,475.24

2 FCMB 6.58 0.17 41.91 2.39% 0.70% 9.33% 16,271.19

3 FIDELITY 2.34 0.11 22.33 4.48% 0.98% 12.22% 28,974.80

4 FBN 12.12 0.78 16.67 6.00% 0.77% 20.73% 32,632.08

5 GTB 15.5 0.78 21.75 4.60% 4.41% 21.97% 23,317.19

6 INTERCON. 1.6 0.12 14.22 7.03% 0.00% 5.28% 18,860.01

7 SKYE 6.52 0.44 16.39 6.10% 0.69% 9.79% 11,584.97

8 STANBIC 8.6 0.28 30.81 3.25% 3.45% 18.66% 18,750.009 UBA 9.17 0.19 55.98 1.79% 0.95% 5.18% 25,867.75

10 OCEANIC 1.34 0.34 3.97 25.16% 0.00% 12.82% 24,443.51

11 ECOBANK 4.65 0.11 40.87 2.45% 0.00% 6.44% 14,475.24

12 STERLING 1.79 0.31 5.71 17.52% 0.00% 24.18% 12,563.09

13 ZENITH 12.51 0.68 19.89 5.03% 3.33% 22.00% 31,396.49


Q2 - June 30th, 2010 - Price as at Aug 26, 2010

Some stock price movements in the banking sector in 2010 have been positivenotwithstanding the bearish trend in the recent times.

Stocks that recorded negative performance of different magnitude can be seen in thetable below with Oceanic Bank in the chart with -8.17.


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Banks 31-Dec-09 4-Jan-10

% Change

Jan'10 -

Apr'09 27-Aug-10

% Change

Aug'10 -

Jan'10

% Change

Aug'10 -

Dec'09

1 ACCESS 7.6 7.55 -0.66% 8.01 6.09% 5.39%2 AFRIBANK 2.55 2.43 -4.71% 1.8 -25.93% -29.41%

3 DIAMONDBNK 7.4 7.19 -2.84% 6.55 -8.90% -11.49%

4 ECOBANK 10.63 10.1 -4.99% 4.65 -53.96% -56.26%

5 FCMB 7.16 7.01 -2.09% 6.58 -6.13% -8.10%

6 FIDELITYBK 2.4 2.52 5.00% 2.34 -7.14% -2.50%

7 FIRSTBANK 14.05 14 -0.36% 12.12 -13.43% -13.74%

8 FIRSTINLND 0.53 0.55 3.77% 0.51 -7.27% -3.77%

9 GUARANTY 15.5 15.78 1.81% 15.5 -1.77% 0.00%

10 IBTC 7.47 7.16 -4.15% 8.6 20.11% 15.13%

11 INTERCONT 1.61 1.69 4.97% 1.6 -5.33% -0.62%

12 OCEANIC 1.69 1.77 4.73% 1.34 -24.29% -20.71%13 PLATINUM 1.32 1.38 4.55% 1.14 -17.39% -13.64%

14 SKYEBANK 5.49 5.48 -0.18% 6.52 18.98% 18.76%

15 SPRINGBANK 0.76 0.73 -3.95% 0.84 15.07% 10.53%

16 STERLNBANK 1.23 1.26 2.44% 1.79 42.06% 45.53%

17 UBA 10.8 10.81 0.09% 9.17 -15.17% -15.09%

18 UBN 6 6.25 4.17% 4.79 -23.36% -20.17%

19 UNITYBNK 0.84 0.87 3.57% 1.11 27.59% 32.14%

20 WEMABANK 0.93 0.97 4.30% 0.78 -19.59% -16.13%

21 ZENITHBANK 13.6 13.5 -0.74% 12.51 -7.33% -8.01%



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Oceanic Bank Plcs Recovery Strategy and Outlook

Management represents that http://www.proshareng.com/reports/view.php?id=2315 the following

are some of the strategies being put in place to further reposition the bank

Remain focused on our customers;Be committed to the enthronement of strong corporate governance;Sustain the momentum of the last two months that has resulted in deposit growth,loan recovery and improvements in efficiency;Carefully monitor credit quality and proactively work with customers to remedydelinquencies and mitigate further deterioration of their loans;Use capital wisely; andContinue to review and control expenses.

Investors http://www.proshareng.com/investors/company.php?ref=OCEANICcontinue to seek out a

much more detailed insight into the short term and medium term plans of the bank andbelow, we provide an insight into what we believe Oceanic Bank Plcs managementthinking is.

Short TermRetain and build up customer confidence by engaging at the level of service deliveryand direct engagements with its publics;Avoid loss of depositors funds by leveraging the banks experience in retail banking;Establish the risk management model of the bank; andBuild aggressively the capacity to ensure that low-cost deposit mobilisation. Ourinsight in this area is predicated on the table below:

Date Deposit Base(N'bn) Change

14/08/09 528

10/10/09 430 -18.6%

31/12/09 545 26.7%

27/08/10 620 13.8%

NB: August figures are Proshare estimates Medium Term

Preserve value for shareholders an approach open to the bank is the managementof its NPL recovery process;Engage its shareholders (some of whom form the bulk of the NPL portfolio)

constructively to address the negative shareholders funds situation;Approach AMCON to raise cash; andIdentify a strategic investor as part of its recapitalisation imperative under an M&Adeal.

In their own words - Oceanic Bank Financials

Following the release of its FY09 (12-months December) and Q110 (3-months March)results, Oceanic Bank International Plcs Chief Financial Officer, Mrs. Oyinkan Adewale,on June 24, 2010 appeared on CNBC Africa, providing some much needed clarity onthe Banks efforts at ensuring a return to profitability, its recovery drive, Balance Sheet

position, recapitalization and business strategy. Highlights of her interview, courtesyVetiva Research can be downloaded here http://www.proshareng.com/reports/2736.


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3.Fundamental Analysis

The Objective: To examine in a snapshot, the bank's financials and operations, especially earnings,

growth potential, assets, debt, management, products, and competition through financial ratios

arrived at by studying the balance sheet and profit & loss account over a number of years. This

analysis is more effective in fulfilling long term growth objectives of shares, rather than their short

term price fluctuations. In the Nigerian Stock Market, this has traditionally been the key focus of most

players and it remains a guiding beacon as to what could possible happen to a stock. Our approach

to fundamental analysis therefore takes into consideration only those variables that are directly

related to the company itself, rather than the overall state of the market or technical analysis data,

the former of which was reviewed in section 2 above and the latter, a subject for review in section 4

below.

Group - June 2010

(N'm)

Group - Dec 2009

(N'm) % Variance

ASSETS:

Cash & Short Term Funds 34,591.97 54,707.47 -36.77%

Treasury Bills 38,363.83 30,447.83 26.00%

Due from other banks and Financial Institutions 71,032.47 39,192.60 81.24%

Short Term Investments 40,331.67 29,256.08 37.86%

Loans and Advances 400,101.46 387,803.73 3.17%

Advances under Finance Lease 1,727.49 3,209.04 -46.17%

Investment Securities 127,902.00 103,732.12 23.30%

Deferred tax asset 132,430.27 133,422.86 -0.74%

Other Assets 35,644.18 40,957.62 -12.97%Investment Property 11,526.00 12,156.32 -5.19%

Property & Equipments 64,163.30 66,213.83 -3.10%

Total Assets 957,814.66 901,089.53 6.30%

Liabilities

Customers' Depositis 629,228.59 556,781.49 13.01%

Due to Other Banks 245,568.06 278,330.69 -11.77%

Other Borrowings 26,210.62 25,830.00 1.47%

Current Income Tax 3,620.99 2,797.33 29.44%

Other Liabilities 60,066.76 51,716.45 16.15%

Retirement Benefits Obligations 1,798.31 1,557.72 15.45%

CBN Convertible loans 100,000.00 100,000.00 0.00%

Total Liabilities 1,066,493.34 1,017,013.68 4.87%

Equity

Share Capital 11,111 11,110.68 0.00%

Other Reserves -125,000 -126,677.26 -1.32%

Attributable to Equity Holders of the parent -113,889 -115,566.58 -1.45%

Non-Controlling Interest -349.194 -357.57 -2.34%

Total Equity -114,239 -115,924.15 -1.45%

Total equity and Liabilities 937,701 901,089.53 4.06%

Contingent Liabilities and Commitments 102,282 107,715.38 -5.04%


OCEANIC BANK PLC Balance Sheet @ 30 June 2010


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Profit and Loss Account

Group - June 2010

(N'm)

Group - Sept 2009

(N'm) % Change

Gross Earnings 64,266.49 69,462.00 -7.48%

Interest Income 54,052.01 47,695.00 13.33%

Interest Expense -29,093.18 -28,762.00 1.15%

Net Interest Income 24,958.83 18,932.00 31.83%

Net Fee and Commision Income 7,312.92 14,018.00 -47.83%

Foreign Exchange Income 2,090.03 5,672.00 -63.15%

Underwriting Profit/Loss 604.18 1,016.00 -40.53%

Trusteeship Income 4.27 0.00 0.00%

Income from Investments 203.05 1,060.00 -80.84%

Other Income 10,214.48 21,767.00 -53.07%

Operating Income 35,173.31 40,700.00 -13.58%

Operating Expenses -34,920.03 -45,395.00 -23.08%

Write back/Provision for Losses 9,937.75 46,088.00 -78.44%

Profit/Loss before taxation 10,191.04 50,783.00 -79.93%

Taxation -1,949.91 9,855.00 -119.79%

Profit/Loss after taxation 8,241.12 -40,928.00 -120.14%

Non-controlling interest -112.80 -264.39 -57.34%

Profit attributable to the group 8,128.31 -41,192.00 -119.73%

Key Financial Information

Earnings per share (basic) 37.00 -184.00 -120.11%

Earnings per share (diluted) 37.00 -184.00 -120.11%


OCEANIC BANK PLC H1 2010 Income Statement Results

GENERAL COMMENTS AND OBSERVATIONSecond Quarter Results Analysis

Gross Earnings and Profitability: The bank in Q2 recorded a marginal decline in itsgross earnings by -7.48% to close at N64.266bn compared with N69.462bn recordedin the preceding comparable period.

Heavy declines recorded in some income components accounted for the decline.

However, the result showed growth in profitability measures on a quarter on quarter

basis with 391.4% growth recorded over the preceding quarter figures.

Comparing these figures with the preceding years comparable period indicates amaterial improvement by 120.14% to close at N8.241bn as against the loss ofN40.928bn reported last year.

The earnings per share (EPS) of the bank as at 30th June 2010 stood at 37k comparedwith 8k recorded as at 31st March 2010.


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The trend in the banks profitability is showcased in both PBT and PAT margins for the

period, following the trend of negative profitability.


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The trend has definitely created a run on the earnings per share (EPS) of the bank asdepicted by the chart below.

Given the improved profitability recorded in the first and second quarters of the year, itis probable that the bank should be able to sustain the improvement going forward.

Deposit Base and Net Interest Margin: The bank recorded growth in its depositbase in Q2 by 13.10% to close at N629.228bn when compared with N556.781bnrecorded in the preceding year comparable period. This is an improvement.

Financial Efficiency: The banks financial efficiency as measured by cost to incomeratio (quarter by quarter basis) trended downward when measured - down to 87.18%as at 30th June, 2010. The ratio measured by H1 2010 compared with H1 2009 declinedto 99% from 112% reported as at the previous years comparable period.

This showed commendable improvements over the trend recorded in the threepreceding quarters. We hope the management would strive to beat down this abnormalrate to avoid recording depletions in the coming periods. The management attributedthe change to the impact of their staff rationalisation exercise - embarked upon inDecember 2009.


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Provision for Loan Losses:The bank made write backs of N7.428bn and N9.938bn inQ1 and Q2 results respectively. This trend is likely to continue.


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Non-Performing Loans and CAR: The Capital Adequacy Ratio of the bank stillremains in the negative region, far below the regulatory threshold of minimum of 10%.

The burden of non-performing loans and the precarious situations of its financials as

revealed by negative shareholders Funds could be attributed to the Banks CAR.

Oceanic Capital Adequacy Ratio as at 30th June, 2010 still left much to be desired,though the non-performing loan to total loan ratio declined to 68% by June 30 th, 2010from 71.2% reported as at March 31st, 2010.

Oceanic Banks loans to deposit ratio on quarter to quarter basis remained on thehistorical profile level; the rate declined to 63.59% in the second quarter period to June30th, 2010 from 65.67% recorded by March 31st, 2010.

Loans and Advances


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Total Assets and Total Deposits: The total assets of the bank, after the 179.43%growth recorded in 2007 financial year has been on a steady decline.

The total assets recorded a decline of 30.06% in December 2009 measured YoY. Closescrutiny of the figures indicate that significant declines were recorded mainly in the

liquid assets and this is evident in the precarious situation of the banks liquidity asreported by the management. On the quarter to quarter basis, the two financial indicesassumed uptrend in the first quarter period, still maintained in the second quarter,albeit on decline note.

In the Twelve months period to December 31st 2009, customers deposits dipped by48.47% to close at N556.781bn from N1.089 trillion of the preceding year. This was animprovement from the immediate post intervention decline that occurred. Theestimated figures for August 2010 indicate that depositors confidence has beenrestored and sustained. Q3 2010 should validate this further.

Earnings Performance: As a result of the negative profitability in the books of thebank, the banks earnings performance, as measured by the returns on average assetsand returns on average equity closed on the negative note.

The banks return on equity and return on assets as at December 31st 2009 stood at -35.31% and -4.54% respectively, an improvement from -843.96% and -18.22%


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recorded for return on equity and return on assets respectively for the period ended31st December, 2008. These negative figures showed the magnitude of deteriorations inboth assets and profits. However, there seems to be improvements in the subsequentquarters as could be seen in the chart below.

Shareholders Funds and Total Assets: The decline in shareholders fund is in a way,a pointer to weak Capital Adequacy Ratio of the bank.

The Banks shareholders fund closed at the negative of N116bn by December 31st 2009from the negative of N27.699bn reported as at 31st December, 2008. Shareholdersfund still closed in the negative of N114.239bn as at 30th June, 2010. This is anindication of the unhealthy capital adequacy ration for the bank a matter itsmanagement is acutely aware of.


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4. Technical Analysis

The Objective: To review the stock valuation by relying on the assumption that market data,

such as charts of price, volume, and open interest, can help predict future (usually short-term) market trends. Unlike fundamental analysis, the intrinsic value of the stock is not part

of the consideration here. More and more investors are beginning to appreciate and rely

on technical analysis in reviewing stocks on the Nigerian Stock Exchange because of the

proven fact that market psychology influences trading in a way that enables predicting

when a stock will rise or fall. For that reason, technical analysis are market timed based and

predicated on the belief that technical analysis can be applied just as easily to the market

as a whole as to an individual stock.

MOST RECENT STOCK PERFORMANCE OF OCEANIC BANK SHARES

Oceanic Bank International Plcs share price in the last seventeen months to August26th, 2010 recorded -88.85% depreciation to close at N1.34 from N12.02 attained onthe January 2nd, 2009 trading session. This trend placed Oceanic Bank International Plcas one of the banks in the sector with massive price decline below their January 2 nd,2009 price levels.

In the same vein, in the year 2009 alone, the share price of the bank closed with -85.94% depreciations, well above depreciations of -33.80% recorded in the entiremarket in the period. It is instructive to note that this negative stock price performancehad shown signs of a strain long before the August 14 th, 2009 shake up in the bankingsector in which Oceanic Bank was one of the first five banks directly affected. Theaction however escalated a pending reaction from investors who had been sceptical ofthe banks financials based on rumours that was rife in the market.

Other reasons that could be adduced to the scenario were myriads of uncertainties thattrailed the affairs of the bank, which includes unattractive results declarations and somebickering in the bank which sent jitters to the investors holding the shares of the bank.

In the year 2010, the bank as at 26th August, 2010 recorded year to date marginaldepreciations of-20.71%.


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THE ASI AND OCEANIC BANK PLC

There is a wide gulf between the All-Share Index and Oceanic Bank International Plcshare as the performances of the comparism seems to be inverse. In the year 2009alone, the share price of the bank closed with -85.94% depreciations, compared with -

33.80% depreciations recorded in the entire market in the period.

In the year 2010, while Oceanic Bank International Plc share price depreciatedmarginally by -20.71%, All-Share Index has recorded year to date appreciation of+16%. This shows Oceanic Bank International Plc performed both below ASI and theentire banking sector performance in the current year.

As illustrated from the graph below, the Oceanic Bank International Plc share price nowtrades below its 20 days, 50 days and 200 days moving averages ofN1.69, N1.71 andN1.91 respectively.

The price moving average trend indicates that Oceanic Bank Plc share price has a highrate of volatility as investors that now patronise the bank, do so on a speculative basis.


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5. Analyst Insight

The Objective: This is not an opinion on the stock (given that we still await specific

information required to form an objective opinion). To enable investors make sense ofthe data released however, and considering the significance of the paradigm shift takingplace in the banking industry; we have thus provided an insight into the deductions weare able to make from the information available for further review and professionaladvice.

Oceanic Bank International Plc, as seen from the review carried out to gauge itsoperations and its going concern status would need to address three key imperatives:

1. The continued professional management of the entity as done so far to sustainthe recovery and repositioning objectives undertaken;

2. The deft management of the shareholders contribution to the NPLs in addition to

its larger debt recovery efforts to reduce its requirements from the AMCON andimprove the shareholders funds; and3. The enhancement of value for shareholders through a recapitalisation

programme that would necessitate an M&A arrangement in the absence of a coreinvestor. This would be predicated on the managements ability to navigate thenegotiations and discussions without recourse to unending litigations.

It is trite knowledge that the new management has been able to present a case for thebanks going concern, albeit with a guaranteed lifeline from the CBN.

However, the most significant step must be that taken by the new management tostraighten the 2008 audited account earlier published by the sacked management; andshould aid it in its desire to a true and fair view of the financial profile of the bank todate. But for the action taken, the result would have still remained an illusion of itsrealities.

Of huge concern must be the negative shareholders fund in the books of the bankwhich speaks volume of the unhealthy status of the bank. A reliance on interbankborrowings to finance operations is an unsustainable option. This can be reversed asmore positive news is made available to the market on the three key points raisedabove.

It appears incumbent upon the bank to impress it on existing shareholders the reality ofits situation, and the options open to them as long term investors.

Given the relief which the AMCON platform represents, and the outcomes from themanagement of discussions with shareholders involved in insider-related credits formingthe bulk of its NPLs; it is possible to inch closer to redemption that it is to fail.

Q3 and indeed Q4 2010 should be a veritable measurement of how well and how far themanagement has gone in moving the entity closer to a position where its going concernstatus will not elicit such fears from investors and patrons alike.

We look forward to more positive news from the bank, which the market will have toprice into its decision model on the bank.


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