New report explains exactly how Diamond Bank failed

On Wednesday, May 8, 2019, Moody’s, a global consulting firm, released a comprehensive report analysing the factors that led to the collapse of Diamond Bank following their recent merger with Access Bank. The report also states that Access Bank is strong enough to reduce the risk of default by Diamond Bank’s former creditors.

Diamond bank
Diamond Bank’s shareholder structure and profits from 2013-2017

Diamond Bank went from making N28.5 billion in 2013 to making losses of about N9 billion in 2017. The now-consumed bank merged with Access Bank in March 2019 after recording a sharp increase in the volume of its non-performing loans.

“Diamond aimed to become the leading retail bank in Nigeria, and took on excessive risk as it pursued its objective,” Moody’s said.

“The bank’s NPLs (all loans overdue by more than 90 days) reached 42% of gross loans in 2017 (Diamond has not yet reported its 2018 results). The bank’s provisions against these NPLs were low at only 19%, weakening the quality of its capital, while high credit losses eroded its profits.”

In analysing the reasons for Diamond Bank’s failure, Moody’s highlighted bad leadership, poor risk management, the board’s lack of independence, and a high volume of turnovers within the board.

  1. Bad leadership and poor risk management

Diamond Bank’s goal to become the largest retail bank in Nigeria saw it loan money to businesses who could not pay back. It did not attract enough corporate borrowers who are a major moneymaker for banks and it loaned more to the oil and gas sector than the central bank thought was prudent (52% versus 20%). So, when oil prices fell in 2015 and 2016, the bank was badly affected.

Diamond bank
Diamond Bank oil and gas lending

Diamond Bank’s weak governance structure, Moody’s says, “compromised the board’s ability to determine the bank’s risk appetite, and rigorously interrogate management over strategy.” As a result of this, Moody’s believes that the board did not place enough emphasis on risk management with the bank biting more than it could chew.

The bank’s leadership made several bad decisions that led to the decline of profits and ultimate loss in 2017. After making profits of less than N5 billion in 2016, the bank fell far to losses of N9 billion the following year. Many in the board no longer trusted in former CEO Uzoma Dozie.

In late 2018, Proshare published a letter written by the former chairman of Diamond Bank, Seyi Bickerstheth, highlighting how the bank’s major shareholder, Carlyle Group’s Carlyle Sub-Saharan Africa Fund (CSSAF) DBN Holdings, wanted Dozie out.

“A key shareholder CSSAF DBN Holdings demanded the immediate removal of management principally the CEO but the Board favoured a less drastic approach to minimise disruption and also enable the Board to secure new leadership,” Bickerstheth wrote in the letter.

“After several discussions, the CEO of the Bank, who is also a representative of the second largest shareholder Kunoch Ltd agreed to resign effective January 3, 2019, but would not tender his letter to confirm his verbal notification.”

  1. The board lacked independence

There were not enough independent directors on the Diamond Bank board and this resulted in a lack of effective board oversight.

“By the end of 2017, only one of Diamond’s 13 board members met the Nigerian SEC’s definition of independent (another had retired in August),” Moody’s reported.

The Dozie family was the second biggest shareholder in the bank, directly controlling 5% and another 9% indirectly through its investment firm, Kunoch Ltd (14% in total). The biggest shareholder, Carlyle Fund, controlled 18%.

A member of the founding family held the CEO role between November 2014 and March 2019 when it merged with Access Bank. During this period, profits fell by 78% in 2015 and bank deposits shrank by 22% between year-end 2014 and 2017.

“We believe Diamond’s board failed to provide an effective check against the bank’s management team,” Moody’s said.

Adding that “Board independence is important because it makes it more likely that management strategies are subject to rigorous questioning, reducing the risk of directors ‘rubber stamping’ management decisions.”

  1. High turnover within the board

Not only did the high rate of turnover erode the board’s independence, but it also created instability.

Between 2009 and 2019 when it merged with Access, Diamond Bank had three different CEOs and three different board chairmen.

According to the Moody’s report, “While new board members can make a positive contribution to a bank’s governance by bringing fresh insights and experience, the new appointees at Diamond tended to lack sufficient knowledge of the bank.

“The board’s high membership turnover, therefore, hindered its oversight role.”

All of these factors contributed in a variety of ways to the fall of one of Nigeria’s most promising financial institutions.

 

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