TETRAD Investment Bank — which is under provisional judicial management — is technically insolvent as its total liabilities exceed assets by US$26,3 million and its cumulative losses scaled US$54 million by January this year as it faces imminent collapse unless prospective Russian investors provide an urgent bailout, its judicial manager’s report shows.
The bank’s provisional judicial manager, Winsley Militala, says in a report to creditors and shareholders presented to them on Wednesday this week its situation is now disastrous.
“The bank has continued to report significant losses since 2009 except for year ending 30 September 2011,” the report says.
“Accumulated losses as at 31 January 2015 stand at US$54 million.
Total liabilities exceed assets by US$26,3 million. These conditions, alongside other matters set out in this report, indicate the existence of material uncertainty which may cast doubt on the bank’s ability to continue as a going concern.”
The report comes at a time the bank is still engaged in talks with investor Horizon Capital Consortium Holdings (HCCH) for a US$50 million bailout package. The meeting between the bank and Russian investors was scheduled to be held yesterday after being postponed from last week.
It says while negotiations for a bailout go on, the bank must be placed under provisional liquidation to salvage remaining value for the benefit of its depositors and creditors. Depositors and creditors, however, gave the bank one month to conclude talks with HCCH after which it faces liquidation at the end of its two-month provisional judicial management.
The report further paints a desperate and even catastrophic picture of the situation.
“As a result of being undercapitalised, as evidenced by the negative core capital of US$38,2 million, the bank’s financial position was inadequate to cover the risk to which it was exposed,” it adds. “As a consequence, its customers lost confidence in its continued solvency as well as its ability to protect depositors against loss of their deposits.”
The report says the bank failed to adequately protect its assets, earning capacity and reputation as evidenced by high levels of non-performing loans (NPLs).
“Best practice would have seen strong internal controls system and appropriate corporate behaviour form the basis for effective, entrepreneurial and prudent management of the bank’s affairs,” it says. “Normally the board of directors, the board’s risk committee and the audit committee perform the central role in management oversight. In the case of the bank, the situation obtaining on the ground was a case of overbearing owner-managers calling all the operational shots and by-passing control measures at times. Two of the owner managers sit on almost all board committees with most of the non-executive directors having resigned.”
The report says 99% of the bank’s loan book comprises NPLs, 40% being unsecured loans amounting to US$25,1 million, while 30% is made up of loans to related parties amounting to US$19 million, the majority of which are unsecured.
The report indicates that because 99% of the loan book, which is US$62 million, was considered non-performing, the bank had to rely on only 1% of the book to generate interest income to fund its operations.
“The significant percentage of the bank’s loan book is unsecured. I note that related party loan balances (US$19,1 million) account for 76% of the unsecured loan balance (which is US$25,1 million) as at end of year 2014, with no security to recover these balances,” it notes. “In addition to this, the majority of the security held against the secured portion of the loan book has been used by the bank to further secure its own borrowings and customer investment deposits.”
The bank understated the exposure by some US$12,9 million when it declared US$19,1 million instead of the US$32 million that became apparent, it adds.
The report expresses concern that the placement of cash with Metbank (US$8,42 million) and Ecobank (US$4 million) was in fact cash cover required by the two banks to guarantee loans granted to Tetrad Holdings amounting to US$12,42 million.
It also says Tetrad last signed audited accounts in 2012. The statutory financial statements for 2013 and 2014, it says, had not been signed off by the auditors. The 2013 financials had not been signed by the auditors because of non-payment of audit fees, it adds.
“The banking regulation requires that banks publish their financial statements no later than three months after the financial year-end.
This has not happened for the past two consecutive years,” the report says. “The loan balances amounting to US$25,2 million are unsecured representing 40% of the book while 50% of the loan book is secured with properties. These properties are not sufficient security as their values are lower than the debt they secure leaving the bank exposed. It is therefore the provisional judicial manager’s considered opinion that the bank should be placed under provisional liquidation in order to salvage the value that remains at the bank for the benefit of its depositors and creditors.”
Several banks, including Capital, Allied and AfrAsia, closed down recently while a number have collapsed since 2000 due to liquidity problems, mismanagement and protracted economic challenges.