Hard as it may be, Moody’s has just come up with a report on how and why one of Nigeria’s strongest banks, Diamond Bank failed. The global advisory services firm, in an in-depth report analysed factors that brought about the downfall of the bank (a bank that went from making profits of N28.5 billion in 2013 to making losses of around N9 billion in 2017) and its eventual palliative merger with Access Bank.

Here are key insights that led to a bad day for Diamond Bank, according to the report, and what lessons surviving businesses can learn from it.

“Diamond Bank Aimed to Become The Leading Retail Bank in Nigeria, and Took on Excessive Risk as it Pursued This Objective”

Indeed, this is a case of borrowing Peter to pay Paul in bid to become more attractive to Paul while satisfying Peter also. The report said, although Diamond Bank set out to become Nigeria’s leading bank, it banked its hope on achieving that by letting all its taps open, without properly gauging the risk implication of it. It was like a case of everybody come take a loan, we would take care of that. The result: all business owners scampered in that direction, wielding buckets, ready to pluck out some loans to finance their businesses.

Why that idea may not be entirely bad, for a bank that was trying to make businesses in Nigeria love it, most of the businesses were not ready for the loans, had no plan of paying back soon. The bank did not appear, however, from the report, to be strategic enough: while endearing itself to retail businesses in Nigeria by allowing them to cut so much flesh off it in the name of loans. It didn’t turn its eyes to a balancer?

The report said that the bank did not attract enough corporate borrowers who are a major moneymaker for banks and that, well, it loaned out more money to the oil and gas sector than the Central Bank of Nigeria thought was prudent (52% versus 20%). So when oil prices fell in 2015 and 2016, the bank came crashing with it.The result is best captured by this point from Moody’s:

“The bank’s Non-Performing Loans (that is, 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 Non-Performing Loans were low at only 19%, weakening the quality of its capital, while high credit losses eroded its profits, ” Moody wrote 

There is still hope for the bank, though, as Moody’s noted that Access Bank with which it has merged, is strong enough to reduce the risk of default for former Diamond Bank creditors.

‘‘Diamond Bank’s Weak Governance Structure Compromised The Board’s Ability to Determine The Bank’s Risk Appetite’’

This point was going to come anyway. Moody’s merely captured what was already in the public domain. In 2018, this letter came from Nigeria’s market research and analysis news site Proshare. The content of the letter simply was that a former chairman of Diamond Bank, Seyi Bickerstheth gave some hints why Diamond Bank’s CEO, Mr. Pascal Dozie, should be replaced. It re-echoed the same demand from Carlyle Group’s Carlyle Sub-Saharan Africa Fund (CSSAF) DBN Holdings who also wanted Mr. Dozie shown the exit door.

“A key shareholder CSSAF DBN Holdings demanded an immediate removal of management principally the CEO but the Board favoured a less drastic approach to minimise disruption and also enable the Board 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.”

The Implication:

You can’t expect a lesser consequence. Moody’s therefore noted that this Diamond Bank’s weak governance structure meant:

• A highly compromised board

• A board with little ability to assess the bank’s risk exposure and;

• And a board that failed to rigorously interrogate management over strategy.

Now watch the follow-up consequence: 

The weak governance structure meant the bank’s management would plunge the bank into an unrecoverable loss. There was a sudden decline of profits. After making profits of less than N5 billion in 2016, the bank fell far to losses of N9 billion the following year.

‘‘The CEO’s Family Was The Second Biggest Shareholder In The Bank, Directly Controlling 14% Shareholding’’ 

It looked like nobody was going to tell the bank the hard truth anyway, and when you don’t have such hard truth tellers in organisations, all boats would be oared to one direction. Moody’s said Diamond failed because it did not have enough independent directors (the objective truth tellers)on its 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 noted

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

The implication of this is not far-fetched, Mr. Dozie, whose 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) was only 4% off the Bank’s biggest shareholder, Carlyle Fund, which controlled 18%. This meant, of course, a huge overbearing influence of one family over how the business of the bank was run. A striking example was the fact that 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.

“The Board’s High Membership Turnover Hindered Its Oversight Role.”

Indeed, between 2009 and 2019 when it merged with Access Bank, Diamond Bank had three different CEOs and three different board chairmen. This only meant two things:

• A continuous erosion of the independence of the Board and;

• A badly destabilised board membership

“While new board members can make a positive contribution to a bank’s governance by bringing in 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.”

As it stands now, it appears Diamond Bank’s fate has been sealed. The merger is merely an official language. Access Bank expects to help Diamond Bank rewrite a different history. But whether the Phoenix rises again is merely a matter of time. The deed has been done and other businesses have to learn their lessons. 

Charles Rapulu Udoh

Charles Rapulu Udoh, a Lagos-based Lawyer with special focus on Business Law, Intellectual Property Rights, Entertainment and Technology Law. He is also an award-winning writer. Working for notable organisations so far has exposed him to some of industry best practices in business, finance strategies, law, dispute resolution and data analytics both in Nigeria and across the world.