Introduction to the Stock Market Chaos
The Nigeria Exchange Limited (NGX) experienced a significant upheaval on Monday, June 16, 2025, as investors rapidly sold off bank shares. This sudden reaction was in response to a directive from the Central Bank of Nigeria (CBN) that temporarily suspended banks’ dividend payments until 2028. The policy also halted the issuance of management bonuses and investments in offshore subsidiaries.
The Reason Behind the Policy
The CBN introduced this policy to curb banks’ abuse of forbearances and Single Obligor Limits (SOL) by forcing them to make adequate provisions for significant lending risks. Although the apex bank issued the directive in good faith to boost retention of internally generated funds and bolster capital adequacy, it failed to realize that the circular contained price-sensitive information. This type of information, also known as insider information in the stock market, can significantly impact a company’s share price if released.
The Aftermath of the Policy
The NGX All-Share Index declined by 170.77 points or 0.15 percent to close at 115,258.77, while the total market capitalization dropped from N72.82 trillion to N72.70 trillion, resulting in a loss of N121 billion. The market sustained this loss on the following day, with the All-Share Index nosediving by 348.61 points or 0.3 percent to close at 114,910.16. The market capitalization also decreased from N72.7 trillion to N72.5 billion, amounting to a loss of N183 billion.
Banks’ Exposure to Forbearances
A report by Renaissance Capital revealed that Zenith International Bank had the highest exposure to forbearances, followed by First HoldCo, Fidelity Bank, FCMB, and Access Corporation. On the other hand, the loan books of GTCO and Stanbic IBTC were clean, indicating that these banks can pay dividends from their banking business.
The Impact on Banks’ Share Prices
The freefall of share prices took a toll on banks with high exposures. To assuage their shareholders and depositors, many banks issued statements on their exposure status, payment plans, and assurances of their ability to pay dividends.
Criticism and Call for Action
The Chairman of the Association of Securities Dealing Houses of Nigeria (ASHON), Sam Onukwue, criticized the CBN for announcing price-sensitive information, urging the apex bank to provide alternative information to calm the market. He expressed concern that investor confidence in the banking sector was waning, especially since some banks would still need to raise capital to comply with the CBN-induced recapitalization deadline.
Damage Control
In an attempt to mitigate the damage, the CBN issued another circular on June 17, affirming the strength of the banking sector and providing routine transitional guidance for select institutions. This circular helped to ease tension in the market and restore relative stability in the banking sector.
The Power of Information
The CBN’s initial mishandling of corporate communication highlights the importance of information in the stock market. The Efficient Market Hypothesis (EMH) suggests that financial instrument prices reflect all available information. Although the assumptions of EMH are unrealistic, information plays a crucial role in security pricing. Government policies can significantly influence stock markets, and policy announcements can lead to volatility.
Lessons Learned
The CBN’s mistake serves as a lesson in the importance of careful communication. The rapid reaction of investors to the initial circular and the subsequent reversal of the situation demonstrate how investors respond to information. To avoid similar situations in the future, it is essential to have a practising stockbroker on the CBN’s Monetary Policy Committee (MPC) to advise on the impact of policy issues on the capital market.
Conclusion
The recent events in the Nigerian stock market highlight the significance of information and careful communication. The CBN’s error in handling price-sensitive information led to a sudden decline in bank share prices. However, the apex bank’s subsequent actions helped to restore stability in the market. As investors, it is crucial to focus on cash profit rather than accounting profit and subject banks to more scrutiny to avoid relying on paper profit. By understanding the importance of information and its impact on the stock market, investors can make more informed decisions and navigate the complex world of finance.
