Chairman’s Statement It is with great pleasure and delight that I present the Corporation’s Annual Report and Statement of Accounts for the year ended December 31, 2005. The report reviews developments in the banking industry, highlights the activities of the Corporation during the year under review and provides information on insured banks, which the reading public may find useful. Macroeconomic Environment in 2002005555 For the second year running the overall performance of the economy was quite promising in spite of pockets of socio-economic and political problems both from within and external. Provisional figures showed that GDP growth was robust at about the same level of 6% attained in 2004. The provisional figures for non-oil GDP growth in 2005 was 8.2% higher than the target of 7.0 per cent in the National Economic Empowerment and Development Strategy (NEEDS). In the last quarter of 2005, non-food prices or core 1 inflation remained at single digit; anchored at 8.8% as at the end of December 2005 though the rate of inflation as at the same time on a year- on-year basis was estimated at 11.9%. Similarly, provisional data showed that the growth in some components of monetary aggregates were within the targets for the period whilst some were slightly above target. For instance, whilst M1 rose by 10.9 per cent compared with the target of 11.4per cent for fiscal 2005, M2 increased by 16.1per cent, a little above the set target of 15.0 per cent. The moderation in monetary aggregates also reflected in the decrease in credit to the economy. Aggregate bank credit to the domestic economy (net) grew by 14.5 per cent, compared with the growth target of 22.5 per cent for fiscal 2005. Compared with previous years, interest rates on different classes of deposits experienced a downward trend in 2005. That was due to the government efforts to curtail excessive pricing of bank deposits, which had negative influence on the lending rates. The downward trend was also reflected in the rate payable on government securities. During the year, especially between 2 June and December, rates on Treasury Bills crashed to a level never witnessed in the system since the commencement of deregulation in the late 1980s. That had profound influence on other deposit rates as well as the prime lending rate. Average rate on savings deposits which hovered around 4.9% at the beginning of the year decreased to 4.3%, while average rate on 3-month tenored deposits declined by 3.4 percentage points from 14.4% in January to 11% by December, 2005. Prime lending rate also declined gradually from 19.2 per cent for greater part of the year to 17 per cent as at the end of 2005. During the year, the exchange rate remained stable and within the projected band of plus or minus 3% around the central rate. In the Dutch Auction System (DAS) the exchange rate appreciated from N132.9/US$1 at the beginning of 2005 to N129.1/US$1 at end of December, depicting an appreciation of 2.9% during the period. The stability of the exchange rate during the year could be attributed to the relative stability in the nation’s macro-economy, the fiscal discipline exercised by the government coupled with a consistent tight monetary policy. However, in the other segments of 3 the foreign exchange market - Bureau de Change and parallel market, the Naira depreciated slightly during the year. At the Bureau de Change, the naira exchange rate anchored around x139.1 to a dollar at the beginning of the year but depreciated to x143.3 to a dollar as at December, 2005 depicting about 1.86% depreciation. In the parallel market, the range was between x138.4 and x143.6 to a dollar during the year depicting a depreciation of about 1.86%. Undoubtedly, a key achievement of the economic reform in fiscal year 2005 was the successful negotiation to shed the country’s US$30 billion Paris Club debt burden through an unprecedented debt write-off of about US$18 billion by the Paris Club. The arrears of about US$6 billion was to be paid while the country was to apply debt buy-back to the balance in order to completely exit from the club. During the year under review, there was a sustained accretion to reserves resulting in the stock of external reserves of US$28.3 billion as at the end of December. That level of reserves was sufficient to finance 18.4 months of foreign exchange disbursement. Beyond increase in the price of crude oil in the international market, prudent exchange rate management and 4 fiscal restraints on the part of government were also contributory factors to the accretion to external reserves. The Banking Environment The environment in which banks operated in 2005 was shaped, significantly, by the Banking Consolidation Programme initiated by the Central Bank of Nigeria (CBN) in July 2004, the amendment to the Monetary, Credit, Foreign Trade and Exchange Rate Policy Guidelines for Fiscal year 2004/2005, the fiscal regimes operated by all tiers of government. Under the recapitalization and consolidation exercise in the industry, each licensed bank was expected to meet up with the new minimum capitalization requirement of =N=25 billion on a solo basis or achieve that either through merger with others or acquisition of/by others. Throughout the year, several Memoranda of Understanding (MOU) were signed by different groups of banks. Whilst some MOU resulted in fruitful amalgamations, others did not. As at the end of December 2005, twenty-five (25) consolidated banks emerged from seventy-five (75) banks out of the eighty-nine (89) banks that 5 existed as at December 31, 2004. The remaining fourteen (14) banks, which had negative shareholders’ funds and could not find merger partners/acquirers were receiving special supervisory attention. Against this background, the performance indicators of the industry reflected a mixed fortune. The total assets of insured banks grew by over 34 per cent in 2005 compared to that of 2004, while total deposits liabilities of the industry grew by 36.1 percent within the same period. The growth rate of deposits was higher than the rate attained between 2003 and 2004 by 7.9 percentage points. However, the contribution of the banking industry to the economy reduced significantly during the period under consideration as depicted by the ratios of banks’ total assets and that of total deposits to Gross Domestic Product (GDP). Whilst the former decreased by 17 percentage points from the 2004 level of 47.3 per cent to 30.3 per cent in 2005, the latter reduced by 4.6 percentage points from 21.6 per cent in 2004 to 16.6 per cent in 2005. This could well be attributed to the temporary uncertainty occasioned by the frenzied atmosphere created for most of the banks by the consolidation processes. 6 However, the overall financial condition of insured banks improved in 2005 relative to 2004. The adjusted shareholders fund increased from x289.83 billion to x682.13 billion between December 2004 and December 2005 mainly due to the new requirement of increased capitalisation by each bank. Similarly, capital adequacy improved as capital to risk weighted asset ratio rose from 13.16% to 21.25% during the period. In addition, the industry’s ratio of non-performing credit to total credit decreased from 23.08% to 20.13% while the average liquidity ratio increased from 50.44% to 60.60% within the year. Despite the improvement in their financial condition, the earnings performance of insured banks declined marginally in 2005 as their un-audited profit before tax fell from x88.60 billion in 2004 to x81.63 billion in 2005. Inauguration of TTTheThe Board of Directors AAAndAnd Operational AAActivitiesActivities of the Corporation A new Board of Directors of the Corporation was inaugurated by the Honourable Minister of Finance, Dr (Mrs) Ngozi Okonjo-Iweala, during the 7 year. The Board which I have the honour of presiding as Chairman, included the Managing Director and Chief Executive officer of the Corporation and the two Executive Directors. Others are five (5) Directors including one representative each of the Federal Ministry of Finance and the Central Bank of Nigeria (CBN). The Board had since settled down to tackling the challenges facing the Corporation. I am confident that the members of the Board will bring their wealth of experience to bear on the work of the Corporation. There was no bank closure in 2005. Accordingly, the Corporation continued with the liquidation activities of the 34 failed banks earlier closed between 1994 and 2000. As at the end of 2005, the Corporation had paid about N3.3 billion out of N5.2 billion total insured deposits of the closed banks-in- liquidation. The Corporation also declared an aggregate dividend of N10.96 billion for 32 of the 34 banks in liquidation out of which N5.96 billion or 54.38% was paid out to uninsured depositors. So far, 100% dividend had been declared for 10 8 out of the 34 banks-in-liquidation, indicating that all the affected depositors would fully recover their trapped deposits in the affected banks. Similarly, liquidation dividend ranging from 5% to 96% had been declared in favour of the uninsured depositors of 22 other closed banks. This remarkable achievement had no doubt shored up public confidence in the nation’s banking system. However, the liquidation exercise was still bedeviled by slow depositors’ response. To this end, the Corporation would continue with its aggressive public awareness campaign to further sensitize the affected depositors.