Business & finance

A time and a place – Nigeria report

In the face of significant macroeconomic and policy headwinds, Nigerian banks have been adopting more conservative funding strategies than in years gone by.

For Nigerian banks, many of which had latterly been enjoying a run of luck, 2015 has not been an easy ride. First came the drop in oil prices, tumbling from a high of $115 a barrel in June 2014 to under $60 a barrel by summer this year. Then came a sharp fall in the value of the naira, unsurprising in an economy where oil accounts for around 80% of the national income.

The subsequent trading curbs, imposed by Nigeria’s Central Bank in February, have thus far prevented any further depreciation, but have caused currency trading to drop dramatically. Amid a climate of unpaid wages, a black market in foreign dollars, and minimal foreign exchange, we are seeing mounting pressure for the Central Bank to loosen its regulations and let the naira slide.

The operating environment has therefore been complex, with the banking sector facing pressures in terms of profitability, asset quality and liquidity. And while recent economic policy reforms should ultimately improve public finance and clamp down on corruption, in the short-term the challenges are considerable.

In September, the new president Muhammadu Buhari issued a directive requiring all federal revenue-generating institutions to pay their revenue into a single Treasury account. This has seen the transfer of around $6.5bn of public funds (some 10% of the money in Nigeria’s banking system) away from privately held accounts.

Analysts have suggested such a rapid outflow of cash will add to the upward pressure on domestic bond yields, further tightening liquidity and hiking up already high interest rates.

With international confidence in the economy low – and many foreign portfolio investors making their exit – JP Morgan recently announced it would remove Nigeria from its influential emerging bonds index. Although this is likely to prove merely embarrassing, rather than detrimental to the economy, the move has triggered an outflow of local bonds and a stock market sell-off. As of September, overseas holdings of local currency debt are estimated to have fallen to around $3bn, from $11bn in 2013.

What is more, although the majority of Nigerian banks are still able to keep up with interest payments, one member of the Central Bank’s monetary policy committee, Adedoyin Salami, recently decried a “disconcerting rise” in the number of non-performing loans.

This is something of a turnaround from the glory days of last year, which saw a surge of new Eurobonds and other foreign deals. While Guaranty Trust Bank has said it will redeem its existing Eurobond at maturity, and Sterling Bank laid the grounding for international capital by receiving first-time ratings in July, there has been just one international debt issue so far in 2015.

The deal in question, a five-year debut $750 million Eurobond, was made in April by Lagos-based development financier Africa Finance Corporation (AFC). “The Eurobonds were placed following a seven day roadshow across three continents and involving meetings with over 100 institutional investors … enabling a well-diversified distribution among international institutional investors across Asia, Europe and the US,” said AFC in a statement.

According to Tolu Osinibi, executive director at investment bank FCMB Capital Markets, banks are approaching the capital markets with caution.

“Frankly, I think most people, unless they absolutely have to, would not be thinking about going into a bond market now because it’s unfavorable in Nigeria both from interest and exchange rate perspectives,” he tells EMEA Finance.

FCMB Capital Markets’ sister company, First City Monument Bank, raised a loan of about $300 million last year from DFIs and international commercial banks. This decision, says Osinibi, was driven by the need to restructure its US Dollar liability book and essentially swap out call deposits for more stable longer-term borrowing.

Overall, however, the bank’s funding strategy remains retail driven, with a diversified portfolio and a focus on ramping up regional growth. This deliberately conservative stance – aimed at maintaining robust capital buffers in tricky times – enabled the group to maintain a strong capital adequacy ratio in the first half of 2015. “The macro and policy environment wasn’t helpful and it has definitely affected our performance in the short term,” says Osinibi.

FCMB is not the only institution to focus its attentions on retail banking. With a significant proportion of the population still unbanked, the retail and SME spaces have been billed as presenting sizable growth opportunities, meaning banks have an opportunity to continue their expansion despite unpropitious market conditions.

And it seems that the picture is not wholly bleak, with Nigeria’s economy having shown strong resilience to shocks in the past. During the last financial crisis, the government displayed a strong willingness to support the banks via recapitalisations and purchases of their non-performing loans. With overall economic growth expected this year (albeit at slower rate than average), there is a good chance for banks to lay the foundations for a rebound.

“For the foreseeable future, until we have a lot more clarity around market outlook our funding strategy will remain conservative,” says Osinibi. “Regarding the bond market, there will always be a time and a place.”

This news story appears in the October / November 2015 edition of EMEA Finance


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