Many Nigerian banks will be forced to raise fresh capital to boost their operations if there is any further weakening of the naira, analysts at Afrinvest say.
“Quite a number of mid-tier banks and some of the weaker large tier banks are in that space where a slight movement in exchange rate might force them to fall below the regulatory minimum capital adequacy ratio which will force them to raise capital.
“We are already seeing that, as they begin to close up on the 2016 accounts. Watch out for announcement on annual general meetings. Banks may be taking measures that will give them more flexibility to attract new capital”, Ike Chioke, managing director, Afrinvest (West Africa) Limited, said at the launch of the investment 2017 outlook on 23 January.
The Afrinvest reports notes the factors that plunged the Nigerian economy into a recession including; lack of access to foreign exchange, low oil prices, below- trend production volumes and tight monetary policy, have also led to a deterioration in the asset quality of Nigerian banks over the past two years and are at the heart of a “slow-burning solvency and liquidity crisis in the sector.
“Non-Performing Loans (NPL) ratio increased from 2.9 percent in 2014 to 11.7 percent as of June 2016 and we forecast this to rise to 12.1 percent as at December 2016.”
Afrinvest identified the major sectors that banks are accumulating bad loans to include: Upstream Oil and Gas, General Commerce, Manufacturing and Power Sectors, which all account for 48.1 percent of total industry loan book.
They also note that provisioning for the NPLs has more than tripled from N280.4 billion in December 2014 to N856.9 billion in August 2016.
“The impact of the above factors has put pressure on the Capital Adequacy Ratio (CAR) of banks across all Tiers with 4 of the 15 listed banks currently below or at threshold of regulatory limit.”
Analysts predict that banks will have to resort to rights issue, while institutional investors would drive the capital raising as retail investors pressured by declining household incomes will not be in a position to participate in any capital raising exercise.
The Central Bank of Nigeria (CBN) has been under pressure, especially from foreign investors, to allow the naira to float, even though the CBN has insisted that it will continue to pursue its current “managed float” policy.
“It is important for us to know that we do not run a float regime; we run a managed float. What that means is that from time to time, we would continue to intervene in the market to ensure that the exchange rate does not go beyond our own expectations and those interventions will be to manage the risks, as we deem necessary”, Godwin Emefiele, governor of the CBN said after at the end of the Monetary Policy Committee meeting on January 24.
Despite the CBN’s resistance to a free float of the naira, analysts believe the naira is likely to get weaker in the official market, dropping from the current N305 per dollar to about N400 before year end.
To reduce the current bad debt pressure on banks, the “CBN recently issued a regulatory guideline to allow a one-off write-off of already provisioned loans before the mandated 1-year period.”
However, analysts believe that banks are faced with certain risks despite the CBN’s move.
“The level of provisioning, both for restructured and un-restructured assets, is not adequate with Loan Loss Reserve and Non-Performing Loan ratio currently below 50.0% (Afrinvest Estimate) and at a six-year low.”
Analysts at Afrinvest also note that in their estimation, seven banks FBNH, DIAMOND, SKYE, FCMB, UBN, UNITY, and HERITAGE would need to raise capital or aggressively capitalise earnings to stay within prudential limits in the next one year.”
They noted that access to the capital market for debt and equity financing remains tight, due to the weak macroeconomic backdrop and investor sentiment. “
While acknowledging the need for banks to raise additional capital, Johnson Chukwu, managing director and CEO, Cowry Asset Management limited, said liquidity constraint may pose a challenge for banks to achieve this.
“There will be pressure on banks to meet the regulatory minimum capital adequacy ratio but as liquidity remains tight, banks might find the market not ready for them. You might see instances of special placements to raise additional capital”, Chukwu told BusinessDay by phone.
But Tajudeen Ibrahim, Head of Research at Chapel Hill Denham Securities Limited, told BusinessDay by phone that two key activities that would take place in the banking sector are capital raising and mergers and acquisition.
Ibrahim said both activities are against the backdrop of challenges banks have with non-performing loans, which have affected the quality of their balance sheets, adding that their exposure to oil and gas played a key role in this regard.
“Capital raising might likely be rights issue, which is going to be determined by the parent company of the entity. Institutional investors that invest for a long term, will likely be the ones to buy the offers, considering that many retail investors incomes are under pressure”, Ibrahim said.
Africa’s biggest bank, First Rand, said on January 19 that it is currently considering acquiring a bank in Nigeria. FirstRand would be willing to recapitalise a bank if needed as part of the acquisition, the bank’s chief executive was quoted by Bloomberg, as saying but declined to be specific on what the company would be willing to spend on a purchase.
FirstRand said it was looking for an acquisition to help fund Rand Merchant Bank’s operations in Nigeria and is looking to buy a mid size bank with wide branch network.