Nigeria: Banking in uncertain times
Election years tend to bring challenges for Nigerian banks.
This year has a few more dangers than normal – falling oil prices, the depreciating naira and the need to raise capital to meet regulatory requirements.
Developments in the electricity and oil and gas sectors could also prove problematic for the financial sector.
The government of outgoing President Goodluck Jonathan argues that its push to resuscitate Nigeria’s electricity sector by infusing it with private investment has been one of its great success stories.
Local banks, which lent heavily to the sector, are now concerned that they may have difficulty recouping their investments.
The government announced in mid-March that electricity tariffs will go down 50%, making it much harder for distribution companies to stay solvent.
Those banks involved in the sector include Zenith Bank and Diamond Bank, both of which raised $500m on promises to investors that the proceeds would be spent on power projects.
The incoming Buhari government will have to rule on whether to maintain that tariff drop, while keeping an eye on debt levels.
As with the toxic-asset crisis of 2009, several Nigerian banks, including GTBank and First Bank, have built up sizeable lending portfolios in the oil sector.
According to Ademola Adeyemi-Bero, chief executive of FIRST Exploration & Petroleum, a Nigerian oil company, local banks lent 70% of the $10bn spent by indigenous oil companies on buying assets from the oil majors in recent years.
For example, 40% of GTBank’s gross loans are to the oil sector, with 12% focused on upstream activities.
That is something ratings agency Fitch called a “key risk” in a February report.
With an oil price of $50 per barrel for the foreseeable future in 2015, lending to oil explorers and producers has dropped around the world.
But analysts do not say it will be back to the future. “Nigerian banks have learnt loan restructuring,” says Jude Fejokwu, chief executive of Nigeria-based Thaddeus Research.
This allows banks to call in businesses that have difficulty repaying loans to renegotiate terms, thereby avoiding a bad loan on their books.
“Asset quality has become a huge bragging right within the industry,” Fejokwu explains.
Nevertheless, there are other dangers lurking. Many of the bigger banks have been lending in US dollars, and the value of the naira against the dollar slid by 25% over the past 12 months.
The banks say that lending in dollars is not a problem because the oil assets backing many loans pay out in dollars. Do not waste your time, click at this website
“What about the underlying businesses? If cheap oil puts them out of business, that will be a non-performing loan,” argues Fejokwu.
This slide against the dollar has hit valuations on the Nigerian Stock Exchange (NSE) too.
The NSE’s current N10trn market capitalisation is worth just $50bn today, compared to $60bn when the naira traded at 160 to the dollar in September 2014.
More cash, please
That might blunt investor sentiment at a critical time for Nigeria’s banks. Some of them require a capital boost to comply with Basel II regulations, global banking regulations that specify minimum capital adequacy ratios of 10% for national banks and 15% for those with an international presence.
The Nigerian government has given banks that have breached these requirements until 13 June to submit recapitalisation plans and until the following year to raise the cash.
Some financial institutions, such as Skye Bank – which bought Mainstreet Bank late last year – have to raise working capital.
Skye says it is trying to raise $500m, starting with a N20bn 90-day bond for domestic investors.
Stanbic and Ecobank are also set to raise capital in the near future. For Fejokwu, banks will not face too many challenges raising the money.
The problem may turn out to be that they are unable to make the most of it.
He explains: “Banks that already have raised their money are just waiting for the post-election period to see where they can put that money to use. If you are only now starting to raise funds, you are late in the game.”