Nigerian companies have largely snubbed the capital market as a source of funding over the past two decades, a situation which is increasing risks in the banking system and wider economy.
The country should be more of a capital market player rather than a banking loan economy, according to Andrew Nevin, the Chief economist at Price Waterhouse Coopers (PWC).
“We expect too much from the Central Bank and from the banks when the only thing we need is actually a lot deeper capital market,” Nevin said in an interview monitored by BusinessDay.
“Take the 9-mobile matter for example, if the capital market had provided the credit, they would have sorted it out in a kind of orderly way. This is something the Securities and Exchange Commission SEC, Stock Exchange NSE and FMDQ need to begin to tackle.”
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The total market capitalisation of the NSE was N12.8 trillion ($42 billion) as of November 24, 2017. This compares to the Johannesburg’s Stock Exchange (JSE) market capitalisation of $995.12 billion.
The value of total loans disbursed by Nigerian banks was N12.66 trillion as at September 2017.
The recent surge in bank non-performing loans (NPL) is a symptom of Nigeria’s shallow equity capital market as banks extended credit to largely unlisted players like indigenous oil firms.
They are mostly now behind on their payments as oil prices collapsed between 2014 and 2016, putting immense strain on the banking industry and economy.
There were no initial public offerings (IPOs) on the NSE in 2016, neither has there been any 2017 to date.
Moody’s expects Nigeria’s banking NPL ratio to rise marginally to 14-16 percent in 2017. These ratios are close to the levels seen in 2010, but below the recent peak of 33 percent in 2009 when the sector was effectively underwater.
It expects the increase to be driven by exposures to the oil and gas sector, import-dependent borrowers as well as from foreign-currency loans.
Most current data available on the Security and Exchange Commission show Nigerian corporates raised merely N319 billion in Initial Public offering (IPO) between 1999 and 2015.
Between 1999 and 2007, Nigeria did not record a single IPO, according to SEC data.
The years 2007 and 2008 were the most active years in the stock market as it coincided with the stock market bullish run at the time. Though the total amount raised at the time was just under N200 billion, the number of companies that IPOed were more than it was in the latter years.
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Only Seplat Petroleum Development Company Plc and Transcorp Hotels Plc undertook IPOs in 2015.
The poor trend understandably ensued in 2016, which saw zero IPOs, as the period marked Nigeria’s first economic recession in a quarter of a century.
Planned IPOs were shelved due to the prevailing negative market sentiments, driven by growing uncertainties on the back of falling oil price and broader macro-economic challenges.
Analysts say 2018 holds better prospects for IPOs in Nigeria, as oil prices rebound and stocks attract local and foreign investors on the back of improved economic activity, corporate profit and foreign exchange liquidity.
“Notwithstanding, the Nigerian capital market will have to do a better job at promoting its unique value proposition to both global and domestic investors. Monetary policy will continue to play a vital role in determining activity in the market,” CEO of the NSE, Oscar Onyeama said.
Pension Fund Administrators (PFAs) a second potential source of capital for local firms are largely risk averse and have very little of their assets under management (AuM) invested in Private Equity (P.E) or the Stock Market.
PFAs are exposed to the stock market to the tune of N620 billion which represents 8.66 percent of N7 trillion in AuM, according to September 2017 data from PenCom the industry regulator.
Their exposure to private equity funds is 0.34 percent which represents N24 billion.
In total the PFAs are 9 percent exposed to the local stock market and private equity, equivalent to N644 billion.
The lack of IPOs and shallow equity capital market shows up in only four stocks out of the 171 listed companies on the Nigerian bourse making up about 56 percent of the entire N12.78 trillion equities market capitalisation.
The stocks cumulatively valued at N7.16 trillion are Dangote Cement Plc (N3.92 trillion), GT Bank Plc (N1.24 trillion), Nigerian Breweries Plc (N1.03 trillion) and Nestle Nigeria Plc (N1.03 trillion).
Interestingly also, only 30 stocks (in NSE-30 basket) valued at N11.73 trillion as at November 23 period tracked by BusinessDay account for 92 percent of the value of listed equities.
The Nigerian bourse has since hungered for bigger sectoral representation that could help give investors more options for sector rotation and reduce volatility associated with most of these names dragging down the entire market.
“While Telecom represents 12 percent of the Nigeria’s GDP, the sector does not feature on the Bourse,” said Abiola Rasaq, Head of Investor Relations at United Bank for Africa Plc.
Early this month, MTN Group Limited disclosed on-going groundwork for an Initial Public Offering (IPO) of its Nigerian business, noting that it should complete the process in the next six months.
Interswitch a payments company is also expected to conclude its IPO in 2018, which is expected to give the firm a $1 billion valuation.
One major impact analysts see from the telecommunications sector’s listing is that it will significantly dilute the dominance of the banking and cement sectors on the Nigerian bourse and give investors more options which is good for the market.
Such listing will change the stock market dynamics in terms of increase in market capitalisation, volume of trades and attractions of investors to the market, according to Sewa Wusu, Head, Research & Investment Advisory, at SCM Capital.
IHEANYI NWACHUKWU & LOLADE AKINMURELE
