Nigerian banks were at a crossroads of incurring more costs on their outstanding Eurobonds or exercise the call option on their dollar-denominated liabilities following tumbling lending opportunities in the foreign currency as Nigeria’s economy continued to struggle since oil crashed some four years ago.
The latter seems to be a more favorable choice as three banks comprising Access Bank, First Bank of Nigeria Limited and Ecobank Nigeria have so far this year redeemed as much as $1.1 billion worth of outstanding Eurobond notes issued in 2014 before maturity, while out of the three remaining banks’ dollar notes, Zenith Bank planned to re-call its outstanding 2022-dollar notes worth $500 million.
This would bring the total value of early redemptions in 2019 to $1.6 billion, reflecting weakened demand for dollar loans from Nigerian corporates. “When banks are recalling or redeeming their Eurobonds, it is a signal that there aren’t many dollar lending opportunities in the economy,” Wale Okunrinboye, head of investment research at Pension Fund, Sigma Pensions, had told BusinessDay.
The Nigerian economy grew less than 3 percent in the last four years with a slower growth pace of 1.94 percent in the second quarter of the year compared with a revised growth of 2.10 percent recorded in the previous quarter. Dollar lending opportunities which predominantly abound in the country’s oil & gas sector have also come under pressure, no thanks to the lower crude oil prices in the international market.
For instance, foreign currency loans by Zenith Bank to the oil and gas sector, which stood at $1.82 billion in the first half of 2017, fell to $1.32 billion in the same period of 2018. In the first six months of this year, the dollar-denominated loan disbursed by the bank to the sector further dropped to $1.01 billion.
Prior to the 2014 crash in crude oil prices, some international oil companies (IOCs) such as Shell, Total, Chevron, and Eni divested their stakes in some onshore and shallow water assets in the country, this among other deals required dollar funding from the Nigerian banks.
However, “such transactions have reduced now locally,” said Omotola Abimbola, macro and fixed-income analyst at Lagos-based Chapel Hill Denham. “There is no point holding on to dollar liabilities as a bank if you don’t have any major use for it.”
Since the private sector players are not demanding for the foreign currency related loans because the macro conditions still look quite fragile, the banks felt this is the best time to make a call on those Eurobonds and focus more on naira-denominated loans, according to Gbolahan Ologunro, research analyst at CSL Stockbrokers Limited.
In addition to this, the redemption of Eurobond ahead maturity is coming at a time when banks recorded significant growth in their foreign currency deposits and central bankers across the globe are adopting dovish monetary policy stance to shore up growth in response to rising concerns over a likely global recession.
Foreign currency deposits of First Bank of Nigeria Holdings accounted for 20 percent of total deposits in half-year 2019 as against 16 percent recorded in the corresponding period of 2018. Zenith Bank’s domiciliary deposits grew from 21.7 percent at end-year 2018 to 26.8 as at June 2019.
“The robust foreign currency deposits come at cheaper costs to the banks,” said Abimbola. “The banks pay relatively low-interest rates on the dollar-denominated deposits and that’s another consideration for some of them.”
However, analysts at investment house, United Capital plc, believed that the early redemptions could be more titled to the fears of an imminent currency adjustment that could increase obligations of these banks in domestic currency.
“With maturities of most of these Eurobonds scheduled for 2021-2022, the banks are likely pricing the next devaluation to happen any time from 2020,” the analysts said in a note to clients.
