Nigerian lenders have received a boost as new guidelines from the Central Bank of Nigeria (CBN) extending the deadline for complying with Basel 2 capital requirements are seen as positive for their capital-raising plans.
The CBN introduced Basel 2 and higher capital requirements for systemically important banks (SIBs), in 2013 as part of tighter regulations to help bring about financial system stability.
On March 13 the regulator, however, issued a letter to the banks, extending compliance of regional/national and international banks with the minimum Capital Adequacy Ratio (CAR) of 10 percent and 15 percent respectively, under Basel 2 till 30 June 2016.
“We believe this should give the banks some room to make optimal capital decisions around earnings retention and asset growth in the near term, with the consideration of a tier 1 raise in more favourable market conditions,” said Renaissance Capital bank analysts led by Adesoji Solanke in a March 23 sector update.
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“In our view, this extension is a positive development for Nigerian banks, as we have previously noted that the pace of implementation of Basel 2 and other tighter capital requirements was rather speedy.”
Lenders are getting a breather on capital raising as stock valuations at the lowest levels since January 2013 is making it harder to raise funds through common equity, which dilutes existing shareholdings.
The NSE banking index, tracking the nation’s 10 biggest banks by market value, has lost 9.71 percent this year to March 20 compared with a 15.36 percent slide in the main all-share index.
Skittish investors are selling stocks, unwilling to be caught up in currency-related losses as the naira slumps on oil price weakness.
The pricing of the Right Issues is principally premised on company fundamentals, earnings outlook and sometimes the number of funds to be raised,” said Abiodun Keripe Research & Strategy Elixir Investment Partners Limited.
“Existing investors at this point have to focus on the value and long-term prospects they stand to derive.”
Some international investors are however questioning the ability of Nigerian lenders to create positive returns, in excess of the cost of equity (CoE), given constraining regulations and weakening macro fundamentals, according to Renaissance Capital.
Nigeria which is Africa’s largest economy, derives 90 percent of export earnings and 70 percent of government revenue from oil.
The International Monetary Fund (IMF) predicts growth of 4.8 percent this year, down from 6.3 percent in 2014.
The naira has weakened 18 percent in the past six months, according to Bloomberg data.
The Nigerian banking sector may face asset quality, profitability, and potential liquidity pressures in the next year, with the sources of weakness likely to be around oil loans, utilities, manufacturing, and U.S. dollar exposures, according to the rating agency, Standard and Poor’s (S & P) on Friday.
“In our view, mid-tier banks are likely to be the most at risk. Nevertheless, regulation and governance over the past few years has improved, and may help limit potential downside risks,” S&P said in the statement.
A transition to Basel requirements is being pushed by the CBN in a bid to keep Nigerian lenders on par with counterparts overseas.
International standards set by the Basel Committee demand that banks meet minimum capital requirements, measured as a percentage of their assets.
The amount of capital that must be held is linked to the riskiness of the assets.
Lenders expected to raise tier 1 capital over the next 12 – 24 months include Skye Bank, N30 bn ($150 mn); Stanbic and Ecobank Nigeria, according to Recap.
“Access Bank’s rights issue (NGN52.7bn/$265mn) closed recently, while FCMB expects FY14 earnings retention to materially improve its CAR from 9M14 levels,” said Recaps Solanke.
“On FBNH, we remain concerned about its light CAR of 15-16%, but expect the bank to focus on earnings retention and slower growth over the next 12-18 months, with the possibility of a tier 1 raise when market valuations improve.”
PATRICK ATUANYA
