Nigerian banks are moving to shore up capital levels by taking advantage of surging equity markets to sell stocks and boost tier-one capital as they grow lending and assets.
Stock valuations close to record highs make it easier for lenders to raise funds through common equity, which dilutes existing shareholdings.
Diamond Bank, a mid-tier lender, is currently in the process of raising $300 million (N50.374 billion) in tier-one capital via rights issue, sources familiar with the matter told BusinessDay.
Sterling Bank had earlier in the year raised equity capital via rights issue.
Analysts tell BusinessDay that Nigerian lenders need to raise about $1 billion in tier-one capital in the medium term.
“A number of banks will raise tier-one capital in 12-18 months. If they don’t, they will have to stop lending, manage their capital better or sell down assets,” said a ratings agency source.
“Without raising capital, they are not defending the balance sheet properly,” the source said.
Tier-one capital – the highest quality capital – refers to a firm’s core equity capital and is the measure of a bank’s financial strength based on the sum of its equity capital and disclosed reserves.
Nigerian banks had core capital reserves averaging about 18.1 percent of their risk-weighted assets at the end of 2012. The total assets of Nigerian banks were about N22.64 trillion ($138 billion) at the end of last year, data compiled by BusinessDay show.
Banks may need to boost capital levels by up to N360 billion this year to meet tougher international rules set by the Basel Committee on Banking Supervision, FBN Capital said in a report released earlier this year.
International standards set by the Basel Committee, which the Central Bank of Nigeria (CBN) is pushing Nigerian banks to comply with, demand banks to 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.
“The recent capital needs by the banks are much in line with our expectation, driven by the need to shore up capital to offset Basel requirements on operational risk, the need to grow risk assets, and the drive for retail expansion and penetration,” said Kayode Omosebi, a research analyst at UBA Capital plc, in a response to questions.
“We believe this will boost Diamond Bank’s capital adequacy ratio (CAR) further to circa 23 percent and expect the bank to utilise this capital in lending to its focus sectors and segment, thereby growing its loan books,” Omosebi said.
Banks with international operations are required by the CBN to meet a minimum CAR of 15 percent. Analysts say equity capital raised by banks via rights issue shows there is increasing confidence by investors in banking stocks.
“Investors are beginning to see the prospect and potential in this space,” Omosebi said.
The Nigerian Stock Exchange (NSE) Banking Index, which tracks the nation’s 10 biggest banks by market value, has lost -2.4 percent this year to June 26, compared with the +1.59 percent rise in the NSE All-Share Index. Bank like Stanbic IBTC, FCMB and GTB have, however, outperformed the index with year-to-date gains of 21.78 percent, 12.2 percent, and 6.96 percent, respectively.
The total stock market capitalisation of N13.8 trillion has surpassed the highs of 2008 reached before the banking crisis.
Nigerian lenders, while having relatively stronger balance sheets after the 2009 banking crisis, are contending with reduced profitability on the back of higher reserve requirements, lower fees and increased competition and are seeking to boost lending to mitigate loss of income.
Most banks have also been accessing the Eurobond market – a move aimed at matching dollar assets with liabilities.
“We expect more banks to access the capital market in the medium term. Recently, shareholders of Union Bank approved the bank’s $750 million capital raising exercise,” said Omosebi.
PATRICK ATUANYA
